Ch 13: Assignment - Capital Structure and Leverage 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 Dynamic Defenses Corporation: Dynamic Defenses Corporation is considering a project that will have fixed costs of $10,000,000. The product will be sold for $37.50 per unit, and will incur a variable cost of $10.75 per unit. 286,661 373,832 364,742 Given Dynamic Defenses's cost structure, it will have to sell units to break even on this project (Que). 67,264 Dynamic Defenses Corporation's marketing sales director doesn't think that the market for the firm's goods is big enough to sell enough units to make the company's target operating profit of $25,000,000. In fact, she believes that the firm will be able to sell only about 150,000 units. However, she also thinks the demand for Dynamic Defenses Corporation's product is relatively inelastic, so the firm can increase the sale price. Assuming that the firm can sell 150,000 units, what price must it set to meet the CFO's EBIT goal of $25,000,000? $280.69 per unit $305.10 per unit $256.28 per unit $244.08 per unit What affects the firm's operating break-even point? Several factors affect a firm's operating break-even point. Based on the scenarios described in the following table, indicate whether these factors would increase, decrease, or leave unchanged a firm's break-even quantity-assuming that only the listed factor changes and all other relevant factors remain constant Increase Decrease No Change The firm's fixed costs increase. The variable cost per unit decreases. The amount of debt increases, causing the firm's total interest expense to increase. large When fixed costs are high, a small decline in sales can lead to decline in return on invested capital (ROI). small