ctdi cpa review makati Unit 2D ,2nd Floor, Classica 1 Building , 112 H.V. H.V. Dela Costa St., Makati City Tel. Tel. Nos. !2!"!# and !$% &'( Ctdi Makati% )*ail(ctdire+ie-1g*ail .co*
MANAGEMENT ADVISORY SERVICES 11 1st Preboard
jaurojrtcbic
May 2018
ECONOMICS
1. Which one of the following statements about supply and demand is true? a. If supply increases and demand remains constant, equilibrium price will rise. b. If demand increases and supply increases, equilibrium quantity will fall. c. If demand increases and supply decreases, equilibrium price will increase. d. If demand increases and supply remains constant, equilibrium price will fall. Choice "c" is correct. If quantity q uantity demanded for a product goes up, this drives price up. dditionally, dditionally, if supply decreases, this will also drive prices u p. !herefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply. Choice "a" is incorrect. Increased supply will reduce not increase# prices, assuming demand remains constant. Choice "b" is incorrect. Increased demand will increase price, and increased supply will reduce price. !he net impact on price cannot be determined without more facts. Choice "d" is incorrect. Increased demand will increase not reduce# price, assuming supply remains constant. $. When the supply of and demand for a good both increase% a. &quilibrium price will increase. b. &quilibrium price will decrease. c. &quilibrium price may increase, decrease, or remain unchanged. d. &quilibrium quantity may increase, decrease, or remain unchanged. CPA-03694 Explanation
Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. 'owever, 'owever, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged as illustrated above#. 'owever, if demand increases by more than supply, supply, price will increase. Conversely, Conversely, if supply increases by more than demand, price will decrease. Choices "a" and "b" are incorrect, since the impact on price is indeterminate. Choice "d" is incorrect, since equilibrium quantity will increase. (. basic basic determinant of the elasticity of demand for a normal good is the% a. )ength of time producers have to respond to mar*et changes. b. +umber of substitutes available for the product. c. +umber of sellers of the product. d. +umber of complements available for the product. CPA-03697 Explanation
Choice "b" is correct. !he change in demand for a product, based upon a given change in that products price, is dependent on whether or not other presumably cheaper# goods can be substituted for the product. Choice "a" is incorrect. !he elasticity of supply not demand# would ta*e into account the response time producers might have to mar*et changes. Choice "c" is incorrect. !he number of sellers is irrelevant when calculating the elasticity of demand. Choice "d" is incorrect. complement complement goods demand is the same as the primary good. -or eample, an increase in the demand for a given food would cause the demand for its complement to also increase. !he increased demand of the complement is irrelevant when calculating the elasticity of demand. /. In the long run in a competitive mar*et, a maimum or ceiling price set below the equilibrium price will% a. Cause a surplus to be produced. b. 'ave no effect on the mar*et. c. Cause a shortage to be created. d. 0esult in a decrease in price. CPA-03728 Explanation
Choice "c" is correct. etting a ceiling price below the price dictated by mar*et forces which is the equilibrium price set by the supply and demand curves# would create ecess demand for the product at its reduced price# and, consequently, consequently, a shortage. Choice "a" is incorrect. surplus would be produced if a floor price under which no supplier could sell# were set above the equilibrium price, because suppliers would supply ecess product at the inflated price. Choices "b" and "d" are incorrect, per the above eplanation. 2. !he *in*ed demand curve is associated with%
1
a. !he analysis of agricultural mar*ets. b. !he analysis of monopolistic competition. c. !he analysis of pure competition. d. !he analysis of oligopoly. CPA-03446 Explanation
Choice "d" is correct. !he demand curve for any individual oligopolist is *in*ed sharply downward. !his occurs because, in oligopoly mar*et conditions, the other firms in the mar*et will match any price reduction so they do not lose mar*et share but will not match any price increase of an individual firm. !herefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quic*ly buy from other firms in the mar*et and demand will drop off sharply creating a *in*ed demand curve. Choices "a", "b", and "c" are incorrect, per the above eplanation. 3. If consumption is 456b, investment 426b, government spending 4$6b, eports 45b, and imports 42b, what is 789? a. 412$b. b. 41(:b. c. 41/6b. d. 41/$b. CPA-03406 Explanation
Choice "d" is correct. ;y the ependiture approach to measuring 789, 789, 789 equals% Consumption < Investment < 7overnment pending < &ports &ports = Imports. !hus, 789 > 56 < 26 < $6 < 5 = 2 > 1/$b. CPA-03407 Type1 M/C A-D Corr Ans D PM!24 " 2-02
/1. C9=6(/65 C- 5:$ 9age 15 5. When a wor*er quits wor* to stay at home with the children, it is an eample of% a. -rictional unemployment. b. tructural unemployment. c. Cyclical unemployment. d. +ot counted in unemployment figures. CPA-03407 Explanation
Choice "d" is correct. @nemployment only tallies wor*ers actively see*ing e mploymentA it does not count retirees or stay=at=home parents. Choice "a" is incorrect. -rictional unemployment describes wor*ers who leave wor* voluntarily to see* a better position. Choice "b" is incorrect. tructural unemployment describes wor*ers whose s*ills are no longer needed. Choice "c" is incorrect. Cyclical unemployment describes wor*ers unemployed due to the business cycle. (6. C9=6((3: 1;.C6$ = 1( 9age 1/ :. @nder the ependiture approach, 789 can be calculated as the sum of% a. Consumption, money supply, government purchases, and eports. b. Consumption, investment, transfer payments, and imports. c. Consumption, investment, government purchases, and net eports. d. Consumption, investment, government purchases, and foreign echange. CPA-03368 Explanation
Choice "c" is correct. @nder the ependiture approach, 789 is calculated as the sum of% consumption ependitures investment ependitures government purchases net eports. Choice "a" is incorrect. ee definition above. Choice "b" is incorrect. ee definition above. Choice "d" is incorrect. ee definition above. B. recession recession can be caused by% a. n increase in aggregate demand. b. decrease in aggregate supply. c. decrease in aggregate demand. d. ;oth "b" and "c". CPA-03233 Explanation
Choice "d" is correct. ;oth choices "b" and "c" can cause a recession. recession is defined as a period of falling 789 and rising unemployment. 789 will fall if there is a decrease in aggregate demand or a decrease in aggregate supply. supply. Choice "a" is incorrect. n increase in aggregate demand will cause 789 to increase +! decrease. Choice "b" is incorrect, per the above eplanation. Choice "c" is incorrect, per the above eplanation. CPA-03246 Type1 M/C A-D Corr Ans C PM!# " 2-01
2. C9=6($/3 C9=6($/3 1;.C6$ = $6 9age ( 16. period period during which real 789 is rising and unemployment is falling is called an#% a. 0ecession. b. 9ea*. c. &pansion. d. !rough. CPA-03246 Explanation
Choice "c" is correct. 8uring an epansion, real 789 is rising and unemployment is falling.
