ARTS CPA REVIEW rd
3 Floor, Ala Moana Commercial Complex, Maharlika Highway, Santiago City 0917-5723900
e-mail address:
[email protected] [email protected]
26TH MANAGEMENT ADVISORY SERVICES
BATCH
ACCT. SAMUEL U. ITCHON, JR.
MAS – 25
SUMMARY LECTURE
COSTS AND COST CONCEPTS 1. If a firm firm's 's net net inco income me doe doess not change not change as its volume changes, the firm('s) a. must must be in the the ser servi vice ce indu indust stry ry.. c. sale saless pri price ce must must equa equall P0. P0. b. must must hav have e no fie fied d cost costs. s. d. sales sales pric price e must must equal equal its its vari variabl able e costs. costs. I!"#$ % & &*" +&$" !-" //I2 3astelo, 4illasin and +arrera is a large, local accounting firm located in 3ebu. +elle 3astelo, one of the irm5s founders founders,, appreci appreciate atess the success success her firm has en6oyed en6oyed and 7ants to give give something bac8 to her community. $he believes that an inepensive accounting services clinic could provide basic accounting services for small businesses located in the province. $he 7ants to price the services at cost. $ince the clinic is brand ne7, it has no eperience to go on. +elle decided to operate the clinic for t7o months before determining ho7 much to charge per hour on an ongoing basis. &s a temporary measure, the clinic adopted an hourly charge of P90, half the amount charged by 3astelo, 4illasin and +arrera for professional services. !he accounting services clinic opened on :anuary 1. uring :anuary, the clinic had 1%0 hours of professional service. uring ebruary, the activity 7as 190 hours. 3osts for these t7o level of activity usage are as follo7s2 Professional hours $alaries2 $enior accountant ffice assistant Internet and soft7are subscriptions 3onsulting by senior partner epreciation (equipment) $upplies &dministration *ent (offices) ?tilities %. !he clini clinic5s c5s month monthly ly fied fied costs costs amount amount to2 to2 a. P<,@00 b. P9,0!
1%0 hours P%,900 1,%00 ;00 1,%00 %,=00 >09 900 %,000 %
190 hours P%,900 1,%00 <90 1,900 %,=00 1,100 900 %,000 @9
c. P =%9 d. P1%,1<>
. &ppl &pple e +aby +aby,, the the chief chief para parapr prof ofes essi sion onal al of the the clin clinic ic,, has has esti estima mate ted d that that the the clin clinic ic 7ill 7ill average 1=0 professional hours per month. If the clinic is to be operated as a nonprofit organiAation, ho7 much 7ill it need to charge per professional hourB a. P>;.<1 c. P<%.;; b. P"#.0$ d. P%%.@0
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=. -$* 3omputer $ystem designs and develops specialiAed soft7are for companies and use a normal costin% s&stem. !he follo7ing data are available for %0192 +udgeted verhead #achine hours irect labor hours
P@00,000 %=,000 ;9,000 &ctual
?nits produced verhead Prime costs #achine hours irect labor hours
100,000 P@0,900 P>00,000 %9,090 ;9,;00
verhead is applied on the basis of direct labor 'ours. hat is the unit cost for the yearB a. P19.0 b. P(!.0$
c. P19.0> d. P19.00
Prime costs P 900,000 Applied overhead ( P600,000 !",000 #L$ % !",!00& Total cost U)its prod*ced
60",600 P',"0",600 '00,000
U)it cost
P
'"+06
A)C S*STE+ 9. -aAelnut 3ompany uses activityCbased costing. !he company produces t7o products2 coats and hats. !he annual production and sales volume of coats is <,000 units and of hats is @,000 units. !here are three activity cost pools 7ith the follo7ing epected activities and estimated total costs2 &ctivity 3ost Pool &ctivity 1 &ctivity % &ctivity
"stimated 3ost P%0,000 P;,000 P>1,%00
"pected &ctivity 3oats 100 <00 <00
"pected &ctivity -ats =00 %00 ,000
!otal 900 1,000 ,<00
sin% A)C, the cost per unit of coats is approimately2 a. P%.=0 c. P $.$0 -!,"00/",000 b. P.>0 d. P10.9>
@.
