MANAGEMENT ADVISORY SERVICES QUESTIONS AND ANSWERS COMPILED BY: MA. CRISTINA P. OBESO, CPA
THEORY 1.
Which A. B. C. D.
2.
Which of the following is not considered in the cash conversion cycle? A. Receivable collection period B. Debt repayment period C. Inventory conversion period D. Payable deferral period
3.
Cash flows from capital budgeting projects are assumed to be received A. At the beginning of the year B. Evenly during the year C. At the end of the year D. At a certain point of the year
4.
In the absence of shutdown costs, A. Shutdown point is higher than breakeven point B. Shutdown point is equal to the breakeven point C. Shutdown point is lower than breakeven point D. One cannot determine the relationship between shutdown point and breakeven point
5.
The balanced scorecard approach does not require looking at performance from which of the following perspectives? A. Customer B. Employees C. Competitor D. Internal business processes
6.
Contribution margin ÷ profit after interests and preferred dividends = A. Degree of operation leverage B. Degree of financial leverage C. Degree of total leverage D. No meaningful amount
7.
If an increase in product price by 5% causes a decrease in quantity demanded by the same percentage, then the demand for the product is said to be A. Elastic B. Unit-elastic C. Inelastic D. Perfectly Elastic
8.
Under the high-low method, the unit variable cost closely resembles the math concept of A. Y-intercept B. X-intercept C. Slope of the line D. Independent variable
9.
Profit under variable costing fluctuates with A. Sales only B. Production only C. Both sales and production D. Neither sales nor production
A
B
C
B
C
C
B
C
A
C
of the following costs should consider the tax shield effect in computing the costs of capital? Cost of debt Cost of common stock Cost of preferred stock Cost of retained earnings
10. The path that has the highest slack time in the PERT network is A. Critical path B. Longest path C. Shortest path D. Psychopath
C
11.Which of the following is an invalid measure of productivity? A. Partial operational B. Partial financial C. Total operational D. Total financial
12.Which of the following situations is among the concerns of a controller (as opposed to those of a treasurer)? D A. The company is in need of financing from external sources. B. The company is already late in filing its monthly VAT returns. C. The company is guilty of unplanned material bank overdraft. D. The company is in default of its account payable to suppliers. B
A
C
A
A
A
A
D
13. A firm’s working capital financing requirements may be divided into A. Aggressive and conservative B. Seasonal and permanent C. Current and non-current D. Internal and external 14. Dividend yield multiplied by price-earnings ratio A. Pay-out ratio B. Retention ratio C. Equity ratio D. Earnings per share 15. A term A. B. C. D.
descriptive of managerial accounting. Historical financial statements Generally accepted accounting principles Discretionary Regulatory
16. Identify the term that does not belong to the group. A. Differential cost B. Prevention cost C. Appraisal cost D. Internal failure cost 17. Which A. B. C. D.
of the following capital budgeting techniques is non-discounted? Simple rate of return Sophisticated rate of return Benefit-cost ratio Net present value
18. Identify the term that does not belong to the group. A. Probability analysis B. Regression analysis C. High-low method D. Scattergraph method 19. A system not used in inventory management. A. Lockbox system B. Economic order quantity C. Materials requirement planning system D. ABC system 20. A factor that is dealt with by both ‘linear programming’ and ‘best product combination.’ A. Efficiency B. Productivity C. Solvency D. Scarcity
21. A(n) ________ cost increases or decreases in intervals as activity changes. a. historical cost b. fixed cost c. step cost d. budgeted cost ANS:
C
22. which of the following is not a product cost component? a. rent on a factory building b. indirect production labor wages c. janitorial supplies used in a factory d. commission on the sale of a product ANS: 23.
Which of the following always has a direct cause-effect relationship to a cost? Predicto r
a. b. c. d.
