Select the one best answer to each question.
1. A firm's sales increase by 50 percent and inventory was $100,000. According to the percent of sales method of Forecasting, what will the new inventory be?
A. $100,000 C. $150,000
B. $120,000 D. $175,000
2. If a firm produces 50,000 widgets and sells each unit for $20.50, what is the total revenue generated by this production?
A. $10,250 C. $1,025,000
B. $100,250 D. $10,250,000
3. If investors want to limit financial risk and maximize their control of the business, which of the following forms of business would they prefer?
A. A sole proprietorship C. An S corporation
B. A limited partnership D. A corporation
4. Break-even analysis is concerned with the relationship between
A. financial leverage and risk. C. debt and equity.
B. total costs and revenues. D. dividends and retained earnings.
5. A union contract suggests that labor costs may be
A. variable. C. a noncash expense.
B. fixed. D. undetermined.
6. A product sells for $5 per unit. If fixed costs are $1,000 and variable costs are $2 per unit, what is the degree of operating leverage at 2,000 units?
A. 0.83 C. 1.2
B. 1.0 D. 2.0
7. Which of the following situations would provide corporate management with the strongest rationale to carry forward current-year losses?
A. Management projects taxable income to remain unchanged over the next five years.
B. Early in his first term this year, the President of the United States initiated legislation and signed into law a significant increase in income tax rates.
C. Management projects pre-tax losses over the next two years, and possibly even four years into the future.
D. Congress just passed a very popular bill that reduces marginal federal income tax rates.
8. Which of these situations offers the best rationale for organizing a business as a limited partnership?
A. You're an entrepreneur and you want two others' expertise, former business partners, to help execute your business plan.
B. You want your small new business, which is operating out of your garage, to pay you and your partner (your spouse) dividends for which income tax will only be paid by you or your business, not both.
C. Management needs to raise money through a stock offering, but does not want to relinquish control of the business to stockholders.
D. Management rejects the idea of personally assuming liability for the business.
9. Airlines have a high degree of operating leverage because of
A. a large investment in fixed assets.
B. small fixed expenses.
C. insufficient government regulation.
D. a large use of debt financing.
10. Currently, a firm's accounts payable is 5 percent of sales. If the level of sales is anticipated to increase from $10,000 to $20,000, what is the level of accounts payable forecasted by the percent of sales method?
A. $250 C. $750
B. $500 D. $1,000
11. Which of the following statements about fixed costs is correct?
A. Fixed costs don't change with the level of output.
B. Fixed costs don't change with the size of the firm.
C. Fixed costs are greater than variable costs.
D. Fixed costs are paid before variable costs.
12. If ABC, Inc. has $650,000 in sales and $230,000 in expenses, what are the firm's earnings before interest and taxes (EBIT)?
A. $850,000 C. $420,000
B. $650,000 D. $325,000
13. Which of the following is an advantage of the sole proprietorship?
A. Ease of formation C. Limited liability
B. Joint ownership D. Ease of transfer of ownership
14. A product sells for $2 per unit. If fixed costs are $200 and variable costs are $1 per unit, what is the break-even level of output?
A. 200 units C. 100 units
B. 150 units D. 50 units
15. Which of the following tends to vary spontaneously with changes in the level of sales?
A. Long-term debt C. Plant
B. Accounts payable D. Paid-in capital
16. If Sam's Diner has an EBIT of $350,000, what are the diner's net earnings after paying $50,000 in taxes and $34,000 in interest?
A. $434,000 C. $311,000
B. $334,000 D. $266,000
17. Which of the following is usually a variable expense?
A. Salaries C. Wages
B. Rent D. Insurance premiums
18. If a firm substitutes fixed for variable costs, which of the following will occur?
A. The use of financial leverage will be increased.
B. The degree of operating leverage will be increased.
C. The break-even level of output will be reduced.
D. The profits will always be higher.
19. Which of the following events would be most likely to increase the quantity breakeven point, assuming other factors remain constant?
A. Reduced marketplace competition enables LMN Corporation to raise its selling price for finance textbooks.
B. The pressure has subsided: The property owner, who rents space to your small manufacturing plant, has agreed to blacktop the employee and customer parking lot.
C. The city council has finally been persuaded: Your taxi business will pay lower water and sewer rates.
D. XYZ Corp agrees to increase its sales-commissions paid to employees by 12 percent.
20. Which of the following is an advantage of a corporation?
A. Permanence C. Elimination of double taxation
B. Ease of formation D. Dilution of ownership