Chapter 12 HW Questions

Note: For each non-excel question, you must provide your source in the proper APA
format.

Reminder: If you DO NOT have a formula within your answer cell, it will not be marked
correct! You must show your work within the excel formula!

1. Fixed and variable costs: Define variable costs and fixed costs, and give an
example of each. Variable costs vary with the number of units of output. Fixed costs
cannot be changed in the short term regardless of how much output the project
produces. (Parrino, 717)

2. EBIT: Describe the role that the mix of variable versus fixed costs has in the
variation of earnings before interest and taxes (EBIT) for the firm. Because you
might be able to change something from being a high variable cost to a fixed cost
and lower or swap costs roles. (Parrino,390)

3. [EXCEL] EBIT: The Generic Publications Textbook Company sells all of its books
for $100 per book, and it currently costs $50 in variable costs to produce each text.
The fixed costs, which include depreciation and amortization for the firm, are
currently $2 million per year. Management is considering changing the firm's
production technology, which will increase the fixed costs for the firm by 50 percent
but decrease the variable costs per unit by 50 percent. If management expects to sell
45,000 books next year, should they switch technologies?

4. [EXCEL]EBIT: WalkAbout Kangaroo Shoe Stores management forecasts that it

will sell 9,500 pairs of shoes next year. The firm buys its shoes for $50 per pair from
the wholesaler and sells them for $75 per pair. If the firm will incur fixed costs plus
depreciation and amortization of $100,000, then what is the percent increase in
EBIT if the actual sales next year equal 11,500 pairs of shoes instead of 9,500?

5. [EXCEL]Cash Flow DOL: The law firm of Dewey, Cheatem, and Howe has monthly
fixed costs of $100,000, EBIT of $250,000, and depreciation charges on its office
furniture and computers of $5,000. Calculate the Cash Flow DOL for this firm.

6. [EXCEL]Cash Flow DOL: The degree of pretax cash flow operating leverage at
Rackit Corporation is 2.7 when it sells 100,000 units of its new tennis racket and its
EBITDA is $95,000. Ignoring the effects of taxes, what are the fixed costs for Rackit
Corporation?

7. Accounting DOL: Explain how the value of the degree of accounting operating
leverage can be used. The degree accounting operating leverage can be used to tell
us how much a firms EBIT will change for a given in revenue. (Parrino, 717)
8. Accounting DOL: Caterpillar, Inc. is a manufacturer of large earth-moving and
mining equipment. This firm, and other heavy equipment manufacturers, have
degrees of accounting operating leverage that are relatively high. Explain why.
Because Accounting DOL is linked to how sensitive accounting operating profits are
to changes in revenue. (Parrino, 393)

9. Break-even analysis: Why is the per-unit contribution important in a break-even

analysis? We must know the difference between unit price and unit variable cost in
order to determine how many units must be sold to pay a firms fixed costs. (Parrino,
717)

10. [EXCEL]Break-even analysis: Calculate the accounting operating profit break-

even point and pretax operating cash flow break-even point for each of the three
production choices outlined below.

11. Break-even point: The accounting operating profit break-even point tells us the
number of units that must be sold for a firm to break-even in a given year from an
accounting operating profit perspective. What measure tells us the number of units
that must be sold each year during the life of a project in order for the project to
break-even with regards to its opportunity cost of capital? The economic breakeven
point. (Parrino, 717)

12. Simulation analysis: What is simulation analysis, and how is it used? An

analytical method that uses a computer to quickly examine a large number of
scenarios and obtain probability estimates for various values in a financial analysis.
It provides an estimate of the expected free cash flows and on the distribution of the
free cash flows that the project is likely to produce each year. (Parrino, 404)