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a. !he analysis of agricultural mar*ets. b. !he analysis of monopolistic competition. c. !he analysis of pure competition. d. !he analysis of oligopoly. CPA-03446 Explanation
Choice "d" is correct. !he demand curve for any individual oligopolist is *in*ed sharply downward. !his occurs because, in oligopoly mar*et conditions, the other firms in the mar*et will match any price reduction so they do not lose mar*et share but will not match any price increase of an individual firm. !herefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quic*ly buy from other firms in the mar*et and demand will drop off sharply creating a *in*ed demand curve. Choices "a", "b", and "c" are incorrect, per the above eplanation. 3. If consumption is 456b, investment 426b, government spending 4$6b, eports 45b, and imports 42b, what is 789? a. 412$b. b. 41(:b. c. 41/6b. d. 41/$b. CPA-03406 Explanation
Choice "d" is correct. ;y the ependiture approach to measuring 789, 789, 789 equals% Consumption < Investment < 7overnment pending < &ports &ports = Imports. !hus, 789 > 56 < 26 < $6 < 5 = 2 > 1/$b. CPA-03407 Type1 M/C A-D Corr Ans D PM!24 " 2-02
/1. C9=6(/65 C- 5:$ 9age 15 5. When a wor*er quits wor* to stay at home with the children, it is an eample of% a. -rictional unemployment. b. tructural unemployment. c. Cyclical unemployment. d. +ot counted in unemployment figures. CPA-03407 Explanation
Choice "d" is correct. @nemployment only tallies wor*ers actively see*ing e mploymentA it does not count retirees or stay=at=home parents. Choice "a" is incorrect. -rictional unemployment describes wor*ers who leave wor* voluntarily to see* a better position. Choice "b" is incorrect. tructural unemployment describes wor*ers whose s*ills are no longer needed. Choice "c" is incorrect. Cyclical unemployment describes wor*ers unemployed due to the business cycle. (6. C9=6((3: 1;.C6$ = 1( 9age 1/ :. @nder the ependiture approach, 789 can be calculated as the sum of% a. Consumption, money supply, government purchases, and eports. b. Consumption, investment, transfer payments, and imports. c. Consumption, investment, government purchases, and net eports. d. Consumption, investment, government purchases, and foreign echange. CPA-03368 Explanation
Choice "c" is correct. @nder the ependiture approach, 789 is calculated as the sum of% consumption ependitures investment ependitures government purchases net eports. Choice "a" is incorrect. ee definition above. Choice "b" is incorrect. ee definition above. Choice "d" is incorrect. ee definition above. B. recession recession can be caused by% a. n increase in aggregate demand. b. decrease in aggregate supply. c. decrease in aggregate demand. d. ;oth "b" and "c". CPA-03233 Explanation
Choice "d" is correct. ;oth choices "b" and "c" can cause a recession. recession is defined as a period of falling 789 and rising unemployment. 789 will fall if there is a decrease in aggregate demand or a decrease in aggregate supply. supply. Choice "a" is incorrect. n increase in aggregate demand will cause 789 to increase +! decrease. Choice "b" is incorrect, per the above eplanation. Choice "c" is incorrect, per the above eplanation. CPA-03246 Type1 M/C A-D Corr Ans C PM!# " 2-01
2. C9=6($/3 C9=6($/3 1;.C6$ = $6 9age ( 16. period period during which real 789 is rising and unemployment is falling is called an#% a. 0ecession. b. 9ea*. c. &pansion. d. !rough. CPA-03246 Explanation
Choice "c" is correct. 8uring an epansion, real 789 is rising and unemployment is falling.
2
Choice "a" is incorrect. recession is when real 789 is falling +! rising. Becker CPA Review, PassMaster Questions Lecture: Business
! D $66B 8eEryF;ec*er 8eEryF;ec*er &ducational 8evelopment Corp. ll rights reserved.