D
Cost driver
yes yes no no
ANS:
yes no yes no
C
24.The distinction between direct and indirect costs depends on whether a cost a. is controllable or non-controllable. b. is variable or fixed. c. can be conveniently and physically traced to a cost object under consideration. d. will increase with changes in levels of activity. ANS: C 25.Costs that are incurred for monitoring and inspecting are: a. prevention costs c. appraisal costs b. detection costs d. failure costs ANS:
C
26.Costs that are incurred to preclude defects and improper processing are: a. prevention costs c. appraisal costs b. detection costs d. failure costs ANS:
A
27. Costs that are incurred when customers complain are: a. prevention costs c. appraisal costs b. detection costs d. failure costs ANS:
D
28.The estimated maximum potential activity for a specified time is: a. theoretical capacity c. normal capacity b. practical capacity d. expected capacity ANS:
A
29. Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200 and that this amount is material. What journal entry is needed to close the overhead account? (Round decimals to nearest whole percent.) a. Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450 and credit Overhead $37,200 b. Debit Overhead $37,200 and credit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450 c. Debit Work in Process $37,200 and credit Overhead $37,200 d. Debit Cost of Goods Sold $37,200 and credit Overhead $37,200
ANS: A WIP: 73,150/321,800 = $ 8,456 FG: 115,000/321,800 = $13,294 EI: 133,650/321,800 = $15,450 30.If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in a. higher income and assets. b. higher income but lower assets. c. lower income but higher assets. d. lower income and assets. ANS:
A
31. A functional classification of costs would classify "depreciation on office equipment" as a a. product cost. b. general and administrative expense. c. selling expense. d. variable cost. ANS:
B
32. If a firm uses variable costing, fixed manufacturing overhead will be included a. only on the balance sheet. b. only on the income statement. c. on both the balance sheet and income statement. d. on neither the balance sheet nor income statement. ANS:
B
33.The costing system that classifies costs by both functional group and behavior is a. process costing. b. job order costing. c. variable costing. d. absorption costing. ANS: C 34. Unabsorbed fixed overhead costs in an absorption costing system are a. fixed manufacturing costs not allocated to units produced. b. variable overhead costs not allocated to units produced. c. excess variable overhead costs. d. costs that cannot be controlled. ANS:
A
35. A firm presently has total sales of $100,000. If its sales rise, its a. net income based on variable costing will go up more than its net income based on absorption costing. b. net income based on absorption costing will go up more than its net income based on variable costing. c. fixed costs will also rise. d. per unit variable costs will rise. ANS: A 36.The term cost driver refers to a. any activity that can be used to predict cost changes. b. the attempt to control expenditures at a reasonable level. c. the person who gathers and transfers cost data to the management accountant.
d. any activity that causes costs to be incurred. ANS:
D
37.The term cost driver refers to a. any activity that can be used to predict cost changes. b. the attempt to control expenditures at a reasonable level. c. the person who gathers and transfers cost data to the management accountant. d. any activity that causes costs to be incurred. ANS:
D
38. Activity-based costing and activity-based management are effective in helping managers do all of the following except a. trace technology costs to products. b. promote excellence standards. c. identify only value-added activities. d. analyze performance problems. ANS: C 39.The amount of time between the development and the production of a product is a. the product life cycle. b. lead time. c. production time. d. value-added time. ANS:
B
40. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as a. non-value-added activities. b. business-value-added activities. c. value-added-activities. d. process-efficiency activities. ANS:
C
41.If a firm's net income does not change as its volume changes, the firm('s) a. must be in the service industry. b. must have no fixed costs. c. sales price must equal $0. d. sales price must equal its variable costs. ANS:
D
42. Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit. As with many such techniques, the accountant oversimplifies the real world by making assumptions. Which of the following is not a major assumption underlying CVP analysis? a. All costs incurred by a firm can be separated into their fixed and variable components. b. The product selling price per unit is constant at all volume levels. c. Operating efficiency and employee productivity are constant at all volume levels. d. For multi-product situations, the sales mix can vary at all volume levels. ANS:
D
43.Consider the equation X = Sales - [(CM/Sales) × (Sales)]. What is X? a. net income b. fixed costs c. contribution margin d. variable costs ANS:
D
44. The contribution margin ratio always increases when the a. variable costs as a percentage of net sales increase. b. variable costs as a percentage of net sales decrease. c. break-even point increases. d. break-even point decreases. ANS:
B
45. In a multiple-product firm, the product that has the highest contribution margin per unit will a. generate more profit for each $1 of sales than the other products. b. have the highest contribution margin ratio. c. generate the most profit for each unit sold. d. have the lowest variable costs per unit. ANS:
C
46.If a company's fixed costs were to increase, the effect on a profit-volume graph would be that the a. contribution margin line would shift upward parallel to the present line. b. contribution margin line would shift downward parallel to the present line. c. slope of the contribution margin line would be more pronounced (steeper). d. slope of the contribution margin line would be less pronounced (flatter). ANS:
B
47. If a cost is irrelevant to a decision, the cost could not be a. a sunk cost. b. a future cost. c. a variable cost. d. an incremental cost. ANS:
D
48.The term incremental cost refers to a. the profit foregone by selecting one choice instead of another. b. the additional cost of producing or selling another product or service. c. a cost that continues to be incurred in the absence of activity. d. a cost common to all choices in question and not clearly or feasibly allocable to any of them. ANS:
