Corporate Finance: A Focused Approach (mindtap Course List)
7th Edition
ISBN: 9781337909747
Author: Michael C. Ehrhardt, Eugene F. Brigham
Publisher: South-Western College Pub
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Chapter 3, Problem 4Q
Summary Introduction
To determine: The distinction would individual X anticipate discovering between a basic supply (grocery) chain and steel business.
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Profit margins and turnover ratios vary from one industry to another. What differenceswould you expect to find between the turnover ratios, profit margins, and DuPont equationsfor a grocery chain and a steel company?
APPLY THE CONCEPTS: Target income (sales revenue)
Another useful method for figuring out the type of performance your company will need to reach a target income is by using sales revenue. Rather than using the number of units, this method uses total sales revenue. In companies for which the total set of goods produced and sold is more varied, this would be the preferred method, as opposed to a business in which only one product is sold. Assume a company has pricing and cost information as follows:
Price and Cost Information
Amount
Selling Price per Unit
$30
Variable Cost per Unit
$15
Total Fixed Cost
$15,000
For the upcoming period, the company wishes to generate operating income of $40,000. Given the cost and pricing structure for the company’s product, how much sales revenue must it generate to attain its target income?
Step 1: Calculate the contribution margin ratio:
The contribution margin ratio is the contribution margin in proportion to the selling price on a…
For CVP analysis calculations, which of the following statements is correct?
A. In target profit calculations, sales revenue is less than total costs.
B. CVP analysis relies on our knowledge of cost function to express relationships among costs, sales volume, and profit.
OC. A company's sales mix is ultimately determined by the management of a company.
D. The Break-even point is the point at which operating income is greater than $0.
O E.
If sales volume is expected to be higher than the indifference point, management should choose the cost structure with the
higher fixed costs.
Chapter 3 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
Ch. 3 - Prob. 1QCh. 3 - Prob. 2QCh. 3 - Over the past year, M. D. Ryngaert Co. has...Ch. 3 - Prob. 4QCh. 3 - Prob. 5QCh. 3 - Prob. 6QCh. 3 - Prob. 1PCh. 3 - Prob. 2PCh. 3 - Prob. 3PCh. 3 - Prob. 4P
Ch. 3 - Prob. 5PCh. 3 - Prob. 6PCh. 3 - Ace Industries has current assets equal to 3...Ch. 3 - Prob. 8PCh. 3 - Prob. 9PCh. 3 - Prob. 10PCh. 3 - Complete the balance sheet and sales information...Ch. 3 - The Kretovich Company had a quick ratio of 1.4, a...Ch. 3 - Prob. 13PCh. 3 - Prob. 14PCh. 3 - Prob. 1MCCh. 3 - Prob. 2MCCh. 3 - Prob. 3MCCh. 3 - Prob. 4MCCh. 3 - Prob. 5MCCh. 3 - Prob. 6MCCh. 3 - Prob. 7MCCh. 3 - Prob. 8MCCh. 3 - Prob. 9MCCh. 3 - Prob. 10MC
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- Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between a grocery chain and a steel company? Think particularly about the turnover ratios, the profit margin, and the DuPont equation.arrow_forwardIn few words give me a substantive comment on this post: Cost-Volume-Profit (CVP) analysis is a financial tool used by businesses to analyze the relationship between sales volume, costs, and profits. It provides information as to how changes in these factors have an impact on a company's financial performance. The basic components of CVP analysis include sales revenue, variable costs, fixed cost, contribution margin, break-even point, and profit planning. Determining a company's break-even point is important. It offers multiple analyses and helps with many valuable decision-making opportunities. The break-even analysis allows a company to understand the minimum level of sales required to cover all its costs. Knowing the break-even point enables better decision-making in various areas, such as setting sales targets, pricing products, determining production levels, and evaluating investment opportunities. Identifying the break-even point helps a business understand the level of sales…arrow_forwardwhich of the following is considered a signal of success for a manufacturing company? A) A low quick ratio B) A high inventory turnover ratio C) A high current ratio D) Low quality costsarrow_forward
- What can the weighted average contribution margin ratio be used for? To solve for a measure, at any level of sales volume, of the sensitivity of operating profit to changes in volume. Breakeven and profit planning for sales volume expressed in dollars (Y) rather than units (Q). To calculate an average per-unit contribution margin based on an assumed sales mix. To figure out the relative proportion in which a company’s products (or services) are sold. To determine the extent of fixed costs in an organization’s cost structure.arrow_forwardWhich of the following is the indicator of the rate at which company is earning profit? Select one: a. Margin of safety b. All options are correct c. Contribution margin d. Profit volume ratioarrow_forward1. how would a cost volume profit analysis would be performed for a company that sells more than one product when the sales mix is known?arrow_forward
- . A company can use cost-volume-profit analysis to determine the level of sales required to earn a target profit. TRUE OR FALSEarrow_forwardWhat are the answers for the following? Construct a cost-volume-profit chart on your own paper. What is the break-even sales? What is the expected margin of safety in dollars and as a percentage of sales? Determine the operating leverage. Round to one decimal place.arrow_forwardThe Golden Fence Company and Stone Wall Corporation are competitors in manufacturing walls and fences. You are interested in comparing the two firms' profitability. Their income statements and other information are presented below. LOADING... (Click the icon to view the comparative income statements.) Golden Fence is the larger company based on sales and total assets, so you perform the following steps to compare and analyze the companies. Read the requirements LOADING... . Requirement a. Prepare common-size income statements. Comment on differences in the relative size of each line item. (Round percentages to the nearest tenth of a percent, X.X%.) Percent of Sales Golden Fence Stone Wall Golden Fence Stone Wall (amounts in millions) Company Corporation Company Corporation Sales $987,236 $67,450 % % Cost of goods sold 678,626 43,370 % % Gross profit 308,610 24,080…arrow_forward
- Pick two companies in the same industry.a. Determine their DOL, DFL, and DCL.b. What effect does a change in sales have on their operating income?c. What effect does a change in sales have on earnings per share?arrow_forwardshould a company promote the products with the greatest sales prices, greatest gross profit margin or greatest gross profit margin percentage?arrow_forwardThe difference between the average customer’s willingness to pay and the total costs of a product is known as ______. When a company makes a profit, the difference between the price of the product and the cost of production is known as what? Value creation and value capture are key concepts for which parts of business? If a company innovates in a way that reduces its production costs without affecting any features of the product, would that create value? Suppose a price war was to erupt in the airline market, which causes prices for flights to decline, but affected nothing else about the industry. Would this change the value created by airlines? Suppose a price war was to erupt in the airline market, which causes prices for flights to decline, but affected nothing else about the industry. Would this change the value captured by airlines? Please solve all part and do not give solution in image format thankuarrow_forward
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