Choice "b" is incorrect. pea* is the highest point of economic activity. activity. It is the point where real 789 is at its highest level in the cycle and unemployment is at its lowest level in the cycle. Choice "d" is incorrect. trough is the lowest level of economic activity. It is the point where real 789 is at its lowest level in the cycle and unemployment is at its highest level in the cycle. COS" BE#A$IOR
11. !he management of 8in*y !ree !rimming believes that the number of trees trimmed each month is an appropriate activity measure for total operating cost. hown below are the number of trees trimmed and operating costs in each of the last three months%
Trees rees Trimm rimmed ed Oper Operat atin ing g Cost Cost March..................... 12 $2,600 April....................... 18 $2,990 May........................ 20 $,2!0 What is 8in*ys cost formula for monthly operating cost using the least=squares regression method? # G > 4/5:./6 < 4153.:6H ;# G > 41,3$2 < 4:1.$2H C# G > 41,322 < 455.26H 8# G > 4:,:/6 < 4153.:6H ns% C C;% nalytic IC9 IC9 ;;% Critical !hin*ing ppendi% 2 )% 2 )evel% 'ard olution% !he solution using icrosoft &cel functions is% slope > 455.26 per tree intercept > 41,322 per month
3
IC9 IC9 -+% 0eporting
1$. Gour boss would li*e you to estimate the fied and variable components of a particular cost. ctual data for this cost over four recent periods appear below%
#eriod 1...... #eriod 2...... #eriod ...... #eriod ......
Acti"ity 26 29 2! 2
Cost $269 $28! $2!6 $2!
@sing the least=squares regression method, what is the cost formula for this cost? # G > 46.66 < 416.$(H ;# G > 4B5.66 < 43.26H C# G > 4B1./6 < 43.5$H 8# G > 4BB.16 < 42.11H ns% ; C;% nalytic IC9 ;;% Critical !hin*ing ppendi% 2 )% 2 )evel% 'ard
IC9 -+% 0eporting
olution% !he solution using icrosoft &cel functions is% slope > 43.26 per activity unit intercept > 4B5.66 per period @se the following to answer questions 1(=12% Callaghan Corporation is a wholesaler that sells a single product. anagement has provided the following cost data for two levels of monthly sales volume. !he company sells the product for 41(:.$6 per unit.
%ales "ol&me '&nits(....................... 6,000 ),000 Cost o* sales................................... $99,200 $!82,00 %elling and administrati"e costs..... $28!,600 $0,800
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1(. !he best estimate of the total monthly fied cost is% # 4153,/66 ;# 4:(2,266 C# 45:/,:66 8# 4::3,$66 ns% C;% nalytic )% 1,( )evel% edium
IC9 ;;% Critical !hin*ing
olution%
+ariale component o* cost o* goods sold+ariale cost Change in costs/Change in &nits +ariale cost '$!82,00 $99,200(/'),000 6,000( +ariale cost $8.20 ied cost3igh "ol&me- $!82,00 $8.20 4 ),000 $0 5o "ol&me- $99,200 $8.20 4 6,000 $0 +ariale component o* selling and administrati"e epenses+ariale cost Change in costs/Change in &nits +ariale cost '$0,800 $28!,600(/'),000 6,000( +ariale cost $18.20 ied cost3igh "ol&me- $0,800 $18.20 4 ),000 $1)6,00 5o "ol&me- $28!,600 $18.20 4 6,000 $1)6,00 Total "ariale cost per &nit$8.20 7 $18.20 $101.0 Total *ied cost$0 7 $1)6,00 $1)6,00
#
IC9 -+% 0eporting
1/. !he best estimate of the total variable cost per unit is% # 4:(.$6 ;# 41$3.36 C# 4161./6 8# 41(6.:6 ns% C )% 1,(
C;% nalytic )evel% edium
IC9 ;;% Critical !hin*ing
olution%
+ariale component o* cost o* goods sold+ariale cost Change in costs/Change in &nits +ariale cost '$!82,00 $99,200(/'),000 6,000( +ariale cost $8.20 ied cost3igh "ol&me- $!82,00 $8.20 4 ),000 $0 5o "ol&me- $99,200 $8.20 4 6,000 $0 +ariale component o* selling and administrati"e epenses+ariale cost Change in costs/Change in &nits +ariale cost '$0,800 $28!,600(/'),000 6,000( +ariale cost $18.20 ied cost3igh "ol&me- $0,800 $18.20 4 ),000 $1)6,00 5o "ol&me- $28!,600 $18.20 4 6,000 $1)6,00 Total "ariale cost per &nit$8.20 7 $18.20 $101.0 Total *ied cost$0 7 $1)6,00 $1)6,00
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IC9 -+% 0eporting
12. !he best estimate of the total contribution margin when 3,(66 units are sold is% # 45(,6:6 ;# 4$(1,:/6 C# 4/3,3$6 8# 4(/3,266 ns% ; C;% nalytic )% 1,(,/ )evel% edium
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution%
+ariale component o* cost o* goods sold+ariale cost Change in costs/Change in &nits +ariale cost '$!82,00 $99,200(/'),000 6,000( +ariale cost $8.20 ied cost3igh "ol&me- $!82,00 $8.20 4 ),000 $0 5o "ol&me- $99,200 $8.20 4 6,000 $0 +ariale component o* selling and administrati"e epenses+ariale cost Change in costs/Change in &nits +ariale cost '$0,800 $28!,600(/'),000 6,000( +ariale cost $18.20 ied cost3igh "ol&me- $0,800 $18.20 4 ),000 $1)6,00 5o "ol&me- $28!,600 $18.20 4 6,000 $1)6,00 Total "ariale cost per &nit$8.20 7 $18.20 $101.0 Total *ied cost$0 7 $1)6,00 $1)6,00 %ales re"en&e '$18.20 4 6,00(......................... $8)0,660 +ariale epenses+ariale cost o* goods sold '$8.20 4 6,00(... $!2,160 +ariale selling and administrati"e epense '$18.20 4 6,00(........................................... 11,660 68,820 Contri&tion margin............................................ $ 21,80 @se the following to answer questions 13=1:% Comparative income statements for ;oggs ports &quipment Company for the last two months are presented below%
%ales in &nits.................................................... %ales................................................................. Cost o* goods sold............................................ ross margin.................................................... %elling and administrati"e epenses:ent............................................................... %ales commissions........................................ Maintenance epenses.................................. Clerical epense............................................ Total selling and administrati"e epenses........ ;et operating income....................................... 7
