Problem 1

Gateway Appliance toaster sell for $20 per unit, and the variable cost to produce them is $15. Gateway estimates that the fixed costs are $80.000.

Compute the break-even point in units.

Fill in the table below(in dollars) to illustrate the break-even point has been achieved _____________________________________________________

Sales ______________________

-Fixed costs _______________________

-Total variable cost _______________________

Net profit (loss)

______________________________________________________

Problem 4

Air Filter, Inc., sells its products for $6 units. It has the following cost

_____________________________________________________________

Rent. $100.000

Factory Labor $1.20 per unit

Executive salaries under contract. $89.000

Raw materials. $.60 per unit

Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $6, compute the break-even point

Solution

Problem 5

Eaton Tool Company has fixed costs of $200.000m sells its unit for $56, and has variable costs of $31 per unit.

Compute the break-even point

Ms. Eaton comes up with a new plan to cut fixed costs to $150.000. However, more labor will now be required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new break-even point

Under the new plan, what is likely to happen to profitability at very high volume levels (compare to the old plan)?

Solution

Eaton Tool Company

BE= FIXED costs__________

Price variable cost per unit

= $200,000 = $200,000 = 8,000 units

$56 - $31 $25

BE= FIXED costs__________

b. Price variable cost per unit

= $150,000 = $150,000 = 6,818 units

$56-$34 $22

The breakeven level decreases.

c. With less operating leverage and a smaller contribution margin, profitability is likely to be less that it would have been at very high volume levels.

Chapter 6

Explain how rapidly expanding sales can drain the cash resources of a firm.

Rapidly expanding sales will require a buildup in assets to support the growth. In particular, more and more of the increase in current assets will be permanent in nature. A non-liquidating aggregate stock of current assets will be necessary to allow for floor displays, multiple items for selection, and other purpose. All of these asset investments can drain the cash resources of the firm.

Discuss the relative volatility of short-and-long-term interest rates.

Figure 6-10 shows the long-run view of short-and-long-term interest rates. Normally, short-term rates are much more volatile than long-term rates.

Example 6-10

XYZ Corporation

Normal conditions Expected higher returnProbability ofExpected

Conditions under plan A normal conditions outcome

7,000 x .80 = +$ 5,600

TightExpected lower returnProbability of

Money under plan A tight money

($50,000) x .20 = (10,000)

= ($4,400)

Negative expected value of return for Plan A versus Plan B

What is the significance to working capital management of matching sales and production?

If sales and production can be matched, the level of inventory and the amount of current assets needed can be kept to a minimum; therefore, lower financing cost will be incurred. Matching sales and production has the advantage of maintain smaller amounts of current assets than level production, and therefore less financing costs are incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining sales climate and machinery (fixed assets) will be idle. Here lies the tradeoff between level and seasonal production. Full utilization of fixed a assets with skilled workers and more financing of current assets versus capacity, training and retraining workers, with lower financing for current assets.

How is a cash budget used to help manage current assets?

A cash budget helps minimize current assets by proving a forecast of inflows and outflows of cash. It also encourages the development of a schedule as to when inventory is produced and maintained for sales (production schedule), and accounts receivables are collected. The cash budget allows us to forecast the level of each current asset and the timing of the buildup and reduction of each.

The most appropriate financing pattern would be one in which asset buildup and length of financing terms is perfectly matched.Discuss the difficulty involved in achieving this financing pattern.

Only a Financial manager with unusual insight and timing could design a plan in which asset buildup and the length of financing terms are perfectly matched. One would need to know exactly what current assets are temporary and which ones are permanent. Furthermore, one is never quite sure how much or short-term or long-term financing is available at all times. Even if this were known, it would be difficult to change the financing mix on a continual basis.

Problems

Solution

4.

Solution

7.

Solution

Chapter 7

In the management of cash and marketable securities, why should the primary concern be for safely and liquidity rather than maximization of profit?

Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits.

Explain the similarities and differences of lockbox systems and regional collection offices

Both lockbox systems and regional collection offices allow for the rapid processing of checks that originate at distant points. The difference is that a regional collection center requires the commitment of corporate resources and personnel to staff an office, while a lockbox system requires only the use of a post office box and the assistance of a local bank. Clearly, the lockbox system is less expensive.

Why would a financial manager wants to slowdown disbursements?

By slowing down disbursements or the processing of checks against the corporate account the firm is able to increase float and also to provide a source of short-term financing.

Use The Wall Street Journal or some other financial publication to find the group interest rates for the list of markets securities in Table 7-1 on page 200.Which security would you choose for a short-term investment? Why?

Table 7-1 on page 200

The answer to this question may well depend upon the phase of the business cycle at the time the question is considered. In normal times, small CDs and savings accounts may prove adequate. However, in a tight money period, wide differentials may be established between the various instruments and maximum returns may be found in Treasury bills, Large CDs, commercial paper, and money market funds.

Why are Treasury bills a favorite place for financial managers to invest excess cash?

Treasury bills are popular because of the large and active market in which they trade. Because of this, the investor may literally pinpoint the maturity desired choosing anywhere from one day to a year. The T-bill market provides maximum liquidity and can absorb almost any dollar amount of business.

Problems 4

Solution

Problem 5

Solution