1. Break-even analysis

To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit.

Consider the case of Free Spirit Industries Inc.:

Free Spirit Industries Inc. is considering a project that will have fixed costs of $15,000,000. The product will be sold for $32.50 per unit, and will incur a variable cost of $10.75 per unit.

Given Free Spirits cost structure, it will have to sell ___ units to break even on this project (QBEQBE).

-689,655

-145,015

-330,769

-314,199

Free Spirit Industries Inc.s marketing sales director doesnt think that the market for the firms goods is big enough to sell enough units to make the companys target operating profit of $20,000,000. In fact, she believes that the firm will be able to sell only about 175,000 units. However, she also thinks the demand for Free Spirit Industries Inc.s product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 175,000 units, what price must it set to meet the CFOs EBIT goal of $20,000,000?

- $242.36 per unit

- $210.75 per unit

- $263.44 per unit

- $221.29 per unit

What affects the firms operating break-even point?

Several factors affect a firms operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firms break-even quantityassuming that only the listed factor changes and all other relevant factors remain constant.

INCREASE, DECREASE, OR NO CHANGE.

The firms fixed costs increase.

The products sales price increases.

The amount of debt increases, causing the firms total interest expense to increase.

When other things are held constant, the higher a firms operating leverage, the __ will be its business risk. (lower / higher)