"laine -ospital plans to use the activityCbased costing to assign hospital indirect costs to the care of patients. !he hospital has identified the follo7ing activities and activity rates for the hospital indirect costs2 Activity Activity Rate Room and meals P150 per day Radiology P95 per image
Page 3 Pharmacy Chemistry lab Operating room
P28 per physician order P85 per test P550 per operating room hour
The records o t!o representati"e patients !ere analy#ed$ using the acti"ity rates% The acti"ity inormation associated !ith the t!o patients are as ollo!s& Patient 1
Patient 2
( ) 5 * )%5
3 2 1 2 1
'umber o days 'umber o images 'umber o physician orders 'umber o tests 'umber o operating room hours +etermine the acti"ity cost associated !ith Patient 2% a+ P',-c% b% P 908 d%
P1$81* P)$555
;. +alat /eather or8s, 7hich manufactures saddles and other leather goods, has three departments. !he &ssembly epartment manufactures various leather products, such as belts, purses, and saddle bags, using automated production process. !he $addle epartment produces handmade saddles and uses very little machinery. !he !anning epartment produces leather. !he tanning process requires little in the 7ay of labor or machinery, but it does require space and process time. ue to the different production processes in the three departments, the company uses three different cost drivers for the application of manufacturing overhead. !he cost drivers and overhead rates are as follo7s2
3ost (river
Predetermined ,verhead *ate
!anning epartment $quareCfeet of leather P per squareCfoot &ssembly epartment #achine time P> per machine hour $addle epartment irectClabor time P= per direct labor hour !he company5s delue saddle and accessory set consists of handmade saddle, t7o saddlebags, a belt, and a vest, all coordinated to match. !he entire set uses 100 squareC feet of leather from the !anning epartment, machine hours in the &ssembly epartment, and =0 directClabor hours in the $addle epartment. !he company is processing :ob o. %0 consisting of %0 delue saddle and accessory sets. -o7 much is the applied manufacturing overhead in the Assembl& Department for :ob o. %0B a. P,%00 c. P@,000 b. P !0 -91210 d. P,000 Assem.l/ departme)t P9machi)e ho*r % machi)e ho*rs % 10 sets P"20
<. If activityCbased costing is implemented in an organiAation 7ithout any other changes
being effected, total overhead costs 7ill a. be reduced because of the elimination of nonCvalueCadded activities. b. be reduced because organiAational costs 7ill not be assigned to products or services. c. be increased because of the need for additional people to gather information on cost drivers and cost pools. d. remain constant and simpl& be spread over products di33erentl&. C4P AND )5EA6E4EN ANA7*S8S
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>. -arry #anufacturing incurs annual fied costs of P%90,000 in producing and selling a single product. "stimated unit sales are 1%9,000. &n afterCta income of P;9,000 is desired by management. !he company pro6ects its income ta rate at =0 percent. hat is the maimum amount that -arry can epend for variable costs per unit and still meet its profit ob6ective if the sales price per unit is estimated at P@B a. P.; c. P2.00 -#!,000/$0:(!,000; b. P.9> d. P.;0 !0,000:2#!,000 / (!,000 :2. T'ere3ore $-2:2 10. or its most recent fiscal year, a firm reported that its contribution margin 7as equal to =0 percent of sales and that its net income amounted to 10 percent of sales. If its fied costs for the year 7ere P@0,000, ho7 much 7as the margin of safetyB a. P190,000 c. P@00,000 b. P%00,000 d. P !0,000
11. $am 3ompany manufactures a single product. In the prior year, the company had sales of P>0,000, variable costs of P90,000, and fied costs of P0,000. $am epects its cost structure and sales price per unit to remain the same in the current year, ho7ever total sales are epected to increase by %0 percent. If the current year pro6ections are realiAed, net income should eceed the prior year5s net income by2 a. 100 percent. c. %0 percent. CD>0C90E=0C0E10 b. "0 percent. d. 90 percent. =0F10 E= /
1%. "dil 3ompany produces and sells a single product. !he costs and selling prices on a perCunit basis are as follo7s2 $elling Price #aterials /abor 4ariable overhead ied overhead 4ariable selling and administrative ied selling and administrative
P1%0 9 19 10 10 %0 9
!he above perCunit figures are computed based on the company5s normal capacity of %0,000 units. !he company5s epected margin of safety is a. ;,900 units. c. $.!. b. P%,=00,000. d. P1%,900.
