Corporate
Finance Questions
2 The management of a firm wants to introduce a
new product. The product will sell for $4 a unit and can be produced by either
of two scales of operation. In the firm, total costs are
TC= $3,000 + $2.8Q.
In the
second scale of operation, total costs are
TC =
$5,000 +$2.4Q.
a.
What is the break-even level of output for each scale of operation?
b.
what will be the firms profits for each scale of operation is sales reach 5,000
units?
c.
One-half of the fixed costs are noncash (depreciation). All other expenses are
for cash. If sales are 2,000 units, will cash receipts cover cash expenses for
each scale of operation?
d.
the anticipated levels of sales are the following:
year Unit sales
1 4,000
2 5,000
3 6,000
4 7,000
If management
selects the scale of production with higher fixed cost, what can it expect in
years 1 and 2? On what grounds can management justify selecting this scale of
operation? If sales reach on 5,000 a year, was the correct scale of operation
chosen ?
3 A firm has the following total revenue and
total cost schedules:
TR =
$2Q.
TC =
$4,000 + $1.5Q.
a.
What is the break-even level of output? What is the level of profits at sales
of 9,000 units?
b. As
the results of a major technological breakthrough, the total cost schedule is
changed for
TC=$6,000
+ $0.5Q
What
is the break-even level of output? What is the level of profits at sales of
9,000 units?
4.
the manufacturer of a product that has a variable cost of $2.50 per unit and
total fixed cost of $125,000 wants to determine the level of output necessary
to avoid losses.
a.
What level of sales is necessary to break even if the product is sold for
$4.25? What will be the manufacturer’s profit or loss on the sales of 100,000
units?
b. If
fixed costs rise to $175,000, what is the new level of sales necessary to break
even?
c. if
variable costs decline to $2.25 per unit, what is the new level of sales necessary to break even?
d. If
fixed costs were to increase to $175,000, while variable costs declined to
$2.25 per unit, what is the new break-even level of sales?
e. If
a major proportion of fixed costs were
noncash(depreciation), would failure to achieve the break-even of sales imply
that the firm cannot pay its current obligations as they come due? Suppose
$100,000 of the above fixed costs of $125,000 were depreciation expense. What
level of sales would be the cash
break-even level of sales?
TUTORIAL PREVIEW
Breakeven
level of output = Fixed cost/ (selling price per unit – variable cost per unit)
First Scale:
Breakeven = $3,000 / ($4 –
$2.80)
= $3,000 / $1.2
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