MANAGEMENT ADVISORY SERVICESQUESTIONS AND ANSWERSTHEORY1. Which of the following costs should consider the tax shield effect in computing the costs of capital?A A. Cost of debtB. Cost of common stockC. Cost of preferred stockD. Cost of retained earnings2. Which of the following is not considered in the cash conversion cycle?B A. Receivable collection periodB. Debt repayment periodC. Inventory conversion periodD. Payable deferral period3. Cash flows from capital budgeting projects are assumed to be receivedC A. At the beginning of the yearB. Evenly during the yearC. At the end of the yearD. At a certain point of the year4. In the absence of shutdown costs,B A. Shutdown point is higher than breakeven pointB. Shutdown point is equal to the breakeven pointC. Shutdown point is lower than breakeven pointD. One cannot determine the relationship between shutdown point and breakeven point5. The balanced scorecard approach does not require looking at performance from which of thefollowing perspectives?C A. CustomerB. EmployeesC. CompetitorD. Internal business processes6. Contribution margin ÷ profit after interests and preferred dividends =C A. Degree of operation leverageB. Degree of financial leverageC. Degree of total leverageD. No meaningful amount7. If an increase in product price by 5% causes a decrease in quantity demanded by the samepercentage, then the demand for the product is said to beB A. ElasticB. Unit-elasticC. InelasticD. Perfectly Elastic8. Under the high-low method, the unit variable cost closely resembles the math concept ofC A. Y-interceptB. X-interceptC. Slope of the lineD. Independent variable9. Profit under variable costing fluctuates withA A. Sales onlyB. Production onlyC. Both sales and productionD. Neither sales nor production10. The path that has the highest slack time in the PERT network isC A. Critical pathB. Longest pathC. Shortest pathD. Psychopath11.Which of the following is an invalid measure of productivity?
C A. Partial operationalB. Partial financialC. Total operationalD. Total financial12.Which of the following situations is among the concerns of a controller (as opposed to those of atreasurer)?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.13. A firm’s working capital financing requirements may be divided intoB A. Aggressive and conservativeB. Seasonal and permanentC. Current and non-currentD. Internal and external14. Dividend yield multiplied by price-earnings ratioA A. Pay-out ratioB. Retention ratioC. Equity ratioD. Earnings per share15. A term descriptive of managerial accounting.C A. Historical financial statementsB. Generally accepted accounting principlesC. DiscretionaryD. Regulatory16. Identify the term that does not belong to the group.A A. Differential costB. Prevention costC. Appraisal costD. Internal failure cost17. Which of the following capital budgeting techniques is non-discounted?A A. Simple rate of returnB. Sophisticated rate of returnC. Benefit-cost ratioD. Net present value18. Identify the term that does not belong to the group.A A. Probability analysisB. Regression analysisC. High-low methodD. Scattergraph method19. A system not used in inventory management.A A. Lockbox systemB. Economic order quantityC. Materials requirement planning systemD. ABC system20. A factor that is dealt with by both ‘linear programming’ and ‘best product combination.’D A. EfficiencyB. ProductivityC. SolvencyD. Scarcity21. A(n) ________ cost increases or decreases in intervals as activity changes.a. historical costb. fixed costc. step costd. budgeted costANS: C22. which of the following is not a product cost component?a. rent on a factory building
b. indirect production labor wagesc. janitorial supplies used in a factoryd. commission on the sale of a productANS: D23. Which of the following always has a direct cause-effect relationship to a cost?PredictorCostdrivera. yes yesb. yes noc. no yesd. no noANS: C24.The distinction between direct and indirect costs depends on whether a costa. is controllable or non-controllable.b. is variable or fixed.c. can be conveniently and physically traced to a cost object underconsideration.d. will increase with changes in levels of activity.ANS: C25.Costs that are incurred for monitoring and inspecting are:a. prevention costs c. appraisal costsb. detection costs d. failure costsANS: C26.Costs that are incurred to preclude defects and improper processing are:a. prevention costs c. appraisal costsb. detection costs d. failure costsANS: A27. Costs that are incurred when customers complain are:a. prevention costs c. appraisal costsb. detection costs d. failure costsANS: D28.The estimated maximum potential activity for a specified time is:a. theoretical capacity c. normal capacityb. practical capacity d. expected capacityANS: A29. Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200and that this amount is material. What journal entry is needed to close the overheadaccount? (Round decimals to nearest whole percent.)a. Debit Work in Process $8,456; Finished Goods $13,294; Cost of GoodsSold $15,450 and credit Overhead $37,200b. Debit Overhead $37,200 and credit Work in Process $8,456; FinishedGoods $13,294; Cost of Goods Sold $15,450c. Debit Work in Process $37,200 and credit Overhead $37,200d. Debit Cost of Goods Sold $37,200 and credit Overhead $37,200ANS: AWIP: 73,150/321,800 = $
8,456FG: 115,000/321,800 =$13,294EI: 133,650/321,800 =$15,45030.If a firm produces more units than it sells, absorption costing, relative to variable costing,will result ina. higher income and assets.b. higher income but lower assets.c. lower income but higher assets.d. lower income and assets.ANS: A31. A functional classification of costs would classify "depreciation on office equipment"as aa. product cost.b. general and administrative expense.c. selling expense.d. variable cost.ANS: B32. If a firm uses variable costing, fixed manufacturing overhead will be includeda. 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: B33.The costing system that classifies costs by both functional group and behavior isa. process costing.b. job order costing.c. variable costing.d. absorption costing.ANS: C34. Unabsorbed fixed overhead costs in an absorption costing system area. 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: A35. A firm presently has total sales of $100,000. If its sales rise, itsa. net income based on variable costing will go up more than its netincome based on absorption costing.b. net income based on absorption costing will go up more than its netincome based on variable costing.c. fixed costs will also rise.d. per unit variable costs will rise.ANS: A36.The term cost driver refers toa. 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 managementaccountant.d. any activity that causes costs to be incurred.ANS: D
37.The term cost driver refers toa. 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 managementaccountant.d. any activity that causes costs to be incurred.ANS: D38. Activity-based costing and activity-based management are effective in helping managersdo all of the following excepta. trace technology costs to products.b. promote excellence standards.c. identify only value-added activities.d. analyze performance problems.ANS: C39.The amount of time between the development and the production of a product isa. the product life cycle.b. lead time.c. production time.d. value-added time.ANS: B40. In the pharmaceutical or food industries, quality control inspections would most likely beviewed asa. non-value-added activities.b. business-value-added activities.c. value-added-activities.d. process-efficiency activities.ANS: C41.If a firms 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: D42. Cost-volume-profit analysis is a technique available to management to understand betterthe interrelationships of several factors that affect a firms profit. As with many suchtechniques, the accountant oversimplifies the real world by making assumptions. Whichof the following is not a major assumption underlying CVP analysis?a. All costs incurred by a firm can be separated into their fixed andvariable components.b. The product selling price per unit is constant at all volume levels.c. Operating efficiency and employee productivity are constant at allvolume levels.d. For multi-product situations, the sales mix can vary at all volumelevels.ANS: D43.Consider the equation X = Sales - [(CM/Sales) × (Sales)]. What is X?a. net income
b. fixed costsc. contribution margind. variable costsANS: D44. The contribution margin ratio always increases when thea. 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: B45. In a multiple-product firm, the product that has the highest contribution margin per unitwilla. 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: C46.If a companys fixed costs were to increase, the effect on a profit-volume graph would bethat thea. contribution margin line would shift upward parallel to the present line.b. contribution margin line would shift downward parallel to the presentline.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: B47. If a cost is irrelevant to a decision, the cost could not bea. a sunk cost.b. a future cost.c. a variable cost.d. an incremental cost.ANS: D48.The term incremental cost refers toa. 