&ly A&g&st 11,000 10,000 $16!,000 $1!0,000 )2,600 66,000 92,00 8,000 12,000 1,200 1,!00 16,000 !,)00 $ ),)00
12,000 12,000 1,000 1!,000 !2,000 $ 2,000
ll of the companys costs are either fied, variable, or a miture of the two i.e., mied#. ssume that the relevant range includes all of the activity levels mentioned in this problem. 13. Which of the selling and administrative epenses of the company is variable? # 0ent ;# ales Commissions C# aintenance &pense 8# Clerical &pense ns% ; C;% nalytic )% 1 )evel% &asy 15. !he # ;# C# 8#
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
total monthly fied cost for ;oggs porting &quipment Company is% 41$,666 4$$,266 4$2,666 4/6,666
ns% C )% 1,(
C;% nalytic )evel% 'ard
IC9 ;;% Critical !hin*ing
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IC9 -+% 0eporting
olution%
+ariale component o* sales commissions+ariale cost Change in costs/Change in &nits +ariale cost '$1,200 $12,000(/'11,000 10,000( +ariale cost $1.20 ied cost o* sales commissions3igh "ol&me- $1,200 $1.20 4 11,000 $0 'anser ill e
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1:. If sales are proJected to be :,666 units in eptember, total epected selling and administrative epenses would be% # 4/B,(66 ;# 4/1,366 C# 4//,526 8# 4/3,366 ns% 8 )% 1,(
C;% nalytic )evel% edium
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution%
+ariale component o* sales commissions+ariale cost Change in costs/Change in &nits +ariale cost '$1,200 $12,000(/'11,000 10,000( +ariale cost $1.20 ied cost o* sales commissions3igh "ol&me- $1,200 $1.20 4 11,000 $0 'anser ill e a < bH, what does the KbL represent? # total cost ;# total fied cost C# total variable cost 8# variable cost per unit ns% 8 C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% 1 )evel% edium $6. In the standard cost formula G > a < bH, what does the KHL represent? # total cost ;# total fied cost C# units of activity 8# variable cost per unit 10
ns% C C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% 1 )evel% &asy
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12
13
C$P
$1. ;rea*=even analysis assumes that% # !otal revenue is constant. ;# @nit variable epense is constant. C# @nit fied epense is constant. 8# elling prices must fall in order to generate more revenue. ns% ; C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% 2 )evel% &asy $$. !arget profit analysis is used to answer which of the following questions? # What sales volume is needed to cover all epenses? ;# What sales volume is needed to cover fied epenses? C# What sales volume is needed to earn a specific amount of net operating income? 8# What sales volume is needed to avoid a loss? ns% C C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% 3 )evel% &asy
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$(. !he margin of safety can be calculated by% # ales M -ied epensesFContribution margin ratio#. ;# ales M -ied epensesFEariable epense per unit#. C# ales M -ied epenses < Eariable epenses#. 8# ales M +et operating income. ns% C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% 5 )evel% edium $/. If the degree of operating leverage is /, then a one percent change in quantity sold should result in a four percent change in% # unit contribution margin. ;# revenue. C# variable epense. 8# net operating income. ns% 8 C;% nalytic IC9 ;;% Critical !hin*ing )% : )evel% &asy ource% CA adapted
IC9 -+% 0eporting
$2. Which of the following is the correct calculation for the degree of operating leverage? # net operating income divided by total epenses. ;# net operating income divided by total contribution margin. C# total contribution margin divided by net operating income. 8# variable epense divided by total contribution margin. ns% C C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% : )evel% &asy $3. 8ata concerning Nardas Corporations single product appear below%
#er >nit %elling price....................... $10 +ariale epenses............... 28 Contri&tion margin........... $112
#ercent o* %ales 100? 20? 80?
!he company is currently selling :,666 units per month. -ied epenses are 451B,666 per month. !he mar*eting manager believes that a 4$6,666 increase in the monthly advertising budget would result in a 1:6 unit increase in monthly sales. What should be the overall effect on the companys monthly net operating income of this change? # decrease of 4136 ;# increase of 4$6,136 C# decrease of 4$6,666 8# increase of 4136 ns% 8 C;% nalytic )% / )evel% &asy
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution%
%ales '8,000 &nits, 8,180 &nits 4 $10(.......... +ariale epenses '$1,120,000, $1,1!,200 4 20?(................ Contri&tion margin....................................... ied epenses................................................ ;et operating income.....................................
8,000 &nits $1,120,000
8,180 &nits $1,1!,200
22,000 896,000 )19,000 $ 1)),000
229,00 916,160 )9,000 $ 1)),160
@ncrease in net operating income- $1)),160 $1)),000 $160 $5.Chovanec Corporation produces and sells a single product. 8ata concerning that product appear below% 1#
#er >nit %elling price....................... $1)0 +ariale epenses............... 68 Contri&tion margin........... $102
#ercent o* %ales 100? 0? 60?