1. &ntiporda, Inc. sells three products, &, +, and 3. !he company sells three () units of 3 for each unit of & and t7o (%) units of + for each unit of 3. !otal fied costs amount to P;@0,000. Product &5s contribution margin per unit is P%, Product +5s is 190G
Page 5
of &5s, and Product 35s is t7ice as much as +5s. -o7 many units of each product must be sold to brea8CevenB Product & Product + Product 3 a. b. c. d.
%,000 0,000 %>,%1 @>,0>1
1%,000 (0,000 9<,=@% =1=,9=@
@,000 $0,000 -0,001( 0,0001$ 0,00012 <;,@>% %0;,%;
?aC+ )rea
P2." Product A :00,000 1 (/(0
:0,000 units
I!"#$ 1= to 1@ &*" +&$"( ,' !-" .,//,I' I'.,*#&!I,'2 & company is ma8ing plans for net year, using costCvolumeCprofit analysis as its planning tool. et year5s sales data about its product are as follo7s2 $elling price 4ariable manufacturing costs per unit 4ariable selling and administrative costs ied operating costs (@0G is manufacturing cost) Income ta rate
[email protected] %%.90 =.90 P1=<,900 %G
1=. -o7 much should sales be net year if the company 7ants to earn profit a3ter ta1 of P%%,==0, the same amount that it earned last yearB a. P10,<00 c. P220,000 -("(,!00/!! b. P>;,900 d. P%%%,000 19. &ssume that the company5s management learned that a ne7 technology that 7ill increase the quality of its product is available. If implemented, its pro6ections for net year 7ill be changed2 1. !he selling price of the product 7ill increase to P;9 per unit. %. ied manufacturing costs 7ill increase by %0G. . &dditional advertising costs 7ill be incurred to promote the higherCquality product. !his 7ill increase fied nonCmanufacturing cost by 10G. =. !he improved product 7ill require a ne7 material that 7ill increase direct materials cost by P=.90 If the ne7 technology is adapted, ho7 much sales should the company ma8e to earn a preC ta profit of 10G on salesB a. P@@,10 c. P%9,%= b. P2!","#! -(#,$0/" d. P9,<>; 1@. If the sales required in Item H19 is realiAed, the company 7ill have an operating leverage factor of a. <.9. c. 1;.%=G. b. !."0. -!"/(0 d. 9.90. 1;. &s pro6ected net income increases the
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a. de%ree o3 operatin% levera%e declines. c. brea8Ceven point goes do7n. b. margin of safety stays constant. d.contribution margin ratio goes up. 1<. amyam 3ompany is considering introducing a ne7 product that 7ill require a P%90,000 investment of capital. !he necessary funds 7ould be raised through a ban8 loan at an interest rate of . !he materials mi variance for a product is P=90 un3avorable and the materials yield variance is P190 un3avorable. !his means that a. the materials price variance is P@00 unfavorable. b. t'e materials quantit& variance is P$00 un3avorable c. the total materials cost variance is definitely P@00 unfavorable. d. the materials price variance is also unfavorable, but the amount cannot be determined from the given information. %0. 4ariance analysis 7ould be appropriate to measure performance in a. profit centers c. cost centers b. investment centers d. all o3 t'e above %1. $amson 3ompany uses a standard costing system in the production of its only product. !he <=,000 units of ra7 materials inventory 7ere purchased for P1%@,000 and = units of ra7 materials are required to produce one unit of final product. In ctober, the company produced 1=,=00 units of product. !he standard cost allo7ed for materials 7as P;%,000, and there 7as an unfavorable usage variance of P,000. !he materials price variance for the units used in ctober 7as a. P(!,000 un3avorable. c. P,000 unfavorable. b. P19,000 favorable. d. P,000 favorable. %%. !he standard direct materials cost to produce a unit of a product is four meters of materials at P%.90 per meter. uring :une, %019, =,%00 meters of materials costing P10,0<0 =ere purc'ased and used to produce 1,000 units of the product. hat 7as the materials price variance for :une, %019B a. P=<0 unfavorable c. P=00 favorable b. P <0 unfavorable d. P0 3avorable %. +uchoy 3ompany manufactures one product 7ith a standard direct manufacturing labor cost of four hours at P1%.00 per hour. uring :une, 1,000 units 7ere produced using =,100 hours at P1%.