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 feasiblyallocable to any of them.ANS: B49. Irrelevant costs generally includeSunk costs Historical costs Allocated costsa. yes yes nob. yes no noc. no no yesd. yes yes yesANS: D50.The potential rental value of space used for production activitiesa. 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: B51.In a make or buy decision, the reliability of a potential supplier isa. 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: D52. Which of the following costs is irrelevant in making a decision about a special orderprice if some of the company facilities are currently idle?a. direct laborb. equipment depreciationc. variable cost of utilitiesd. opportunity cost of productionANS: B53.A manager is attempting to determine whether a segment of the business should beeliminated. The focus of attention for this decision should be ona. the net income shown on the segments 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 thesegment.ANS: D54.An increase in direct fixed costs could reduce all of the following excepta. product line contribution margin.b. product line segment margin.c. product line operating income.d. corporate net income.ANS: A55. A linear programming problem can havea. 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: B56.Contracting with vendors outside the organization to obtain or acquire goods and/orservices is calleda. target costing.b. insourcing.c. outsourcing.d. product harvesting.ANS: C57.An outside firm selected to provide services to an organization is called aa. 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 companys recordkeepingsystem?a. an unexpired costb. an expired costc. a product costd. an opportunity costANS: D59. The basis for measuring the cost of capital derived from bonds and preferred stock,respectively, is thea. pre-tax rate of interest for bonds and stated annual dividend rate lessthe expected earnings per share for preferred stock.b. pre-tax rate of interest for bonds and stated annual dividend rate forpreferred stock.c. after-tax rate of interest for bonds and stated annual dividend rate lessthe expected earnings per share for preferred stock.d. after-tax rate of interest for bonds and stated annual dividend rate forpreferred stock.ANS: D60.All other factors equal, a large number is preferred to a smaller number for all capitalproject evaluation measures excepta. net present value.b. payback period.c. internal rate of return.d. profitability index.ANS: B61. If investment A has a payback period of three years and investment B has a paybackperiod of four years, thena. 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 theinformation given.ANS: D62.The time value of money is explicitly recognized through the process ofa. interpolating.b. discounting.c. annuitizing.d. budgeting.ANS: B63.When using one of the discounted cash flow methods to evaluate the desirability of acapital budgeting project, which of the following factors is generally not important?a. method of financing the project under considerationb. timing of cash flows relating to the projectc. impact of the project on income taxes to be paidd. amounts of cash flows relating to the projectANS: A64.When a project has uneven projected cash inflows over its life, an analyst may be forced touse _______ to find the projects internal rate of return.a. a screening decision
b. a trial-and-error approachc. a post investment auditd. a time lineANS: B65.In capital budgeting, a firms cost of capital is frequently used as thea. internal rate of return.b. accounting rate of return.c. discount rate.d. profitability index.ANS: C66. The net present value method of evaluating proposed investmentsa. measures a projects internal rate of return.b. ignores cash flows beyond the payback period.c. applies only to mutually exclusive investment proposals.d. discounts cash flows at a minimum desired rate of return.ANS: D67. Strategic planning isa. 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: D68.Chronologically, the first part of the master budget to be prepared would be thea. sales budget.b. production budget.c. cash budget.d. pro forma financial statements.ANS: APROBLEMS1. Jonlee Corporation reported sales of P 80,000 in 2006, P 96,000 in 2007 and P 112,000 in 2008. Inan index analysis where 2007 is used as the base year, the respective sales percentages would beB 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 installationcosts estimated at P 23,000. The purchase of the new equipment will prevent the company fromhaving to incur costs of P 30,000 to repair equipment now in service. Depreciation on the newequipment has been estimated at P 20,000 each year. The income tax rate is 40%. The netinvestment in the new equipment for capital investment planning isC A. P 173,000B. P 153,000C. P 145,000D. P 131,0003. If the following data are estimated for next year, what unit sales would be needed to earn P 150,000after taxes?Forecast sales (P 30 per unit) P 600,000Variable costs 240,000Manufacturing fixed costs 90,000Administrative fixed costs 120,000Assumed tax rate 40%D A. 13,333 unitsB. 18,889 units
