Mid-term2 Fall 2006

# Mid-term2 Fall 2006 - #16#17 Total VERSION#1 M I M E 310 E...

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VERSION #1 1 M I M E 310 E N G I N E E R I N G E C O N O M Y M I M E 310 E C O N O M Y Class Test #2 – Thursday, 16 November, 2006 – 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY NAME / INITIAL S O L U T I O N S STUDENT ID # This test consists of 15 multiple This test consists of 15 multiple-choice choice questions, and two problems requi questions, and two problems requiring a ing a full solution. full solution. Each correct multiple-choice question is worth 5 points. There are no penalties for incorrect answers. The problems are worth a total of 25 points. MULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet. Use the following information to answer questions 1 to 3. A fiberglass boat producer with a maximum production rate of 130 units per month has the fol- lowing production variables: Fixed Cost (FC) \$16 000 per month; constant average variable cost (vc) \$350; selling price (p) \$500. 1. By how much must the fixed cost be reduced if the break-even rate is to be 50 units per month? A) \$7500 B) \$8500 C) \$3500 D) \$12 500 E) None of the choices given above 2. Determine the contribution margin if the fixed cost is reduced to \$12 000, the average variable cost is increased to \$450, and the selling price is increased to \$600. A) \$150 B) \$600 C) \$450 D) \$100 E) None of the choices given above New B/E: FC / (500 - 350) = 50 FC = 150 (50) = 7500 FC must be reduced by (16 000 - 7500) = \$8500 #16: #17: Total: The contribution margin primarily applies to linear cost functions and it is defined as (p - vc). Thus, the contribution margin is (600 - 450) or \$150 .

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VERSION #1 2 3. Which of the statement(s) below is/are correct when the situation in question 2 above is compared to the situation in the problem statement? I. More flexible operation II. Less risk III. Lower profit growth A) I B) I & II C) II & III D) I, II & III E) None of the choices given above 4. Stephenson & Sons has a capital structure consisting of 20 percent equity and 80 percent debt. The company expects to report \$3 million in net income this year, and 60 percent of this amount will be paid out in dividends. How large can the firm’s capital budget (i.e. the amount it can invest) be this year without having to issue any new stock? A) \$1.20 million B) \$13.00 million C) \$1.50 million D) \$0.24 million E) \$6.00 million Use the following information to answer questions 5 to 7. Warrick Winery is considering two mutually exclusive projects, Project Red and Project White. The company has no budget constraint and it’s cost of capital is 10 percent. The projects have the fol- lowing distributions of cash flows: Year Project Red Project White Time 0 -\$1000 -\$1000 1 100 700 2 200 400 3 600 200 4 800 100 5. What is the internal rate of return of the project that has the higher net present value?
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## This note was uploaded on 11/22/2010 for the course MIME MIME 310 taught by Professor Jassim during the Winter '09 term at McGill.

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Mid-term2 Fall 2006 - #16#17 Total VERSION#1 M I M E 310 E...

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