Exam 8: Financial Planning and Control

Texas Products Inc.has a division which makes burlap bags for the citrus industry.The unit has operating fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month.If the variable cost per bag is $2.00, what price must the division charge in order to break even?

Breakeven analysis can involve determining the magnitude of the firm's profit or losses at output levels on and around the point where revenues equal costs.

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.

Which of the following liabilities increase typically and create spontaneously generated funds as sales increase for the firm?

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 degree of total leverage for Trident Foods?

The operating breakeven volume in units can be found by dividing the firm's total fixed cost in dollars by its profit margin per unit (i.e., price less variable cost).

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.

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.

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

All else equal, excess capacity means that more external financing is required to support increases in sales than would be needed if the firm previously operated full capacity.

The Price Company will produce 55,000 widgets next year.Variable costs will equal 40 percent of sales, while operating fixed costs will total $110,000.At what price must each widget be sold for the company to achieve an EBIT of $95,000?

Which of the following would generally be considered variable costs?

Underestimating the sales in your forecast could have which of the following effects on the firm?

Warsaw Incorporated is currently operating at 80% of capacity.The sales of Warsaw were $25 million this year and their net plant and equipment were valued at $100 million.Sales are expected to increase to $35 million next year.How much additional plant and equipment will Warsaw need to acquire to keep production up with the new level of sales?

If a firm has a high degree of leverage then a small change in sales results in

A firm has the following balance sheet: Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels.Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent.How much additional funds (AFN) will be needed?

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?

A good control system helps to ensure that plans are executed properly and to facilitate a timely modification of plans if the assumptions upon which the initial plans are based turn out to be inaccurate.

To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds).

If a small change in sales results in a large change in EPS, then it must be caused by the financial leverage associated with the firm.