Exam 8: Financial Planning and Control

The higher the percentage of a firm's total costs that are fixed,the higher the degree of operating leverage and the lower the operating breakeven point.

The financial control phase of financial forecasting is concerned with implementing the financial plans,and with managing the feedback and adjustment process needed to ensure that the goals of the firm are pursued appropriately.

Everything else equal,the higher the DFL is for a firm,the closer its operations are to its operating breakeven point.

Hensley Corporation uses breakeven analysis to study the effects of expansion projects it considers.Currently,the firm's plastic bag business segment has fixed operating costs of $120,000,while its unit price per carton is $1.20 and its variable unit cost is $0.60.The firm is considering a new bag machine and an automatic carton folder as modifications to its existing production lines.With the expansion,fixed costs would rise to $240,000,but variable cost would drop to $0.41 per unit.One key benefit is that Hensley can lower its wholesale price to its distributors to $1.05 per carton (i.e. ,its selling price),and this would likely more than double its market share,as it will become the lowest cost producer.What is the change in the operating breakeven volume with the proposed project?

It is more difficult to estimate fixed and variable cost per unit for a project during planning than once the project is underway.This is because,once a project is operational,the firm has access to clearly reported and separated actual costs that the project incurs.

Holding other things constant,the additional funds required for financing the firm's operations would be reduced with an increase in the firm's

Other things held constant,the greater the firm's use of debt,the greater the change in EPS that will result from a change in sales volume.

Forecasting financial requirements for a firm involves determining how much money the firm will

Firms A and B produce exactly the same products,but use different production technology.Firm A's variable costs are greater than those of Firm B,but its operating breakeven point is lower.From this information,other things held constant,we can conclude that Firm B has greater operating leverage than Firm A.

The firm is concerned with implementing the financial plans,and with managing the feedback and adjustment process needed to ensure that the goals of the firm are met during which stage of the planning and control process

Which of the following business decisions can be improved using breakeven analysis?

Stromburg Corporation makes surveillance equipment for intelligence organizations.Its sales are $75,000,000.Fixed operating costs,including research and development,are $40,000,000,while variable costs amount to 30% of sales.Stromburg plans an expansion which will generate additional fixed costs of $15,000,000,decrease variable costs to 25% of sales,and also permit sales to increase to $100,000,000.What is Stromburg's DOL at the new projected sales level?

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

A high degree of operating leverage,other things held constant,means that a relatively small change in unit sales will result in a large change in operating income.

If any firm with a positive net worth is operating its fixed assets at full capacity,if its dividend payout ratio is 100 percent,and if it wants to hold all financial ratios constant,then for any positive growth rate in sales,the firm will require external financing.

The projected balance sheet forecasting method would be appropriate if,in a regression of sales on each asset and spontaneous liability,the regression line was linear and passed through the origin.

When a small change in sales results in a large change in operating income,one possible reason is that the firm is employing a relatively high degree of operating leverage.

If EBIT doubles when sales doubles,then the firm's degree of operating leverage must be exactly two.

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost,such as labor costs.