Question 1

Management should tailor the use of leverage to meet its own risk-taking desires.

Accepted Answer

A) True 
 B)False

Question 2

The degree of operating leverage is a number indicating the relationship between the percentage change in sales to the percentage change in earnings per share.

Accepted Answer

A) True 
 B)False

Question 3

A firm's break-even point will rise if

Accepted Answer

A)  fixed costs decrease.
B)  contribution margin increases.
C)  price per unit rises.
D)  variable cost per unit rises.E) B) and C)
F) None of the above

Question 4

A high DOL means

Accepted Answer

A)  there are high labor costs.
B)  there is high debt.
C)  there is a large amount of equity.
D)  there are high fixed costs.E) A) and B)
F) A) and C)

Question 5

"Operating leverage" is the use of fixed costs to magnify returns at high levels of operation.

Accepted Answer

A) True 
 B)False

Question 6

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

Accepted Answer

A)  fixed costs
B)  variable costs
C)  marginal costs
D)  semi-variable costsE) B) and D)
F) B) and C)

Question 7

If fixed costs rise while other variables stay constant

Accepted Answer

A)  the break-even point rises.
B)  the degree of operating leverage increases.
C)  total profit declines.
D)  All of the optionsE) None of the above
F) All of the above

Question 8

Firms with a high degree of operating leverage are

Accepted Answer

A)  easily capable of surviving large changes in sales volume.
B)  usually trading off lower levels of risk for higher profits.
C)  significantly affected by changes in interest rates.
D)  trading off higher fixed costs for lower per-unit variable costs.E) None of the above
F) All of the above

Question 9

From Finance in Action - Global, we can correctly assume that

Accepted Answer

A)  Japanese firms routinely employ high financial leverage.
B)  Japanese firms prefer a position of low operating leverage.
C)  Japanese firms tend to react aggressively to volume changes.
D)  Japanese firms routinely employ high financial leverage and tend to react aggressively to volume changes.E) None of the above
F) A) and D)

Question 10

Degree of operating leverage should be computed only over a profitable range of operations.

Accepted Answer

A) True 
 B)False

Question 11

Sales commissions and raw materials are variable costs.

Accepted Answer

A) True 
 B)False

Question 12

Combined leverage is concerned with the relationship between

Accepted Answer

A)  changes in EBIT and changes in EPS.
B)  changes in volume and changes in EPS.
C)  changes in volume and changes in EBIT.
D)  changes in EBIT and changes in net income.E) A) and B)
F) None of the above

Question 13

If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is their cash breakeven in units?

Accepted Answer

A)  6,034 units
B)  11,458 units
C)  12,375 units
D)  45,833 unitsE) All of the above
F) B) and C)

Question 14

Match between columns
                        Premises: A measure of the impact of debt on the earnings capability of the firm.
A reflection of the extent that fixed assets and fixed costs are utilized in the business firm.
A measure of the impact of fixed costs on earnings from the operation's viewpoint of the firm.
A numerical and graphical technique used to determine at what point the firm will equate its costs and revenues.
The total impact of operating and financial leverage.
A measure of the amount of debt used in the capital structure of the firm.
Costs that remain relatively constant regardless of the volume of sales, as long as they are within the company's relevant range.
A measure of the total effect on earnings per share of operating and financial leverage.
Costs that move directly with a change in volume.
The amount of fixed costs covered by each unit of sales. This amount is derived by subtracting variable cost per unit from the sales price of each unit.
The use of break-even analysis based on the assumption that cost and revenue relationships to quantity sold may vary at different levels of sales.
The use of fixed charge obligations with the intent of magnifying the potential returns to the owners of the firm.

Accepted Answer

The Answer of nonlinear break-even analysis and break-even analysis and is...

Question 15

Operating income is not the same thing as EBIT.

Accepted Answer

A) True 
 B)False

Question 16

Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?"

Accepted Answer

A)  A has a lower break-even point than B, but A's profit grows faster after the breakeven.
B)  A has a higher break-even point than B, but A's profit grows slower after the breakeven.
C)  B has a lower break-even point than A, but A's profit grows faster after the breakeven.
D)  B has a lower break-even point than A, and profit grows at the same rate for both companies after the break-even point.E) A) and B)
F) B) and D)

Question 17

If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume.