B
49. Irrelevant costs generally include Sunk costs a. b. c. d.
Historical costs
yes yes no yes
ANS:
yes no no yes
D
Allocated costs no no yes yes
50.The potential rental value of space used for production activities a. is a variable cost of production. b. represents an opportunity cost of production. c. is an unavoidable cost. d. is a sunk cost of production. ANS: B 51.In a make or buy decision, the reliability of a potential supplier is a. an irrelevant decision factor. b. relevant information if it can be quantified. c. an opportunity cost of continued production. d. a qualitative decision factor. ANS: D 52. Which of the following costs is irrelevant in making a decision about a special order price if some of the company facilities are currently idle? a. direct labor b. equipment depreciation c. variable cost of utilities d. opportunity cost of production ANS: B 53.A manager is attempting to determine whether a segment of the business should be eliminated. The focus of attention for this decision should be on a. the net income shown on the segment's income statement. b. sales minus total expenses of the segment. c. sales minus total direct expenses of the segment. d. sales minus total variable expenses and avoidable fixed expenses of the segment. ANS: D 54.An increase in direct fixed costs could reduce all of the following except a. product line contribution margin. b. product line segment margin. c. product line operating income. d. corporate net income. ANS: A 55. A linear programming problem can have a. no more than three resource constraints. b. only one objective function. c. no more than two dependent variables for each constraint equation. d. no more than three independent variables. ANS: B 56.Contracting with vendors outside the organization to obtain or acquire goods and/or services is called a. target costing. b. insourcing. c. outsourcing. d. product harvesting. ANS: C 57.An outside firm selected to provide services to an organization is called a a. contract vendor. b. lessee. c. network organization. d. centralized insourcer.
ANS: A 58.Which of the following costs would not be accounted for in a company's recordkeeping system? a. an unexpired cost b. an expired cost c. a product cost d. an opportunity cost ANS: D 59. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the a. pre-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock. b. pre-tax rate of interest for bonds and stated annual dividend rate for preferred stock. c. after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock. d. after-tax rate of interest for bonds and stated annual dividend rate for preferred stock. ANS: D 60.All other factors equal, a large number is preferred to a smaller number for all capital project evaluation measures except a. net present value. b. payback period. c. internal rate of return. d. profitability index. ANS: B 61. If investment A has a payback period of three years and investment B has a payback period of four years, then a. A is more profitable than B. b. A is less profitable than B. c. A and B are equally profitable. d. the relative profitability of A and B cannot be determined from the information given. ANS: D 62.The time value of money is explicitly recognized through the process of a. interpolating. b. discounting. c. annuitizing. d. budgeting. ANS: B 63.When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important? a. method of financing the project under consideration b. timing of cash flows relating to the project c. impact of the project on income taxes to be paid d. amounts of cash flows relating to the project ANS: A 64.When a project has uneven projected cash inflows over its life, an analyst may be forced to use _______ to find the project's internal rate of return.
a. b. c. d.
a a a a
screening decision trial-and-error approach post investment audit time line
ANS: B 65.In capital budgeting, a firm's cost of capital is frequently used as the a. internal rate of return. b. accounting rate of return. c. discount rate. d. profitability index. ANS: C 66. The a. b. c. d.
net present value method of evaluating proposed investments measures a project's internal rate of return. ignores cash flows beyond the payback period. applies only to mutually exclusive investment proposals. discounts cash flows at a minimum desired rate of return.
