Chapter 12 Determining the Financing Mix

20) The break-even model enables the manager of the firm to

A) calculate the minimum price of common stock for certain situations.

B) set appropriate equilibrium thresholds.

C) determine the quantity of output that must be sold to cover all operating costs.

D) determine the optimal amount of debt financing to use.

21) As production levels increase

A) variable costs per unit decrease.

B) fixed costs per unit increase.

C) fixed costs per unit stay the same and variable costs per unit increase.

D) fixed costs per unit decrease and variable costs per unit stay the same.

22) The break-even point is equal to

A) fixed costs divided by (sales price per unit — variable cost per unit).

B) fixed costs divided by unit variable costs.

C) fixed costs divided by selling price per unit.

D) (sales price per unit — variable cost per unit) times the fixed costs.

23) HomeCraft makes wooden play sets. The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year. Each play set requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for $3,200. What is Homecraft's break-even output level?

A) 340 play sets

B) 325 play sets

C) 297 play sets

D) 258 play sets

24) QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%. QuadCity's break-even point in sales dollars is

A) $2,050,633.

B) $2,197,500.

C) $2,438,750.

D) $2,785,000.

25) Variable costs include all of the following EXCEPT

A) property taxes.

B) direct labor.

C) sales commissions.

D) annual rent.

26) Which of the following is a fixed cost?

A) insurance

B) direct material

C) direct labor

D) freight costs on products

27) A plant may remain operating when sales are depressed

A) if the selling price per unit exceeds the variable cost per unit.

B) to help the local economy.

C) in an effort to cover at least some of the variable cost.

D) unless variable costs are zero when production is zero.

28) Potential applications of the break-even model include

A) replacement for time-adjusted capital budgeting techniques.

B) pricing policy.

C) optimizing the cash-marketable securities position of a firm.

D) all of the above.

29) Break-even analysis is used to study the effect on EBIT of changes in all of the following EXCEPT

A) corporate taxes.

B) prices.

C) cost structure.

D) volume.