-ied epenses are 42$1,666 per month. !he company is currently selling 5,666 units per month. anagement is considering using a new component that would increase the unit variable cost by 43. ince the new component would increase the features of the companys product, the mar*eting manager predicts that monthly sales would increase by 266 units. What should be the overall effect on the companys monthly net operating income of this change? # decrease of 4/:,666 ;# decrease of 43,666 C# increase of 4/:,666 8# increase of 43,666 ns% 8 C;% nalytic )% / )evel% &asy
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution%
%ales '),000 &nits, ),!00 &nits 4 $1)0(............ +ariale epenses '),000 &nits 4 $68, ),!00 &nits 4 $)(......... Contri&tion margin......................................... ied epenses................................................. ;et operating income.......................................
),000 &nits $1,190,000
),!00 &nits $1,2)!,000
)6,000 )1,000 !21,000 $ 19,000
!!!,000 )20,000 !21,000 $ 199,000
@ncrease in net operating income- $199,000 $19,000 $6,000 $:.Cherry treet ar*et reported the following information for the sales of their only product, cherries sold by the pint%
%ales................................... +ariale epenses............... Contri&tion margin........... ied epenses................... ;et operating income.........
Total #er >nit $1,!00 $.!0 9,!0 1.! 22,0!0 $.1! 1,000 $ 9,0!0
Cherry treet would li*e to increase their selling price by 26 cents per unit, and feel that this will decrease sales volume by 16O. hould Cherry treet increase the price, and what will the effect be on net operating income? # GesA 4(,266 increase ;# GesA 4B/2 increase C# +oA no change 8# +oA 4B/2 decrease ns% ; C;% nalytic )% / )evel% edium
IC9 ;;% Critical !hin*ing
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olution%
C&rrent sales 'dollars( C&rrent per &nit price 4 C&rrent sales '&nits( $1,!00 $.!0 4 C&rrent sales '&nits( ),000 C&rrent sales '&nits(
%ales '),000 &nits 4 $.!0, 6,00 &nits 4 $!.00(... +ariale epenses '),000 &nits 4 $1.!, 6,00 &nits 4 $1.!(......... Contri&tion margin............................................... 16
),000 &nits $1,!00
6,00 &nits $1,!00
9,!0 22,0!0
8,!0! 22,99!
ied epenses....................................................... ;et operating income................................... .......... @ncrease in net operating income- $9,99! $9,0!0 $9!
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1,000 $ 9,0!0
1,000 $ 9,99!
$B. company ma*es a single product that it sells for 413 per unit. -ied costs are 453,:66 per month and the product has a contribution margin ratio of /6O. If the companys actual sales are 4$$/,666, its margin of safety is% # 4($,666 ;# 4B3,666 C# 41$:,666 8# 41B$,666 ns% C;% nalytic )% 2A 5 )evel% edium
IC9 ;;% Critical !hin*ing ource% CIA adapted
IC9 -+% 0eporting
olution% ;rea*=even in total sales dollars > -ied epensesFC ratio > 453,:66F6./66 > 41B$,666 argin of safety in dollars > ales = ;rea*=even sales > 4$$/,666 = 41B$,666 > 4($,666 (6. ;endel Inc. has an operating leverage of 5.(. If the companys sales increase by (O, its net operating income should increase by about% # $/(.(O ;# 5.(O C# $1.BO 8# (.6O ns% C C;% nalytic )% : )evel% &asy
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution% 9ercent increase in net operating income > 9ercent increase in sales P 8egree of operating leverage > (O P 5.( > $1.BO $ARIABLE %&LL COS"IN'
(1.In its first year of operations, ;ronfren Corporation produced :66,666 sets and sold 5:6,666 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if ;ronfren had produced $6,666 fewer sets? ssume that ;ronfren has both variable and fied production costs.#
A( B( C( (
+ariale costing @ncrease ecrease ecrease ;o e**ect
Asorption costing @ncrease @ncrease ecrease ecrease
ns% 8 C;% nalytic )% $ )evel% edium
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
($. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will% # fluctuate in direct proportion to changes in production. ;# remain constant. C# fluctuate inversely with changes in production. 8# be greater than net operating income under absorption costing. ns% ; C;% nalytic )% $ )evel% edium
IC9 ;;% Critical !hin*ing
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((. @nder the variable costing method, which of the following is always epensed in its entirety in the period in which it is incurred? # fied manufacturing overhead cost ;# fied selling and administrative epense C# variable selling and administrative epense 18
8#
all of the above
ns% 8 C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% $ )evel% 'ard
19
(/. Which of the following will usually be found on an income statement prepared using the absorption costing method?
Contri&tion Margin A( Des B( Des C( ;o ( ;o
ross Margin Des ;o Des ;o
ns% C C;% 0eflective !hin*ing IC9 ;;% Critical !hin*ing IC9 -+% 0eporting )% $ )evel% &asy (2. +et operating income under variable and absorption costing will generally% # always be equal. ;# never be equal. C# be equal only when production and sales are equal. 8# be equal only when production eceeds sales. ns% C C;% nalytic )% ( )evel% edium
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
(3. manufacturing company that produces a single product has provided the following data concerning its most recent month of operations%
%elling price...............................................
$9)
>nits in eginning in"entory..................... >nits prod&ced........................................... >nits sold................................................... >nits in ending in"entory...........................
0 2,200 2,100 100
+ariale costs per &nitirect materials....................................... irect laor............................................. +ariale man&*act&ring o"erhead........... +ariale selling and administrati"e.........