ANS: D 67. Strategic planning is a. planning activities for promoting products for the future. b. planning for appropriate assignments of resources. c. setting standards for the use of important but hard-to-find materials. d. stating and establishing long-term plans. ANS: D 68.Chronologically, the first part of the master budget to be prepared would be the a. sales budget. b. production budget. c. cash budget. d. pro forma financial statements. ANS: A
PROBLEMS 1.
Jonlee Corporation reported sales of P 80,000 in 2006, P 96,000 in 2007 and P 112,000 in 2008. In an index analysis where 2007 is used as the base year, the respective sales percentages would be A. 80%; 96%; 112% B. 83%; 100%; 117% C. 80%; 100%; 120% D. 100%; 120%; 140%
2.
Green Company plans to purchase new equipment costing P 140,000 plus freight and installation costs estimated at P 23,000. The purchase of the new equipment will prevent the company from having to incur costs of P 30,000 to repair equipment now in service. Depreciation on the new equipment has been estimated at P 20,000 each year. The income tax rate is 40%. The net investment in the new equipment for capital investment planning is A. P 173,000 B. P 153,000 C. P 145,000 D. P 131,000
3.
If the following data are estimated for next year, what unit sales would be needed to earn P 150,000 after taxes? Forecast sales (P 30 per unit) P 600,000 Variable costs 240,000 Manufacturing fixed costs 90,000 Administrative fixed costs 120,000 Assumed tax rate 40%
B
C
D
A.
13,333 units
B. C. D. 4.
If the economy is facing demand-pull inflation, which of the following would be a logical action by the government? A. Increase income taxes B. Lower the discount rate C. Buy government securities D. Increase government spending
5.
A supplier extends a credit term of 2/10, n/60 (EOM). The EOM (end-of-month) term has effectively extended credit period up to an average of 75 days from the last day of the discount period.
A
Using a 365-day year, what is the nominal annual cost of trade credit? A. 11.45% B. 11.30% C. 9.93% D. 9.80%
C
6.
Red Company established a standard cost for raw materials at P 25.00 per unit. During the year, a total of 10,000 units were purchased of which 50% was at P 24.70 each, 20% was at P 24.90 each, and the balance, P 25.60 each. The raw materials cost variance is A. P 100 debit B. P 100 credit C. P 900 debit D. P 900 credit
7.
On January 1, 2008, Brown Company has a receivable balance of P 1 M. During 2008, it generated sales amounting to P 20 M, of which 60% is made on credit. 2008 receivable collections amounted to P 9,000,000. The accounts receivable turnover is A. 12.4 x B. 6.0 x C. 4.8 x D. 2.4 x
8.
A careful study by a company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is P 11.6 per mile. If a truck is driven only 80,000 miles, the average operating cost increases to P 13.6 per mile. Using the high-low method, estimate the unit variable cost. A. 7.6 B. 12.4 C. 12.6 D. 20,000
9.