C. 20,000 unitsD. 25,556 units4. If the economy is facing demand-pull inflation, which of the following would be a logical action by thegovernment?A A. Increase income taxesB. Lower the discount rateC. Buy government securitiesD. Increase government spending5. A supplier extends a credit term of 2/10, n/60 (EOM). The EOM (end-of-month) term has effectivelyextended credit period up to an average of 75 days from the last day of the discount period.Using a 365-day year, what is the nominal annual cost of trade credit?C A. 11.45%B. 11.30%C. 9.93%D. 9.80%6. Red Company established a standard cost for raw materials at P 25.00 per unit. During the year, atotal 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 isA A. P 100 debitB. P 100 creditC. P 900 debitD. P 900 credit7. On January 1, 2008, Brown Company has a receivable balance of P 1 M. During 2008, it generatedsales amounting to P 20 M, of which 60% is made on credit. 2008 receivable collections amounted toP 9,000,000. The accounts receivable turnover isC A. 12.4 xB. 6.0 xC. 4.8 xD. 2.4 x8. A careful study by a company’s cost analyst has determined that if a truck is driven 120,000 milesduring 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 theunit variable cost.A A. 7.6B. 12.4C. 12.6D. 20,0009. Pink Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink canrent a house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink canconstruct an on-site office. Pink estimates that the construction of an on-site office would requirematerials costing P 1,500 (20 percent of which are salvageable upon dismantling) and labor costingP 1,000. Ignoring interest and income tax effects, Pink will realize a net benefit by constructing itsown on-site office of Forbidden Kingdom project only if the length of the project is estimated to be atleast:C A. 18 monthsB. 20 monthsC. 22 monthsD. 25 months10. Assuming P 20,000 net annual cash inflows from a 4-year P 59,120-capital investment project, thebreak-even rate of return (IRR) for the project is closest toC 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 acompany whose current liabilities are P 120,000 and long-term liabilities P 480,000.ANSWER: P 252,00012. Blue, Inc. uses a learning curve of 80% for all new products it develops. A trial run of 500 units of anew 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 thenearest whole amount.ANSWER: P 12513. 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 costof goods sold is P 250,000, then how much is the difference in income reported under absorptioncosting and variable costing?ANSWER: P 10,00015. Yellow Corporation’s estimated its after-tax cost of capital is 7.8%. It has the following capitalstructure: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%, andthe firm’s tax rate is 40%, what is the pre-tax cost of long-term debt? Round-off answer to twodecimal places. (2 minutes)ANSWER: 6.67%16. 10% is the profit margin when sales level last year reached P 100,000. If the operating leveragelast year was 4 times, then what would have been the variable costs last year to break-even?ANSWER: P 45,00017. If the annual percentage rate of interest is 10 percent compounded quarterly and payments are tobe made quarterly, then how many percent is the effective annual rate? (Round-off answer to twodecimal places)ANSWER: 10.38%18. Plowback ratio is 40% while dividend yield is 20%. If earnings per share is P 20, then how muchwould be the initial public offering per share?ANSWER: P 6019. Black Merchandising has an optimal order quantity of 2,000 units. Black’s customers demand 50,000units each year. Transaction cost incurred is P 12 per order. If Black also maintains a safety stock of100 units, then how much is the total annual carrying costs?ANSWER: P 330.0020. Net profit ratio ÷ contribution margin ratio = __________ANSWER: Margin of safety ratio (or safety margin percentage)PROBLE 21-24Langley CorporationLangley Corporation has the following standard costs associated with the manufactureand sale of one of its products:Direct material $3.00 per unitDirect labor 2.50 per unitVariable manufacturing overhead 1.80 per unitFixed manufacturing overhead 4.00 per unit (based on anestimateof 50,000 units peryear)Variable selling expenses .25 per unitFixed SG&A expense $75,000 per year