%0 per hour. !he unfavorable direct labor efficiency variance 7as2 a. P<%0 c. P(,00 b. P=00 d. P1,%%0 I!"#$ %= ! %< &*" +&$" !-" //I2 4hong, Inc. evaluates manufacturing overhead in its factory by using variance analysis. !he follo7ing information applies to the month of :uly2 &3!?&/ +?"!" umber of units produced 1>,000 %0,000 4ariable overhead costs P=,100 P% per direct labor hour ied overhead costs P%%,000 P%0,000 irect labor hours %,100 0.1 hour per unit %=. !he controllable variance amounts to a. P%,900 unfavorable c. P,200 un3avorable
Page (
b. P1,000 unfavorable
d. P%,000 unfavorable
%9. ?sing the threeC7ay variance analysis, the spending variance amounts to a. P100 favorable c. P%,000 unfavorable b. P(,900 un3avorable d. P%,100 unfavorable %@. !he e33icienc& variance amounts to a. P00 un3avorable b. P1,>00 unfavorable
c. P=00 favorable d. P1,000 unfavorable
%;. !he nonCcontrollable variance is a. P%,00 unfavorable b. P=00 unfavorable
c. P%,000 unfavorable d. P(,000 un3avorable
%<. !he 3i1ed over'ead e33icienc& variance is2 a. P=00 unfavorable b. PP%,000 unfavorable
c. P=00 favorable d. 0 -no suc' variance, never a meanin%3ul variance
P5ODCT COST8N@ %>. & basic tenet of variable costing is that period costs s'ould be currentl& e1pensed . hat is the rationale behind this procedureB a. Period costs are uncontrollable and should not be charged to a specific product. b. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products 7ould out7eigh the benefits. c. &llocation of period costs is arbitrary at best and could lead to erroneous decision by management. d. )ecause period costs =ill occur ='et'er production occurs, it is improper to allocate t'ese costs to production and de3er a current cost o3 doin% business. 0. !he follo7ing information regarding fied production costs from a manufacturing firm is available for the current year2 ied costs in the beginning inventory P1@,000 ied costs incurred this period 100,000 hich of the follo7ing statements is not trueB a. !he maimum amount of fied production costs that this firm could deduct using absorption costs in the current year is P11@,000. b. !he maimum difference bet7een this firm's the current year income based on absorption costing and its income based on variable costing is P1@,000. c. sin% variable costin%, t'is 3irm =ill deduct no more t'an P($,000 3or 3i1ed production costs. d. If this firm produced substantially more units than it sold in the current year, variable costing 7ill probably yield a lo7er income than absorption costing. 1. &bsorption costing differs from variable costing in all of the follo7ing e1cept a. treatment of fied manufacturing overhead. b. treatment o3 variable production costs. c. acceptability for eternal reporting. d. arrangement of the income statement %. If a firm produces more units than it sells, absorption costing, relative to variable costing, 7ill result in a. 'i%'er income and assets. c. lo7er income but higher assets. b. higher income but lo7er assets. d. lo7er income and assets. . -o7 7ill a favorable volume variance affect net income under each of the follo7ing methodsB
Page 8
&bsorption a. reduce b. reduce c. increase d. increase
4ariable no effect increase no e33ect reduce
I!"#$ = ! @ &*" +&$" !-" //I2 !he follo7ing information is available for J 3o. for its 3irst &ear o3 operations> $ales in units 9,000 Production in units <,000 #anufacturing costs2 irect labor P per unit irect material 9 per unit 4ariable overhead 1 per unit ied overhead P100,000 et income (absorption method) P0,000 $ales price per unit P=0 =. hat 7ould J 3o. have reported as its income before income taes if it had used variable costingB a. P0,000 -(00,000/",000:(.! c. P@;,900 b. P#,!00B (.!1",000-!,000B d. can5t be determined from the given 2#,!00 'i%'er Abs. 9. hat 7as the total amount of S@A e1pense incurred by J 3o.B a. P0,000 c. P@,000 b. P$,!00 -#,!00B-!!,000 d. can5t be determined from the given information 