Pink Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink can rent a house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink can construct an on-site office. Pink estimates that the construction of an on-site office would require materials costing P 1,500 (20 percent of which are salvageable upon dismantling) and labor costing P 1,000. Ignoring interest and income tax effects, Pink will realize a net benefit by constructing its own on-site office of Forbidden Kingdom project only if the length of the project is estimated to be at least: A. 18 months B. 20 months C. 22 months D. 25 months
A
C
A
C
C
18,889 units 20,000 units 25,556 units
10. Assuming P 20,000 net annual cash inflows from a 4-year P 59,120-capital investment project, the break-even rate of return (IRR) for the project is closest to A. 11.1% B. 12.2% C. 13.3% D. 14.4% 11. Assuming a current ratio of 3.5 and a quick ratio of 1.4, determine the amount inventory of a company whose current liabilities are P 120,000 and long-term liabilities P 480,000. ANSWER: P 252,000
12. Blue, Inc. uses a learning curve of 80% for all new products it develops. A trial run of 500 units of a new product shows total labor-related costs (direct, indirect labor, and fringe benefits) of P 120,000. Management plans to produce 1,500 units of the new product during the next year. Determine the unit cost of production for next year for labor-related costs. Round-off answer to the nearest whole amount. ANSWER: P 125 13. Return on equity is 20%. Return on investment is 5%. Determine the debt-equity ratio. ANSWER: 3x or 3:1 or 300% 14. Purchases = 80% of cost of sales; Fixed overhead is, on the average, 20% of inventory cost. If cost of goods sold is P 250,000, then how much is the difference in income reported under absorption costing and variable costing? ANSWER: P 10,000 15. Yellow Corporation’s estimated its after-tax cost of capital is 7.8%. It has the following capital structure: Common stock 50% Preferred stock 20% Long-term debt 30% Assuming the company’s cost of common equity is 10%, the cost of preferred equity is 8%, and the firm’s tax rate is 40%, what is the pre-tax cost of long-term debt? Round-off answer to two decimal places. (2 minutes) ANSWER: 6.67% 16. 10% is the profit margin when sales level last year reached P 100,000. If the operating leverage last year was 4 times, then what would have been the variable costs last year to break-even? ANSWER: P 45,000 17. If the annual percentage rate of interest is 10 percent compounded quarterly and payments are to be made quarterly, then how many percent is the effective annual rate? (Round-off answer to two decimal places) ANSWER: 10.38% 18. Plowback ratio is 40% while dividend yield is 20%. If earnings per share is P 20, then how much would be the initial public offering per share? ANSWER: P 60 19. Black Merchandising has an optimal order quantity of 2,000 units. Black’s customers demand 50,000 units each year. Transaction cost incurred is P 12 per order. If Black also maintains a safety stock of 100 units, then how much is the total annual carrying costs? ANSWER: P 330.00 20. Net profit ratio ÷ contribution margin ratio = __________ ANSWER: Margin of safety ratio (or safety margin percentage)
PROBLE 21-24
Langley Corporation Langley Corporation has the following standard costs associated with the manufacture and sale of one of its products: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead
Variable selling expenses
$3.00 per unit 2.50 per unit 1.80 per unit 4.00 per unit (based on an estimate of 50,000 units per year) .25 per unit
Fixed SG&A expense
$75,000 per year
During its first year of operations Langley manufactured 51,000 units and sold 48,000. The selling price per unit was $25. All costs were equal to standard. 21. Refer to Langley Corporation. Under absorption costing, the standard production cost per unit for the current year was a. $11.30. b. $ 7.30. c. $11.55. d. $13.05. ANS: A DM + DL + VFOH + FFOH = Standard Cost per Unit $3.00 + $2.50 + $1.80 + $4.00 = $11.30
22. Refer to Langley Corporation. The volume variance under absorption costing is a. $8,000 F. b. $4,000 F. c. $4,000 U. d. $8,000 U. ANS: B 1,000 favorable units production variance * $4.00 fixed factory overhead = $4,000 F
23. Refer to Langley Corporation. Under variable costing, the standard production cost per unit for the current year was a. $11.30. b. $7.30. c. $7.55. d. $11.55. ANS: B DM + DL + VOH = Standard Production Cost per Unit $3.00 + $2.50 + $1.80 = $7.30
24. Refer to Langley Corporation. Based on variable costing, the income before income taxes for the year was a. $570,600. b. $560,000. c. $562,600. d. $547,500. ANS: C Sales: Variable Expenses Contribution Margin Fixed Expenses Overhead Net Income
Problem 25-26
$1,200,000 362,400 $ 837,600 $ 200,000 75,000 $ 562,600 =========
Smithson Company Smithson Company produces two products (A and B). Direct material and labor costs for Product A total $35 (which reflects 4 direct labor hours); direct material and labor costs for Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functions are needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each period.
