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Assorted problems in Finance and Accounting

1. A company has operating profits of $15,000 on unit sales of 10,000 units. Fixed costs are $30,000. What is the firm's break-even sales level?
a) less than 6,000 units.
b) 6,000 units.
c) more than 6,000 units
d) There is not enough information to determine the unit break-even point.

2) Crenshaw Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan their rate will be 9 percent. By how much will their earnings after tax change if they choose the more conservative financing plan instead of the more aggressive plan?
a) ($10,800)
b) $6,000
c) ($6,000)
d) $10,000

3) Frederickson Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Frederickson has a turnover ratio of 6 to 1 between sales and accounts receivable. What is the return on investment?
a) 30%
b) 25%
c) 5%
d) none of these

4) Veritan Inc. expects to receive annual incremental income after taxes of $25,000 which includes an adjustment for un-collectible accounts. What is the maximum commitment to A/R they should be willing to assume if the firm's minimum required after-tax return is 8%?
a) $168,000
b) $312,500
c) $180,000
d) $36,000

Solution Preview

1) Contribution Margin = (operating profit+ fixed cost)/no. of units
= (15000+30000)/10000=$4.5

BEP=Fixed cost/Contribution margin=30000/4.5=6666.67

Correct option is C i.e. more than 6000 units

2) In the case of Aggressive financing, short term financing will be ...

Solution Summary

There are four assorted problems in finance. Solution to first problem depicts the steps to find out break even point. Solution to second problem calculates the change in after tax earnings as a result of adopting more aggressive plan. Solution to third problem describes the methodology to calculate ROI in the given case. Solution to 4th problem calculate the maximum commitment to A/R. All solutions are solved with the help of suitable formulas and explanation.