Exam 8: Financial Planning and Control

Projected Balance Sheet Method Trident Food Corporation Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: Each item of inventory Trident Foods produces has a selling price of $20. -Refer to Trident Food Corporation.What is the operating breakeven point in sales units (Q) for Trident Foods?

Musgrave Corporation has fixed operating costs of $46,000 and variable costs that are 30% of the current sales price of $2.15.At a price of $2.15, Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95, but variable cost per unit won't change.Should it cut its price?

Other things held constant, which of the following statements is correct if a firm currently is operating at its financial breakeven point?

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

You have been given the information below on the Crum Company.Crum expects sales to grow by 50% in 2011, and operating costs should increase at the same rate.Fixed assets were being operated at 40% of capacity in 2010, but all other assets were used to full capacity.Underutilized fixed assets cannot be sold.Current assets and spontaneous liabilities should increase at the same rate as sales during 2011.The company plans to finance any external funds needed as 35% notes payable and 65% common stock.After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method? Information on the Crum Company:

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.

Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed operating costs are $400,000.Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit.If Martin expands it expects to sell 270,000 units at $7.00 per unit.By how much will Martin's operating breakeven sales dollar level change?

Assume a portion of a firm's long-term funds includes either debt or preferred stock.Which of the following statements is correct?

Carolina Vineyards is considering two alternative production methods for turning grapes into wine.One method calls for using a hand-operated press, while the other would employ a new, automated press.It has been estimated that the variable cost per bottle will amount to $2.00 using the old press and $0.50 using the new machine.If the new machine is purchased, fixed operating costs will equal $150,000, and interest charges will be $80,000.Fixed operating costs of $25,000 will be incurred if the company decides to use the old press, and interest costs will be zero because no debt will be needed.Assume that sales (in units) will be 100,000 bottles under the automated method and 75,000 units under the labor intensive method.What sales price per unit would cause Carolina to be indifferent between the two methods?

An advantage of breakeven analysis is that it can be applied with equal precision whether a firm's cost curve is linear or nonlinear.

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

Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment.

The use of a high level of operating leverage can enable a firm to maintain a steady operating income despite large changes in the level of sales.

Two firms that have the same financial leverage must also have the same ROE, because both financial leverage and ROE measure the risk associated with equity financing.

With lumpy assets, a small projected increase in sales could potentially mandate a significant increase in plant and equipment, which would lead to a very large financial requirement.

Suppose a firm uses a high degree of operating leverage and operates in an industry whose sales are greatly affected by changes in the overall level of economic activity.The riskiness of that firm's earnings stream will likely be greater than the earnings of a firm in the same industry which has a lower degree of operating leverage.

Which method estimates additional funds needed for a firm by projecting the assets needed for the coming and subtracting the projected liabilities spontaneously generated.

Operating costs include variable costs, depreciation and interest charges.

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Today, computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.