25.Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product A will be a. $86.32. b. $95.00. c. $115.50. d. None of the responses are correct. ANS: C Total OH
Proportion
$ 0.08256880 780,000 7 (7,200/87,2 00)
Allocated OH
Units OH per Produced Unit $ 800 $ 64,403.67 80.50
DM and DL/Unit
Total
$ $ 35.00 115.50
26. Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product B will be a. $115.50. b. $73.32. c. $34.60. d. None of the responses are correct. ANS: D Total OH
Proportion
$ 0.917431193 780,000 (80,000/87,2 00)
Allocated OH
Units OH per Produced Unit $ 8000 $ 715,596.33 89.44
DM and DL/Unit
Total
$ $ 22.00 111.44
27. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000. What is the firm budgeting for fixed costs in the coming period? a. $1,600,000 b. $2,400,000 c. $1,100,000 d. $1,900,000 ANS: D Profit + Fixed Cost = (100,000 units * $60/unit CM) Fixed Cost = (100,000 units * $24/unit CM) - Profit = $2,400,000 - $500,000
= $1,900,000 28. Sombrero Company manufactures a western-style hat that sells for $10 per unit. This is its sole product and it has projected the break-even point at 50,000 units in the coming period. If fixed costs are projected at $100,000, what is the projected contribution margin ratio? a. 80 percent b. 20 percent c. 40 percent d. 60 percent ANS: B Fixed Costs=Contribution Margin at Breakeven Point = $100,000 Breakeven Sales: $500,000 CM Ratio: $(100,000/500,000) = 20% 29. The following information pertains to Saturn Company’s cost-volume-profit relationships: Break-even point in units sold Variable costs per unit Total fixed costs
1,000 $500 $150,000
How much will be contributed to profit before taxes by the 1,001st unit sold? a. $650 b. $500 c. $150 d. $0 ANS: C Fixed Cost = Contribution Margin = $150,000 Contribution Margin/Unit = Contribution Margin/Units $150,000/1,000 units = $150/unit 30. Ledbetter Company reported the following results from sales of 5,000 units of Product A for June: Sales Variable costs Fixed costs Operating income
$200,000 (120,000) (60,000) $ 20,000
Assume that Ledbetter increases the selling price of Product A by 10 percent in July. How many units of Product A would have to be sold in July to generate an operating income of $20,000? a. 4,000 b. 4,300 c. 4,545 d. 5,000 ANS: A If sales price per unit is increased by 10 percent, less units will have to be sold to generate gross revenues of $200,000. Sales price per unit = $200,000/5,000 units = $40/unit $40/unit * 1.10 = $44/unit $(200,000 / 44/unit) = 4,545 units
31.Knox Company uses 10,000 units of a part in its production process. The costs to make a part are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Knox has received a quote of $55 from a potential supplier for this part. If Knox buys the part, 70 percent of the applied fixed overhead would continue. Knox Company would be better off by a. $50,000 to manufacture the part. b. $150,000 to buy the part. c. $40,000 to buy the part. d. $160,000 to manufacture the part. ANS: C Cost to make: $55/unit * 10,000 units = $550,000 Cost to manufacture: $(12+25+13+9)= $59/unit Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000 32.Unique Company manufactures a single product. In the prior year, the company had sales of $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects its cost structure and sales price per unit to remain the same in the current year, however total sales are expected to increase by 20 percent. If the current year projections are realized, net income should exceed the prior year’s net income by: a. 100 percent. b. 80 percent. c. 20 percent. d. 50 percent. ANS: B Contribution margin: $40,000 Net profit: $(40,000 - 30,000) = $10,000 20% CM increase: $40,000 * 1.20 = $48,000 Net profit: $(48,000 - 30,000) = $18,000 Increase in profit
$8,000
$8,000/$10,000 = 80% 33.Paulson Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Paulson Company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of a. $250,000. b. $240,000. c. $210,000. d. $200,000. ANS: B Assume 80% of capacity applied to Product X X: 20,000 hrs/5 hrs 4,000 units * $50 per unit CM/unit Y: 5,000 hrs/8 hrs per 625 units * $64 unit CM/unit
