Operating and Financial Leverage

Chapter 5

Operating and Financial Leverage

Discussion Questions

|5-1. |Discuss the various uses for break-even analysis. |
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| |Such analysis allows the firm to determine at what level of operations it will break even (earn zero profit) |
| |and to explore the relationship between volume, costs, and profits. |
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|5-2. |What factors would cause a difference in the use of financial leverage for a utility company and an automobile |
| |company? |
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| |A utility is in a stable, predictable industry and therefore can afford to use more financial leverage than an |
| |automobile company, which is generally subject to the influences of the business cycle. An automobile |
| |manufacturer may not be able to service a large amount of debt when there is a downturn in the economy. |
| | |
|5-3. |Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities |
| |(labor intensive versus capital intensive). |
| |