EpicSept Is About to Introduce a New Employee Monitoring Tool

question 16

Multiple Choice

EpicSept is about to introduce a new employee monitoring tool which it will sell for $100 per unit. The firm must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortization expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortization expenses of $500. If EBIT Break-even is how the firm evaluates its projects, then above what level of expected sales should EpicSept choose the high fixed cost alternative?

• A) 60 units
• B) 90 units
• C) 120 units
• D) 180 units

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Definitions:

Firm Commitment Underwriting

Underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

IPO Underpricing

The phenomenon where the initial offering price of a stock is set lower than the market price on its first day of trading.

Direct Private Long-term Debt Financing

A type of financing where companies borrow money directly from private investors, bypassing traditional bank loans and public markets.

Public Issues

The process by which a private company goes public by offering its shares to the public for the first time.