Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 5, Problem 4P
Draw two break-even graphs-one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms’ profits.
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Maximizing profits means to ______.a. create a balance between seeking economic profits and seeking accounting profitsb. reinvest accounting profits in an effort to increase production outputs in the long runc. increase the difference between what is given up for inputs and what is received for outputsd. operate in an output range in which the firm experiences constant returns to scale
Suppose sales volume increase by the same percentage for Company X and Company Y. Use CVP analysis to explain which company will experience a larger percentage increase in profits? Company X - Dominated by fixed expenses; or Company Y - Dominated by variable expenses.
Which of the following is the indicator of the rate at which company is earning profit?
Select one:
a. Margin of safety
b. All options are correct
c. Contribution margin
d. Profit volume ratio
Chapter 5 Solutions
Foundations of Financial Management
Ch. 5 - Discuss the various uses for break-even analysis....Ch. 5 - What factors would cause a difference in the use...Ch. 5 - Explain how the break-even point and operating...Ch. 5 - Prob. 4DQCh. 5 - What does risk taking have to do with the use of...Ch. 5 - Discuss the limitations of financial leverage....Ch. 5 - Prob. 7DQCh. 5 - Explain how combined leverage brings together...Ch. 5 - Explain why operating leverage decreases as a...Ch. 5 - Prob. 10DQ
Ch. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Draw two break-even graphs-one for a conservative...Ch. 5 - Prob. 5PCh. 5 - Shawn Pen & Pencil Sets Inc. has fixed costs of ....Ch. 5 - Calloway Cab Company determines its break-even...Ch. 5 - Prob. 8PCh. 5 - Boise Timber Co. computes its break-even point...Ch. 5 - The Sterling Tire Company’s income statement for...Ch. 5 - Prob. 11PCh. 5 - Healthy Foods Inc. sells 50-pound bags of grapes...Ch. 5 - United Snack Company sells 50-pound bags of...Ch. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Lenow’s Drug Stores and Hall’s Pharmaceuticals...Ch. 5 - The capital structure for Cain Supplies is...Ch. 5 - Sterling Optical and Royal Optical both make glass...Ch. 5 - Prob. 19PCh. 5 - Sinclair Manufacturing and Boswell Brothers Inc....Ch. 5 - DeSoto Tools Inc. is planning to expand...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Mr. Gold is in the widget business. He currently...Ch. 5 - Delsing Canning Company is considering an...Ch. 5 - Prob. 2WECh. 5 - Prob. 3WECh. 5 - Prob. 4WECh. 5 - Prob. 5WE
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- When sales volume increases, which company will experience a larger percentage increase in profit: company X, which has mostly fixed expenses, or company Y, which has mostly variable expenses?arrow_forwardThe firm with the largest ratio of fixed costs to total costs automatically gets the greatest increase in operating profits from an increase in sales. A True B Falsearrow_forwardWhat can the weighted average contribution margin ratio be used for? To solve for a measure, at any level of sales volume, of the sensitivity of operating profit to changes in volume. Breakeven and profit planning for sales volume expressed in dollars (Y) rather than units (Q). To calculate an average per-unit contribution margin based on an assumed sales mix. To figure out the relative proportion in which a company’s products (or services) are sold. To determine the extent of fixed costs in an organization’s cost structure.arrow_forward
- Ma4. Hello, Please analyze this firm's performance if the revenue is increasing or decreasing compared to the industry average or if the profitability is stable or rising. Please include if the company needs to create or capture value or if they are creating or capturing value.arrow_forwardCost-volume-profit (CVP) analysis is used to seek answers to questions such as: “What will happen to the profit if the firm increases its selling price by 15%?” Discuss the following under CVP analysis (present graphical representations where applicable):i. The break-even graph ii. The contribution graph iii. The profit grapharrow_forwardSuppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0% revenue growth from price increases and 3.0% revenue growth from sales volume increases. Assume that the firms production cost structure involves strictly variable costs. (That is, the cost to produce each unit of product remains the same.) Should you project that the firms gross profit will increase next year? If you project that the gross profit will increase, is the increase a result of volume growth, price growth, or both? Should you project that the firms gross profit margin (gross profit divided by sales) will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth, price growth, or both?arrow_forward
- Comparison:1. Observe the trend of revenues for both companies. Which company has higher revenue?2. Observe the gross margin for both companies. Which company is more profitable?3. Observe the operating expenses for both companies. Which company has more operating expenses?4. Observe the net income for both companies. Which company is more profitable?5. Which company is more profitable using this type of analysis?arrow_forwardUsing the data in the following table for a number of firms in the same industry, dothe following:•a. Compute the total asset turnover, the net profit margin, the equity multiplier, andthe return on equity for each firm.b. Evaluate each firm’s performance by comparing the firms with one another.Which firm or firms appear to be having problems? What corrective actionwould you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting youranalyses?Firm (in million Dollars A B C D Sales $20 $10 $15 $25 Net Income after sales 3 0.5 2.25 3 Total Assets 15 7.5 15 24 Stockholders’ Equity 10 5 14 10arrow_forwardOn a CVP graph for a profitable company, the total revenue (sales) line will be steeper than the line representing total costs (variable costs and fixed costs). red O False iwer Truearrow_forward
- By modifying the break-even equation, a company is able to determine the sales required to earn a ________________ profit. a.banker's b.working capital c.target d. contributionarrow_forwardFor CVP analysis calculations, which of the following statements is correct? A. In target profit calculations, sales revenue is less than total costs. B. CVP analysis relies on our knowledge of cost function to express relationships among costs, sales volume, and profit. OC. A company's sales mix is ultimately determined by the management of a company. D. The Break-even point is the point at which operating income is greater than $0. O E. If sales volume is expected to be higher than the indifference point, management should choose the cost structure with the higher fixed costs.arrow_forwardWhich of the following statements is true? A In linear break-even analysis, the contribution margin is the difference between the selling price and the average fixed cost. B The Theory of the Business Firm assumes perfect market competition. This means it assumes that the selling price decreases as a firm's production rate increases. C In the Theory of the Business Firm, profits per period are maximized at the production rate at which marginal cost equals average cost. D In the Theory of the Business Firm, profits per period are maximized at the production rate at which average cost is minimized. E All four statements are false.arrow_forward
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