40-3-5-1=31x5,000=155,000 (!!,000-(00,000:!!,000 @. +ased on variable costin%, 7hat 7ould J 3o. sho7 as the value of its ending inventoryB a. P1%0,000 c. P#,000 -2;!;(:912,000 b. P @=,900 d. P%=,000 ;. hich of the follo7ing is an advantage of using variable costingB a. 4ariable costing complies 7ith enerally &ccepted &ccounting Principles. b. 4ariable costing complies 7ith the ational Internal *evenue 3ode. c. 4ariable costing is most relevant to longCrun pricing strategies. d. 4ariable costin% ma0,000 4ariable =0,000 -o7 much higher 7ould asty5s net income be if it used full absorption costing instead of variable costingB a. P>=,000 c. P2$,000 -("0,000/(00,000:(." b. P@<,000 d. P9=,000 (." 1 (00,000-"0,000B :2$,000 D8E5ENT8A7 COSTS ANA7*S8S >. $iomitos ma8es biteCsiAe siomai. hich of the follo7ing could be a constraint at $iomitosB a. !he siomai steamer b. !he 7or8ers 7ho mi the ingredients c. !he 7or8ers 7ho prepare the siomai for steaming d. An& o3 t'e above could be t'e constraint
Page 9
=0. ing 3ompany has only %9,000 hours of machine time each month to manufacture its t7o products. Product J has a contribution margin of P90, and Product has a contribution margin of P@=. Product J requires 9 hours of machine time, and Product requires < hours of machine time. If ing 3ompany 7ants to dedicate <0 percent of its machine time to the product that 7ill provide the most income, the company 7ill have a total contribution margin of a. P%90,000. c. P%10,000. b. P0,000. -0,0001(0 ; !,0001" d. P%00,000. =1. #angit 3ompany is currently operating at a loss of P19,000. !he sales manager has received a special order for 9,000 units of product, 7hich normally sells for P9 per unit. 3osts associated 7ith the product are2 direct material, P@K direct labor, P10K variable overhead, PK applied fied overhead, P=K and variable selling epenses, P%. !he special order 7ould allo7 the use of a slightly lo7er grade of direct material, thereby lo7ering the price per unit by P1.90 and selling epenses 7ould be decreased by P1. If #angit 7ants this special order to increase t'e total net income 3or t'e 3irm to P(0,000, 7hat sales price must be quoted for each of the 9,000 unitsB a. P2.!0 -!,000/!,000:! c. P%;.90 b. P%=.90 !;$;(0;2;-(.!-(:2.! d. P=.00 =%. olly 3ompany has divisions2 *, $, and !. ivision *'s income statement sho7s the follo7ing for the year ended ecember 12 $ales P1,000,000 3ost of goods sold (<00,000) ross profit P %00,000 $elling epenses P100,000 &dministrative epenses %90,000 (90,000) et loss P (190,000) 3ost of goods sold is ;9 percent variable and %9 percent fied. f the fied costs, @0 percent are avoidable if the division is closed. &ll of the selling epenses relate to the division and 7ould be eliminated if ivision * 7ere eliminated. f the administrative epenses, >0 percent are applied from corporate costs. If ivision * 7ere eliminated, olly5s income 7ould "00,0001!:00,0001$0 ;(00,000;!0,0001(0B:!,000 AC (,000,0000 "00-0001#!B :00,000-!,000:(!!,000 a. increase by P190,000. c. decrease b& P(!!,000. b. decrease by P ;9,000. d. decrease by P%19,000. =. !he opportunity cost of ma8ing a component part in a factory =it' e1cess capacit& for 7hich there is no alternative use is a. the total manufacturing cost of the component. b. the total variable cost of the component. c. the fied manufacturing cost of the component. d. Fero. I!"#$ == !, =; &*" +&$"( ,' !-" .,//,I'2
$chundel -air 3are 3ompany produces shampoo 7ith conditioner. !his is the company5s only product, 7hich it sells under the name L$hamcon.M !he manufacturing cost data for $hamcon are as follo7s2 Euantit- r"Fuir"d +urr"nt *ar9"t #ric" #aterials2 #"r 1,000=*! ott!" #"r *! 3hem 1 = ml P0.9= 3hem % ml 0.@ 3hem % ml 0.%0 irect labor2 % hours per bottle N P per hour
Page 10
actory overhead2 4ariable overhead ied overhead
O O
P%.00 per direct labor hour =.00 per direct labor hour