$2 $2! $2 $9
ied costsied man&*act&ring o"erhead............... $8,800 ied selling and administrati"e............. $),800 What is the total period cost for the month under the absorption costing approach? # 423,566 ;# 432,266 C# 4:,:66 8# 4(5,:66 ns% C;% nalytic )% 1 )evel% &asy
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution%
Total "ariale selling and administrati"e cost $9 4 2,100 $18,900 #eriod cost +ariale selling and administrati"e cost 7 ied selling and administrati"e cost $18,900 7 $),800 $!6,)00
20
(5. ullee Corporation produces a single product and has the following cost structure%
;&mer o* &nits prod&ced each year..................... ),000 +ariale costs per &nitirect materials................................................... $!1 irect laor......................................................... $12 +ariale man&*act&ring o"erhead....................... $2 +ariale selling and administrati"e epense....... $! ied costs per yearied man&*act&ring o"erhead........................... $1,000 ied selling and administrati"e epense........... $112,000 !he unit product cost under absorption costing is% # 41/B ;# 432 C# 43( 8# 41$: ns% 8 C;% nalytic )% 1 )evel% &asy
IC9 ;;% Critical !hin*ing
olution% @nit fied manufacturing overhead > 4//1,666 Q 5,666 > 43( @nit product cost > 43( < 421 < 41$ < 4$ > 41$:
21
IC9 -+% 0eporting
(:. toneberger Corporation produces a single product and has the following cost structure%
;&mer o* &nits prod&ced each year..................... ,000 +ariale costs per &nitirect materials................................................... $!0 irect laor......................................................... $)2 +ariale man&*act&ring o"erhead....................... $6 +ariale selling and administrati"e epense....... $ ied costs per yearied man&*act&ring o"erhead........................... $296,000 ied selling and administrati"e epense........... $)6,000 !he unit product cost under variable costing is% # 41$: ;# 41$2 C# 4$6$ 8# 41(1 ns% C;% nalytic )% 1 )evel% &asy
IC9 ;;% Critical !hin*ing
olution% @nit product cost > 426 < 45$ < 43 > 41$:
22
IC9 -+% 0eporting
(B. ;eamish Inc., which produces a single product, has provided the following data for its most recent month of operations%
;&mer o* &nits prod&ced..................................... +ariale costs per &nitirect materials................................................... irect laor......................................................... +ariale man&*act&ring o"erhead....................... +ariale selling and administrati"e epense....... ied costsied man&*act&ring o"erhead........................... ied selling and administrati"e epense...........
8,000 $) $!6 $ $2 $12,000 $8,000
!here were no beginning or ending inventories. !he unit product cost under absorption costing was% # 4B( ;# 4B5 C# 41(3 8# 41B/ ns% C C;% nalytic )% 1 )evel% &asy
IC9 ;;% Critical !hin*ing
olution% @nit fied manufacturing overhead > 4(1$,666 Q :,666 > 4(B @nit product cost > 4(5 < 423 < 4/ < 4(B > 41(3
23
IC9 -+% 0eporting
/6. Nray Inc., which produces a single product, has provided the following data for its most recent month of operations%
;&mer o* &nits prod&ced............................................... ,000 +ariale costs per &nitirect materials............................................................ $91 irect laor................................................................... $1 +ariale man&*act&ring o"erhead................................. $) +ariale selling and administrati"e epense................. $6 ied costsied man&*act&ring o"erhead..................................... $2),000 ied selling and administrati"e epense..................... $16!,000 !here were no beginning or ending inventories. !he unit product cost under variable costing was% # 4111 ;# 41B6 C# 4115 8# 4116 ns% C;% nalytic )% 1 )evel% &asy
IC9 ;;% Critical !hin*ing
IC9 -+% 0eporting
olution% @nit product cost > 8irect materials < 8irect labor < Eariable manufacturing overhead > 4B1 < 41( < 45 > 4111 CAPI"AL B&('E"IN'
/1. Which of the following capital budgeting techniques i$nores the time value of money? a. paybac* period b. net present value c. internal rate of return d. profitability inde +% 8I-% &asy ;R% 1/=$ /$. Which of the following capital budgeting techniques may potentially ignore part of a proJects relevant cash flows? a. net present value b. internal rate of return c. paybac* period d. profitability inde +% C 8I-% &asy ;R% 1/=$ /(. In comparing two proJects, the SSSSSSSSSSS is often used to evaluate the relative ris*iness of the proJects. a. paybac* period b. net present value c. internal rate of return d. discount rate +% 8I-% &asy ;R% 1/=$ //. ssume that a proJect consists of an initial cash outlay of 4166,666 followed by equal annual cash inflows of 4/6,666 for / years. In the formula H > 4166,666F4/6,666, H represents the a. paybac* period for the proJect. b. profitability inde of the proJect. c. internal rate of return for the proJect. d. proJects discount rate. +% 8I-% &asy ;R% 1/=$ /2. If investment has a paybac* period of three years and investment ; has a paybac* period of four years, then a. is more profitable than ;. 24
b. is less profitable than ;. c. and ; are equally profitable. d. the relative profitability of and ; cannot be determined from the information given. +% 8
8I-% &asy
;R% 1/=$