$200,00 0 40,000 Total $240,00 0
===== =
34.Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year ended December 31: Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net loss
$1,000,000 (800,000) $ 200,000 $100,000 250,000
(350,000) $ (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Doyle’s income would a. increase by $150,000. b. decrease by $ 75,000. c. decrease by $155,000. d. decrease by $215,000. ANS: C Sales foregone COGS avoided Variable Fixed Selling Expense Avoided Administrative Expense Avoided Decrease in income
$(1,000,000) $600,000 120,0 00
720,000 100,000 25,000 $( 155,000) =========
35. Thomas Company is currently operating at a loss of $15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Thomas wants this special order to increase the total net income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units? a. $23.50 b. $24.50 c. $27.50 d. $34.00 ANS: A In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit. Direct materials $ 4.50 Direct Labor 10.00 Variable 3.00 Overhead Variable Selling 1.00 Exp Production Costs $18.50 Additional profit per unit 5.00
Sales price/unit
$23.50 =====
36.Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it can make. The following data are pertinent to each respective product: Units of output per machine hour Selling price per unit Product cost per unit Direct material Direct labor Variable overhead
Brushes
Combs
8 $12.00
20 $4.00
$1.00 2.00 0.50
$1.20 0.10 0.05
Total fixed overhead is $380,000. The company has 40,000 machine hours available for production. What sales mix will maximize profits? a. 320,000 brushes and 0 combs b. 0 brushes and 800,000 combs c. 160,000 brushes and 600,000 combs d. 252,630 brushes and 252,630 combs ANS: A Brushes have a contribution margin of $8.50 per unit; combs have a contribution margin of $2.65 per unit. The combination of 320,000 brushes and 0 combs provides a net profit of $340,000.
37. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of military combat boots to the Armed Forces. The company's costs per pair of boots are as follows: Direct material Direct labor Variable overhead Variable selling cost (commission) Fixed overhead (allocated) Fixed selling and administrative cost
$8 6 3 3 2 1
Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is some price greater than a. $23. b. $20. c. $17. d. $14. ANS: C The lowest price would have to be greater than the sum of all variable manufacturing costs. Variable manufacturing costs total $17; therefore the price would have to be greater than $17 per pair. Richmond Steel Corporation
The capital budgeting committee of the Richmond Steel Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more advanced model. Information on the existing machine and the new model follows: Original cost Market value now Market value in year 5 Annual cash operating costs Remaining life
Existing machine $200,000 80,000 0 40,000 5 yrs.
New machine $400,000 20,000 10,000 5 yrs.
38. Refer to Richmond Steel Corporation. The major opportunity cost associated with the continued use of the existing machine is a. $30,000 of annual savings in operating costs. b. $20,000 of salvage in 5 years on the new machine. c. lost sales resulting from the inefficient existing machine. d. $400,000 cost of the new machine. ANS: A 39. Datasoft Industries is considering the purchase of a $100,000 machine that is expected to result in a decrease of $15,000 per year in cash expenses. This machine, which has no residual value, has an estimated useful life of 10 years and will be depreciated on a straight-line basis. For this machine, the accounting rate of return would be a. 10 percent. b. 15 percent. c. 30 percent. d. 35 percent. ANS: C $15,000/($100,000/2) = 30% 40. An investment project is expected to yield $10,000 in annual revenues, has $2,000 in fixed costs per year, and requires an initial investment of $5,000. Given a cost of goods sold of 60 percent of sales, what is the payback period in years? a. 2.50 b. 5.00 c. 2.00 d. 1.25 ANS: A Net cash flow = $10,000 - $6,000 - $2,000 Net cash flow = $2,000 $5,000/$2,000 = 2.50 years Webber Corporation is considering an investment in a labor-saving machine. Information on this machine follows: Cost Salvage value in five years Estimated life Annual depreciation Annual reduction in existing costs