During its first year of operations Langley manufactured 51,000 units andsold 48,000. The selling price per unit was $25. All costs were equal tostandard.21. Refer to Langley Corporation. Under absorption costing, the standard production cost perunit for the current year wasa. $11.30.b. $ 7.30.c. $11.55.d. $13.05.ANS: ADM + DL + VFOH + FFOH = Standard Cost per Unit$3.00 + $2.50 + $1.80 + $4.00 = $11.3022. Refer to Langley Corporation. The volume variance under absorption costing isa. $8,000 F.b. $4,000 F.c. $4,000 U.d. $8,000 U.ANS: B1,000 favorable units production variance * $4.00 fixed factoryoverhead = $4,000 F23. Refer to Langley Corporation. Under variable costing, the standard production cost perunit for the current year wasa. $11.30.b. $7.30.c. $7.55.d. $11.55.ANS: BDM + DL + VOH = Standard Production Cost per Unit$3.00 + $2.50 + $1.80 = $7.3024. Refer to Langley Corporation. Based on variable costing, the income before income taxesfor the year wasa. $570,600.b. $560,000.c. $562,600.d. $547,500.ANS: CSales: $1,200,000Variable Expenses 362,400Contribution Margin $ 837,600Fixed ExpensesOverhead $ 200,00075,000Net Income $ 562,600=========Problem 25-26Smithson Company
Smithson Company produces two products (A and B). Direct material and labor costs forProduct A total $35 (which reflects 4 direct labor hours); direct material and labor costsfor Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functionsare needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product Buses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800units 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 ofoverhead activity hours used, the total product cost per unit assigned to Product A willbea. $86.32.b. $95.00.c. $115.50.d. None of the responses are correct.ANS: CTotal OH Proportion AllocatedOHUnitsProducedOH perUnitDM andDL/UnitTotal$780,0000.082568807$64,403.67800 $80.50$35.00$115.50(7,200/87,200)26. Refer to Smithson Company If total overhead is assigned to A and B on the basis ofoverhead activity hours used, the total product cost per unit assigned to Product B willbea. $115.50.b. $73.32.c. $34.60.d. None of the responses are correct.ANS: DTotal OH Proportion AllocatedOHUnitsProducedOH perUnitDM andDL/UnitTotal$780,0000.917431193 $715,596.338000 $89.44$22.00$111.44(80,000/87,200)27. A firm estimates that it will sell 100,000 units of its sole product in the coming period. Itprojects 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. $1,600,000b. $2,400,000c. $1,100,000d. $1,900,000ANS: DProfit + Fixed Cost = (100,000 units * $60/unitCM)Fixed Cost = (100,000 units * $24/unitCM) - Profit= $2,400,000 - $500,000= $1,900,000
28. Sombrero Company manufactures a western-style hat that sells for $10 per unit. This isits sole product and it has projected the break-even point at 50,000 units in the comingperiod. If fixed costs are projected at $100,000, what is the projected contributionmargin ratio?a. 80 percentb. 20 percentc. 40 percentd. 60 percentANS: BFixed Costs=Contribution Margin atBreakeven Point= $100,000Breakeven Sales: $500,000CM 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 1,000Variable costs per unit $500Total fixed costs $150,000How much will be contributed to profit before taxes by the 1,001st unit sold?a. $650b. $500c. $150d. $0ANS: CFixed Cost = Contribution Margin= $150,000Contribution Margin/Unit = ContributionMargin/Units$150,000/1,000 units = $150/unit30. Ledbetter Company reported the following results from sales of 5,000 units of Product Afor June:Sales $200,000Variable costs (120,000)Fixed costs (60,000)Operating income $ 20,000Assume that Ledbetter increases the selling price of Product A by 10 percent in July. Howmany units of Product A would have to be sold in July to generate an operating incomeof $20,000?a. 4,000b. 4,300c. 4,545d. 5,000ANS: AIf sales price per unit is increased by 10 percent, less units will have to besold 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 apart are: direct material, $12; direct labor, $25; variable overhead, $13; and appliedfixed overhead, $30. Knox has received a quote of $55 from a potential supplier for thispart. If Knox buys the part, 70 percent of the applied fixed overhead would continue.Knox Company would be better off