Accepted Answer

A) True 
 B)False

Question 18

In break-even analysis, the contribution margin is defined as

Accepted Answer

A)  price minus variable cost.
B)  price minus fixed cost.
C)  variable cost minus fixed cost.
D)  fixed cost minus variable cost.E) None of the above
F) All of the above

Question 19

The break-even point can be calculated as

Accepted Answer

A)  variable costs divided by contribution margin per unit.
B)  total costs divided by contribution margin per unit.
C)  variable costs times contribution margin per unit.
D)  fixed costs divided by contribution margin per unit.E) B) and D)
F) A) and D)

Question 20

Linear break-even analysis and operating leverage are only valid within a relevant range of production.

Accepted Answer

A) True 
 B)False

Exam 5: Operating and Financial Leverage

Linear break-even analysis and operating leverage are only valid within a relevant range of production.

Correct Answer
verified

Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?"

Correct Answer
verified

Management should tailor the use of leverage to meet its own risk-taking desires.

Correct Answer
verified

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

Correct Answer
verified

In break-even analysis, the contribution margin is defined as

Correct Answer
verified

If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is their cash breakeven in units?

Correct Answer
verified

Combined leverage is concerned with the relationship between

Correct Answer
verified

Match the following with the items below:

Firms with a high degree of operating leverage are

Correct Answer
verified

If fixed costs rise while other variables stay constant

Correct Answer
verified

"Operating leverage" is the use of fixed costs to magnify returns at high levels of operation.

Correct Answer
verified

Operating income is not the same thing as EBIT.

Correct Answer
verified

The break-even point can be calculated as

Correct Answer
verified

A firm's break-even point will rise if

Correct Answer
verified

The degree of operating leverage is a number indicating the relationship between the percentage change in sales to the percentage change in earnings per share.

Correct Answer
verified

A high DOL means

Correct Answer
verified

From Finance in Action - Global, we can correctly assume that

Correct Answer
verified

Sales commissions and raw materials are variable costs.

Correct Answer
verified

If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume.

Correct Answer
verified

Degree of operating leverage should be computed only over a profitable range of operations.

Correct Answer
verified

Exam 5: Operating and Financial Leverage

Linear break-even analysis and operating leverage are only valid within a relevant range of production.

Correct AnswerverifiedShow Answer

Firm A produces semiconductors using highly technical machinery; Firm B is a retail clothing store. Consider which firm employs a higher degree of operating leverage and then answer the following question: "Which of the following comparative statements about firms A and B is true?"

Correct AnswerverifiedShow Answer

Management should tailor the use of leverage to meet its own risk-taking desires.

Correct AnswerverifiedShow Answer

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

Correct AnswerverifiedShow Answer

In break-even analysis, the contribution margin is defined as

Correct AnswerverifiedShow Answer

If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is their cash breakeven in units?

Correct AnswerverifiedShow Answer

Combined leverage is concerned with the relationship between

Correct AnswerverifiedShow Answer

Match the following with the items below:

Firms with a high degree of operating leverage are

Correct AnswerverifiedShow Answer

If fixed costs rise while other variables stay constant

Correct AnswerverifiedShow Answer

"Operating leverage" is the use of fixed costs to magnify returns at high levels of operation.

Correct AnswerverifiedShow Answer

Operating income is not the same thing as EBIT.

Correct AnswerverifiedShow Answer

The break-even point can be calculated as

Correct AnswerverifiedShow Answer

A firm's break-even point will rise if

Correct AnswerverifiedShow Answer

The degree of operating leverage is a number indicating the relationship between the percentage change in sales to the percentage change in earnings per share.

Correct AnswerverifiedShow Answer

A high DOL means

Correct AnswerverifiedShow Answer

From Finance in Action - Global, we can correctly assume that

Correct AnswerverifiedShow Answer

Sales commissions and raw materials are variable costs.

Correct AnswerverifiedShow Answer

If a firm has a DFL of 2.0, EPS will change 2% for every 1% change in volume.

Correct AnswerverifiedShow Answer

Degree of operating leverage should be computed only over a profitable range of operations.

Correct AnswerverifiedShow Answer

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