/3. If a proJect generates a net present value of Tero, the profitability inde for the proJect will a. equal Tero. b. equal 1. c. equal =1. d. be undefined. +% ; 8I-% &asy ;R% 1/=( /5. If the profitability inde for a proJect eceeds 1, then the proJects a. net present value is positive. b. internal rate of return is less than the proJects discount rate. c. paybac* period is less than 2 years. d. accounting rate of return is greater than the proJects internal rate of return. +% 8I-% &asy ;R% 1/=( /:. If a proJects profitability inde is less than 1, the proJects a. discount rate is above its cost of capital. b. internal rate of return is less than Tero. c. paybac* period is infinite. d. net present value is negative. +% 8
8I-% &asy
;R% 1/=(
/B. 'opwood Corporation bought a piece of machinery. elected data is presented below% @seful life Gearly net cash inflow alvage value Internal rate of return Cost of capital
3 years 4/2,666 =6= 1:O 1/O
!he initial cost of the machinery was a. 4125,(B$. b. 415/,BB$. c. 4132,:1$. d. 41//,(32. +% @se 9E of nnuity for 3 years and 1:O 4/2,666 U (./B53 > 4125,(B$ 26.n investment proJect is epected to yield 416,666 in annual revenues, has 4$,666 in fied costs per year, and requires an initial investment of 42,666. 7iven a cost of goods sold of 36 percent of sales, what is the paybac* period in years? a. $.26 b. 2.66 c. $.66 d. 1.$2 +% +et cash flow > 416,666 = 43,666 = 4$,666 +et cash flow > 4$,666 42,666F4$,666 > $.26 years COS" O% CAPI"AL
21. 8etermine the after=ta# percentage cost of a 426 million debt issue that the attingly Corporation is planning to place privately with a large insurance company. ssume that the 2#
company has a /6O marginal ta rate. !his long=term debt issue will yield 1$O to the insurance company. a. /.:O b. 5.$O c. 1$.6O d. 3.:O nswer% b 9roblem type% fter=ta cost of debt calculation olution% *i > *d1 = !# > 1$O 1= 6./6# > 5.$O 2$. Calculate the after=ta cost of preferred stoc* for hio Ealley 9ower Company, which is planning to sell 4166 million of 4(.$2 cumulative preferred stoc* to the public at a price of 4$2 per share. -lotation costs are 41.66 per share. hio Ealley has a marginal income ta rate of /6O. a. 1(.6O b. 5.:O c. :.1$O d. 1(.2/O nswer% d 9roblem type% Cost of preferred calculation olution% *p > 4(.$2F4$2 = 41# > 1(.2/O 2(. !he llegheny Ealley 9ower Company common stoc* has a beta of 6.:6. If the current ris*=free rate is 3.2O and the epected return on the stoc* mar*et as a whole is 13O, determine the cost of equity capital for the firm using the C9#. a. 1/.1O b. 5.3O c. 3.2O d. 1$.1O nswer% a 9roblem type% Cost of equity C9# olution% *e > r f < V*m = r f # > 3.2O < 6.:613O = 3.2O# > 1/.1O
2/. !he following financial information is available on 0awls anufacturing Company% Current per share mar*et price 4/:.66 Current t > 6# per share dividend 4(.26 &pected long=term growth rate 2.6O 0awls can issue new common stoc* to net the company 4// per share. 8etermine the cost of internal equity capital using the dividend capitaliTation model approach. Compute answer to the nearest 6.1O#. a. 1$.(O b. 1(./O c. 1(.6O d. 1$.5O nswer% d 9roblem type% Cost of internal equity = constant growth dividend valuation model olution% *e > 4(.261.62#F4/: < 6.62 > 6.1$33 or 1$.5O# 22. !he following financial information is available on 0awls anufacturing Company% Current per share mar*et price 4/:.66 ;eta 1.1 &pected rate of return on mar*et 1$.6O 0is*=free rate 3.6O 0awls can issue new common stoc* to net the company 4// per share. 8etermine the cost of internal equity capital using the capital asset pricing model approach. Compute answer to the nearest 6.1O#. 26
a. 1$.BO b. 1$.3O c. 1(.6O d. 1(.23O nswer% b 9roblem type% Cost of equity = C9 approach olution% *e > r f < V*m= r f # > 6.63 < 1.16.1$ = 6.63# > 6.1$3 > 1$.3O 23. lpha 9roducts maintains a capital structure of /6 percent debt and 36 percent common equity. !o finance its capital budget for net year, the firm will sell 426 million of 11 percent debentures at par and finance the balance of its 41$2 million capital budget with retained earnings. +et year lpha epects net income to grow 5 percent to 41/6 million, and dividends also are epected to increase 5 percent to 41./6 per share and to continue growing at that rate for the foreseeable future. !he current mar*et value of lphas stoc* is 4(6. If the firm has a marginal ta rate of /6 percent, what is its weighted cost of capital for the coming year? a. B.3/O b. :.3(O c. B.:/O d. 16.:(O nswer% a 9roblem type% Weighted cost of capital olution% *e > 41./6F4(6 < 6.65 > 6.1135 *a > 6.36.1135# < 6./6.11#1 = 6./# > 6.6B3/ or B.3/O 25. 7roves, Inc. pays an annual dividend of 41.$$. !his dividend is epected to continue growing at a rate of about 2 percent each year. !he firm is in a fairly ris*y business and has a beta of 1./2. !he epected mar*et rate of return is 1(.2 percent, and the ris*=free rate is B.( percent. What is the cost of equity for 7roves? a. 1B.3O b. 1(.2O c. 12./O d. 3.1O nswer% c 9roblem type% Cost of equity = C9 olution% *e > 6.6B( < 1./26.1(2 = 6.6B(# > 6.12/ 2:. Witins stoc* price is currently 4(/.$2 and the current quarterly dividend is 46.$2. Consensus estimates for Witin indicate a growth rate in earnings of 16O into the foreseeable future. If Witin plans to sell 1 million shares to raise new capital for epansion, what is the cost of new equity if the issuance costs are :O? a. 1(./BO b. 16.:5O c. 1(.$1O d. 1(.15O nswer% a 9roblem type% Cost of equity olution% *e > 1.661.16# < .16 > .1(/B or 1(./BO (1.21 2B. California ;est C;#, a sport shoe store, epects an operating income of 4$.( million this year. C; has no long=term debt. !he firm is considering as epansion proJect. !he current ris*=free rate of return is 5O and the current mar*et ris* premium is :.(O. If C;s beta is $6O greater than the overall mar*et, what is the firms cost of capital? ssume that C; has a marginal ta rate of /6O. a. :.(O b. 13.B3O c. B.B3O d. 12.(O nswer% b 9roblem type% Cost of equity olution% *a > *e > 5O < 1.$:.(O# > 13.B3O