3lever 3ompany, o7ner and operator of a chain of hotels, as8ed $chundel -air 3are 3ompany to submit a bid for 900 boes of $hamcon. "ach bo 7ill contain %= bottles. Per 3lever5s specifications, its order should be different in chemical composition from the regular $hamcon. &ccording to $chundel 3ompany5s production manager, 3lever5s specifications can be met if an additional chemical, 3hem = 7ould be used. $chundel 3ompany has @0,000 ml of this chemical. 3hem = 7as used by the company in one of its brands that it decided to eliminate. !he remaining inventory of 3hem = 7as not sold or discarded because it does not deteriorate and the company has adequate space for its storage. $chundel 3ompany can sell 3hem = at the prevailing mar8et price of P0.=0 per ml less P0.10Fml selling and handling costs. 3lever5s order 7ould require 9 ml of 3hem = per bottle. !he company has a stoc8 of 3hem 9. !his 7as used by $chundel -air 3are for its manufacture of another product that is no longer being produced. 3hem. 9, 7hich cannot be used in $hamcon, can be substituted for 3hem 1 on a oneCforCone basis 7ithout affecting the quality of the 3lever order. !here is no problem about the supply of 3hem 1. &t present, the company has %0,000 ml of 3hem 9 in its inventory, 7hich has a salvage value of P@,000. !he production of the 3lever5s order 7ould require the same direct labor hours per bottle as in the regular $hamcon. -o7ever, at present, the company has only %0,000 direct labor hours available. !he 3lever order can be produced if the 7or8ers 7ould 7or8 overtime, although an overtime premium of 0G of the regular rate should be paid. $chundel -air 3are 3ompany5s policy is to price ne7 products at 10G of full manufacturing cost. ==. If $chundel 3ompany bids this month for the special oneCtime order of 900 boes of the product, the special order5s total direct materials cost 7ill be a. P;,>==. c. P@<,<<0. b. P@1,@<0. d. P!$,""0. C( (,0001:",000-0,000C!B:",00010.! C (,00012:2$,00010.2$ C2 (,0001:,00010.0 C (,0001!:$0,00010.0-0.(0B C! 0,0000 -cost $,000 =9. If $chundel -air 3are 3ompany bids this month for the special oneCtime order of 900 boes of the product, the special order5s total relevant conversion cost 7ill be a. P(2,$00. -0,00012 ;,000121(.2 c. P1%0,000. b. P%1>,@00. ;(,00011 d. P%1@,000. =@. If the company5s policy is to price ne7 products at (20 o3 3ull manu3acturin% cost, 7hat is the bid price per unit for this oneCtime special order of 3lever 3ompanyB a. P1>.99 c. P9.9! -!$,""0;(2,$00; b. P @.>1 d. P%.<0 (,00011B:#$,"0 #$,"01(.2:2!9,/(,000 :9.9! =;. hat 7ill be the total variable manufacturing costs for the subsequent, recurring 900Cbo ordersB a. P1<0,=<0 c. P%<;,%<0 b. P;,=@= d. P(9(,"0 C( (,0001:",00010.! CC (2,$00 - no.! C (,00012:2$,00010.2$ C2 (,0001:,00010.0 C (,0001!:$0,00010.0 Total :(9(,"0 D+ $#,$"0
Page 11
I!"#$ =< and => &*" +&$"( ,' !-" .,//,I' I'.,*#&!I,'2 :ane 3orporation produces 7ood glue that is used by furniture manufacturers. !he company normally produces and sells 10,000 gallons of the glue each month. hite lue is sold for P%<0 per gallon, variable costs is P1@< per gallon, fied factory overhead cost totals P=@0,000 per month, and the fied selling costs totals P@%0,000 per month. /abor stri8es in the furniture manufacturers that buy the bul8 of hite lue have caused the monthly sales of :ane 3orporation to temporarily decrease to only 19G of its normal monthly volume. :ane 3orporation5s management epects that the stri8es 7ill last for about % months, after 7hich, sales of hite lue should return to normal. -o7ever, due to the dramatic drop in the sales level, :ane 3orporation5s management is considering to close do7n its plant during the t7oCmoth period that the stri8es are on. If :ane 3orporation 7ill temporarily shut do7n its operations, it is epected that the fied factory overhead costs can be reduced to P=0,000 per month and that the fied selling costs can be reduced by P@%,000 per month. $tartCup costs at the end of the shutCdo7n period 7ould total P9@,000. :ane 3orporation uses the :I! system, so no inventories are on hand. =<. !he shut do7n point in units is a. ,#!0.00. -20",000/(( b. >,@=%.<@.
c. ,%90.00. d. 1,100.00.