$30,000 $0 5 years $6,000 $8,000
41. Refer to Webber Corporation. What is the internal rate of return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are required. a. 37.5% b. 25.0% c. 10.5%
d. 13.5% ANS: C IRR = $30,000 / $8,000 = 3.75 Using PV of Annuity Table 5 years. The constant of 3.75 corresponds to a rate of 10.5% Rhodes Corporation Rhodes Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage value, and is expected to generate annual cost savings of $250,000. Based on Rhodes Corporation's analysis, the project has a net present value of $57,625. 42. Refer to Rhodes Corporation. What discount rate did the company use to compute the net present value? Present value tables or a financial calculator are required. a. 10% b. 11% c. 12% d. 13% ANS: B NPV = $ 57,625 Initial Cost = $1,000,000 PV of Cash Inflows = $1,057,625 Annual Cost Savings =$ 250,000 $1,057,625/$250,000 = 4.2305 PV of Annuity Constant At 6 years, the constant corresponds to a discount rate of 11%. DIF: Moderate
OBJ: 14-3
43. Refer to Rhodes Corporation. What is the project's profitability index? a. 1.058 b. .058 c. .945 d. 1.000 ANS: A PI = $1,057,625/1,000,000 = 1.058 DIF: Moderate
OBJ: 14-3
44. Refer to Rhodes Corporation. What is the project's internal rate of return? Present value tables or a financial calculator are required. a. between 12.5 and 13.0 percent b. between 11.0 and 11.5 percent c. between 11.5 and 12.0 percent d. between 13.0 and 13.5 percent ANS: A $1,000,000/$250,000 = 4.000 Using the Present Value of Annuity Table for 6 years, the rate falls between 12.5% and 13% 45.Budgeted sales for the first six months for Porter Corp. are listed below: UNITS:
JANUARY 6,000
FEBRUARY 7,000
MARCH 8,000
APRIL 7,000
MAY 5,000
JUNE 4,000
Porter Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month's budgeted sales. If Porter Corp. plans to produce 6,000 units in June, what are budgeted sales for July? a. 3,600 units b. 1,000 units c. 9,000 units d. 8,000 units ANS: C Beginning Inventory for June 1,600 units (4,000 * 40%) Produced in June 6,000 units Deduct: June sales (4,000) units Ending inventory for June 3,600 units 3,600/0.40 = 9,000 units 46.Budgeted sales for Knox Inc. for the first quarter the year are shown below: UNITS:
JANUARY 35,000
FEBRUARY 25,000
MARCH 32,000
The company has a policy that requires the ending inventory in each period to be 10 percent of the following period's sales. Assuming that the company follows this policy, what quantity of production should be scheduled for February? a. 24,300 units b. 24,700 units c. 25,000 units d. 25,700 units ANS: D Ending Inventory, February February Sales Requirements for Month Less Beginning Inventory, February Production scheduled for February
3,200 units 25,000 units 28,200 units (2,500) units 25,700 units
47.Production of Product X has been budgeted at 200,000 units for May. One unit of X requires 2 lbs. of raw material. The projected beginning and ending materials inventory for May are: Beginning inventory: 2,000 lbs. Ending inventory: 10,000 lbs. How many lbs. of material should be purchased during May? a. 192,000 b. 208,000 c. 408,000 d. 416,000 ANS: C Ending inventory--May Production needs: 200,000 units * 2 lbs/unit Inventory needed Beginning inventory--May Total purchase requirements
10,000 lbs. 400,000 lbs. 410,000 lbs. (2,000) lbs. 408,000 lbs.
48.Edwards Company has the following expected pattern of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent is never collected. At the end of May, Edwards Company has the following accounts receivable balances: From April sales From May sales
$21,000 48,000
Edwards expected sales for June are $150,000. How much cash will Edwards Company expect to collect in June? a. $127,400 b. $129,000 c. $148,600 d. $152,520 ANS: C June sales ($150,000 * 70%) May sales (160,000 * 15%) April sales (140,000 * 14%) Total cash collections-June
$105,000 24,000 19,600 $148,600