27
36. Columbia 7as Companys C7# current capital structure is (2O debt and 32O equity. !his year C7 has earnings after ta of 42.(1 million and is paying 41.3 million in dividends. !o finance a transmission pipeline, C7 can borrow 4$ million at a cost of 16O, the same rate that C7 is currently paying on a total of 412 million long=term debt. C7 has 1,666,666 shares outstanding and its current mar*et price is 4(1. If C7s long=term growth rate of dividends is epected to be :O, what is the weighted cost of capital for the firm? ssume a marginal ta rate of /6O. a. 16.BO b. 1(.3O c. 1B.3O d. 13.BO nswer% a 9roblem type% Weighted cost of capital olution% *d > 16O1 = 6./# > 3O *e > 41.31.6:#F4(1 < 6.6: > .1(3 or 1(.3O *a > 6.(23O# < 6.321(.3O# > 16.BO LE$ERA'E AN( CAPI"AL S"R&C"&RE
31. 'eleveton Industries is 166O equity financed. Its current beta is 1.1. !he epected mar*et ris* premium is :.2O and the ris*=free rate is /.$O. If 'eleveton changes its capital structure to $2O debt, it estimates its beta will increase to 1.$. If the after=ta cost of debt will be 3O, should 'eleveton ma*e the capital structure change? a. Ges, cost of capital decreases by $.2$O b. Ges, cost of capital decreases 1.35O. c. +o, stoc* price would decrease due to increased ris* d. +o, cost of capital increases by 6.:2O. nswer% b 9roblem type% Cost of capital olution% ld *e > /.$ < 1.1:.2# > 1(.22O > *a +ew *e > /.$ < 1.$:.2# > 1/./O +ew *a > .51/./# < .(3# > 11.::O toc* price is maimiTed where the cost of capital is minimiTed.
3$. ;ay tate !echnology has determined that its cost of equity is 12O and its after=ta cost of debt is 5.$O. ;ay tate epects to earn 41/ million after taes net year and, as a new firm, does not pay any dividends. !he stoc* sells for 4$/. ;onds are currently selling at par value. Compute ;ay tates weighted cost of capital. partial balance sheet is shown below% Current liabilities 4 (66,666 )ong=term debt 1,666,666 Common stoc* at 41 par 166,666 9aid in capital B66,666 0etained earnings (,666,666 !otal liabilities and stoc*= holders equity 42,(66,666 a. 1(./O b. 1(.1O 28
c. 11.3O d. 1$.5O nswer% d 9roblem type% Capital structure and cost of capital olution% Capital structure% 8ebt > 41,666,666 ar*et value of &quity% 166,666 shares4$/# > $,/66,666 !otal 4(,/66,666 Capital structure% 8ebt > 41F4(./ > $B./1O &quity>$./F(./ > 56.2BO *a > 6.$B/15.$O# < 6.562B12.6O# > 1$.51O 3(. ahlo is planing to diversify into the ba*ery industry. s a result, its beta should drop from 1./ to 1.$ and the epected long=term growth rate of dividends will drop from 1$O to BO. !he ris*=free rate is /O, the epected mar*et ris* premium is BO, and the current dividend per share paid by ahlo is 4$.16. hould ahlo complete the diversification into the ba*ery industry? a. +o, stoc* price drops about 411.56 b. Ges, stoc* price increases about 4B./6 c. Ges, stoc* price increases about 41.:6 d. +o, stoc* price drops about 4B./6 nswer% a 9roblem type% Cost of capital olution% Current *e > 6.6/ < 1./6.6B# > 6.133 or 13.3O 96 > 4$.161.1$# F 6.133 = 6.1$# > 421.1( +ew *e > 6.6/ < 1.$6.6B# > 6.1/: or 1/.:O 3/. !he less a firms business ris*, the the amount of structure, holding constant all other relevant factors. a. lessA financial leverage b. moreA financial leverage c. lessA equity capital d. moreA debt capital nswer% b !opic% ;usiness ris*
that will be used in the optimal capital
32. Illinois !ool Companys I!C# fied operating costs are 41,$36,666 and its variable cost ratio i.e., variable costs as a fraction of sales# is 6.56. !he firm has 4(,666,666 in bonds outstanding at an interest rate of : percent. I!C has (6,666 shares of 42 preferred stoc* and 126,666 shares of common stoc* outstanding. I!C is in the 26 percent corporate income ta brac*et. -orecasted sales for net year are 4B million. What is I!Cs degree of operating leverage at a sales level of 4B million? a. 1.36 b. 1.:52 c. (.6 d. /.6 nswer% b !opic% 8egree of operating leverage calculation olution% 8) > X4B,666,666 = 6.54B,666,666#YFX4B,666,666 = 6.54B,666,666# = 41,$36,666Y > 1.:52
33. Illinois !ool Companys I!C# fied operating costs are 41,$36,666 and its variable cost ratio i.e., variable costs as a fraction of sales# is 6.56. !he firm has 4(,666,666 in bonds outstanding at an interest rate of : percent. I!C has (6,666 shares of 42 preferred stoc* and 126,666 shares of common stoc* outstanding. I!C is in the 26 percent corporate income ta brac*et. -orecasted sales for net year are 4B million. What is I!Cs degree of financial leverage at an &;I! level of 41,//6,666. a. 1.$6 b. 1.:52 c. (.6 d. 1.36 nswer% d !opic% 8egree of financial leverage calculation 29