=>. &t the sales level of only 0G of the normal volume, should the company continue operating or shut do7n temporarily for t7o monthsB a. Continue, because t'e e1pected sales is above t'e s'utdo=n point. b. $hut do7n, because the epected sales is above the shutdo7n point. c. 3ontinue, so that the shutdo7n costs may be avoided. d. $hut do7n, because the shutdo7n costs is less than the contribution margin under continued operations. 90. !he process of choosing among competing alternatives is called a. controlling c. decision ma
P00,000 100,000 P%00,000 %<,000 P1;%,000
P%,900,000 900,000 P%,000,000 1,900,000 P 900,000
P%,<00,000 @00,000 P%,%00,000 1,9%<,000 P @;%,000 100,000 P 9;%,000
!he selling prices are P0 for Pat and P90 for 3hin. $pi8ey company can increase the sales of Pat 7ith increased advertising. !he etra advertising 7ould cost an additional P%=9,000, and some of the potential purchasers of 3hin 7ould s7itch to Pat. In total, sales of Pat 7ould increase by %9,000 units, and sales of 3hin 7ould decrease by 9,000 units. !his strategy 7ould a. increase $pi8ey5s total sales by P;90,000. b. decrease $pi8ey5s total contribution margin by P00,000. c. increase Spi
Page 12
CAP8TA7 )D@ET8N@ I!"#$ 9% &'( 9) &*" +&$"( ,' !-" .,//,I'
*ic8y Iron7or8s is considering a proposal to sell an eisting lathe and purchase a ne7 computerCoperated lathe. Information on the eisting lathe and the computerCoperated lathe follo72 +o*#ut"r=o#"rat"d <'istin %ath" %ath" 3ost P100,000 P00,000 &ccumulated depreciation @0,000 0 $alvage value no7 %0,000 $alvage value in = years 0 @0,000 &nnual depreciation 10,000 ;9,000 &nnual cash operating costs %00,000 90,000 *emaining useful life = years = years 9%. hat is the paybac8 period for the computerCoperated latheB a. (."# &ears c. .9 years b. %.00 years d. .%> years
9. If the company uses 10 percent as its discount rate, 7hat is the net present value of the proposed ne7 lathe purchaseB (*ound present value factors to four decimal places) a. P2$,$! c. P1>9,=<9 b. P%9@,=@9 d. P0,=%%
9=. *PI 3orporation bought a piece of machinery. $elected data is presented belo72 ?seful life early net cash inflo7 $alvage value Internal rate of return 3ost of capital
@ years P=9,000 .=>;@ C0C 1;@ 1=G
!he initial cost of the machinery 7as (round present value factor to four decimal places)
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a. P(!#,29. b. P1;=,>>%.
c. P1@9,<1%. d. impossible to determine from the information given.
99. &ll other factors equal, a large number is preferred to a smaller number for all capital pro6ect evaluation measures e1cept a. net present value. c. internal rate of return. b. pa&bac< period. d. profitability inde. 9@. !anya 3orporation issued preferred stoc8s for P1%0 per share. !he issue price is P%0 more than the stoc85s par value. !he company incurred under7riting fees of P10 per share. !he stoc8s 7ill earn annual dividends of P1% per share. If the ta rate is 0G, the cost of capital (preferred stoc8s) is a. 10G c. ;.=%G b. 1%G d. (0.9( -(/(0-(0 9;.
&t the beginning of the year, 6orn 3orporation purchased a ne7 equipment for P@0,000. !he machine has an estimated useful life of four (=) years 7ith no salvage value. It is epected to produce cash flo7s from operations, net of income taes of %G, as follo7s2 ear 1 % = 9
P1%<,000 11%,000 1==,000 >@,000 <0,000
6orn 3orporation uses the sumCofCtheCyearsCdigits method ($) in computing depreciation of its depreciable assets. ?sing $, the ne7 equipment 7ill be depreciated as follo7s2 ear 1 % =
(P@0,000 =F10) (P@0,000 F10) (P@0,000 %F10) (P@0,000 1F10)
P1==,000 10<,000 ;%,000 @,000
!he company5s cost of capital is 10G. !he present value factors at 10G are as follo7s2 "nd of ear 1 % = !otal, = years
0.>0> 0.<%@ 0.;91 0.@< .1;0
If 6orn 3orporation used the straightCline method of depreciation instead of the $ method, the net present value provided by the equipment 7ould increase (decrease) by2 a. P1,=@= c. P,20"."B b. (P1,=@=) d. P=,0<.=< epreciation epense, as a ta shield, provides ta savings. !he difference in the present values of the ta savings under the t7o depreciation methods 7ill represent the difference in the net present values of the equipment. ear 1 P1==,000 %G E P=@,0<0 0.>0> P=1,<<@.;% % 10<,000 %G E =,9@0 0.<%@ %<,[email protected]@ ;%,000 %G E %,0=0 0.;91 1;,0.0= = @,000 %G E 11,9%0 0.@< ;,<@<.1@ !otal present value of ta savings, $ method P4 of ta savings, straightCline method (P@0,000 = years E P>0,000 %G .1;0)
ecrease in net present value
P>9,@0=.=< >1,%>@.00
P =,0<.=<
9<. -arry o7ns a computer reselling business and is epanding his business. -arry is presented 7ith one proposal, Proposal P1, such that the estimated investment for the epansion pro6ect is P<9,000 and it is epected to produce cash flo7s after taes of P%9,000 for each of the net @ years. &n alternate proposal, Proposal P%, involves an investment of P%,000
Page 1)
and afterCta cash flo7s of P10,000 for each of the net @ years. !he present value factors for an annuity of P1 for 1 to @ years are as follo7s2 n
10G
1%G
1=G
1@G
1
%0G
1
0.>0>
0.<>
0.<;;
0.<@%
0.<=;
0.<
%
1.;@
1.@>0
1.@=;
1.@09
1.9@@
1.9%<
%.=<;
%.=0%
%.%%
%.%=@
%.1;=
%.10@
=
.1;0
.0;
%.>1=
%.;><
%.@>0
%.9<>
9
.;>1
.@09
.=
.%;=
.1%;
%.>>1
@
=.99
=.111
.<<>
.@<9
.=><
.%@
!he cost of capital that 7ould ma8e -arry indifferent bet7een these t7o proposals lies bet7een a. 10G and 1%G c. ($ and (" b. 1=G and 1@G d. 1
9>. -arold 3o. is considering an investment in a capital pro6ect. !he sole outlay 7ill be P;1@,=1;.>0 at the outset of the pro6ect and the annual net afterCta cash inflo7 7ill be P%1@,0>.;9 for @ years. !he present value factors at -arold5s
P4 .actors 0.>%@ 0.<9; 0.;>= 0.;9 0.@<1 0.@0 c. 9.00 years d. @.00 years
Br"a9="&"n ti*"/ th" cu*u!ati&" #r"s"nt &a!u" of cash inf!oDs "Fua!s th" cost of in&"st*"nt +ash :nf!oDs ' PV) 4 PV 1 2 3 4 5
216,30(.75 216,30(.75 216,30(.75 216,30(.75 216,30(.75
0.(26 0.857 0.7(4 0.735 0.681
P200,302.83 185,377.46 171,74(.(4 158,(87.67 147,306.(4
$ota! PV of cash inf!oDs, first 4 -"ars P716,417.(0 Br"a9 "&"n ti*" 4 -"ars
@0%The in"estment ban,ing irm o - and .ssociates !ill use a di"idend "aluation model to appraise the shares o the // Corporation% +i"idends + at the end o the current year !ill be P1%20% The gro!th rate g is 9 and the discount rate 4 is 13% hat should be the price o the stoc, to the public6 a%
P28%(5
c+
b. P1.90 Price 7
P0+00
d. P%>.00 + 1%20 7 4 13 9
7 P30
@1. +$* 3o, has an opportunity to purchase a ne7 conveyor line for P%90,000. !hey can borro7 P%00,000, paying P90,000 do7n 7ith annual payments for five years and an interest of 19G. !hey also have an opportunity to lease the line for P@9,000 a year. !he present
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value of an annuity of P1 for five years at >G and 19G are .<<>; and .9%%, respectively. &t the end of five years, the estimated salvage value is P=0,000. If o7ned, the cost of maintenance is epected to be P10,000 per year. &ssume straightCline depreciation, a =0G ta rate, a cost of debt of 19G, and a cost of capital of >G. hat is the present value of the afterCta cost of leasing for the fiveCyear periodB a. P(!(,$9" c. P1==,000 b. P ><,@>< d. P1@9,<00 .nnual lease e:pense$ net o ta: P*5$000 : *0 : P;<$ 9$ 5 years
Present "alue o the ater=ta: cost o leasing C " C
P 39$000 3%889(
P151$*98