bya. $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: CCost to make: $55/unit * 10,000 units = $550,000Cost to manufacture: $(12+25+13+9)= $59/unitIncremental difference in favor of buying: $4/unit * 10,000 units =$40,00032.Unique Company manufactures a single product. In the prior year, the company had salesof $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects itscost structure and sales price per unit to remain the same in the current year, howevertotal sales are expected to increase by 20 percent. If the current year projections arerealized, net income should exceed the prior year’s net income by:a. 100 percent.b. 80 percent.c. 20 percent.d. 50 percent.ANS: BContribution margin: $40,000Net profit: $(40,000 - 30,000) =$10,00020% CM increase: $40,000 * 1.20 =$48,000Net profit: $(48,000 - 30,000) =$18,000Increase in profit $8,000$8,000/$10,000 = 80%33.Paulson Company has only 25,000 hours of machine time each month to manufacture itstwo products. Product X has a contribution margin of $50, and Product Y has acontribution margin of $64. Product X requires 5 hours of machine time, and Product Yrequires 8 hours of machine time. If Paulson Company wants to dedicate 80 percent ofits machine time to the product that will provide the most income, the company will havea total contribution margin ofa. $250,000.b. $240,000.c. $210,000.d. $200,000.ANS: BAssume 80% of capacity applied toProduct XX: 20,000 hrs/5 hrsper unit4,000 units * $50CM/unit$200,000Y: 5,000 hrs/8 hrs perunit625 units * $64CM/unit40,000Total $240,000
======34.Doyle Company has 3 divisions: R, S, and T. Division Rs income statement shows thefollowing for the year ended December 31:Sales $1,000,000Cost of goods sold (800,000)Gross profit $ 200,000Selling expenses $100,000Administrative expenses 250,000 (350,000)Net loss $ (150,000)Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60percent are avoidable if the division is closed. All of the selling expenses relate to thedivision and would be eliminated if Division R were eliminated. Of the administrativeexpenses, 90 percent are applied from corporate costs. If Division R were eliminated,Doyle’s income woulda. increase by $150,000.b. decrease by $ 75,000.c. decrease by $155,000.d. decrease by $215,000.ANS: CSales foregone $(1,000,000)COGS avoidedVariable $600,000Fixed 120,000720,000Selling Expense Avoided 100,000Administrative Expense Avoided 25,000Decrease in income $( 155,000)=========35. Thomas Company is currently operating at a loss of $15,000. The sales manager hasreceived 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; variableoverhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The specialorder would allow the use of a slightly lower grade of direct material, thereby loweringthe price per unit by $1.50 and selling expenses would be decreased by $1. If Thomaswants this special order to increase the total net income for the firm to $10,000, whatsales price must be quoted for each of the 5,000 units?a. $23.50b. $24.50c. $27.50d. $34.00ANS: AIn order to increase income to $10,000, there must be an increase of $25,000 or $5 perunit.Direct materials $ 4.50Direct Labor 10.00VariableOverhead3.00Variable SellingExp1.00Production Costs $18.50Additional profitper unit 5.00
Salesprice/unit$23.50=====36.Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all ofeither product it can make. The following data are pertinent to each respective product:Brushes CombsUnits of output per machine hour 8 20Selling price per unit $12.00 $4.00Product cost per unitDirect material $1.00 $1.20Direct labor 2.00 0.10Variable overhead 0.50 0.05Total fixed overhead is $380,000.The company has 40,000 machine hours available for production. What sales mix willmaximize profits?a. 320,000 brushes and 0 combsb. 0 brushes and 800,000 combsc. 160,000 brushes and 600,000 combsd. 252,630 brushes and 252,630 combsANS: ABrushes have a contribution margin of $8.50 per unit; combs have acontribution 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 pairsof military combat boots to the Armed Forces. The companys costs per pair of boots areas follows:Direct material $8Direct labor 6Variable overhead 3Variable selling cost (commission) 3Fixed overhead (allocated) 2Fixed selling and administrative cost 1Assuming that there would be no commission on this potential sale, the lowest price thefirm can bid is some price greater thana. $23.b. $20.c. $17.d. $14.ANS: CThe lowest price would have to be greater than the sum of all variablemanufacturing costs.Variable manufacturing costs total $17; therefore the price would have tobe greater than $17 per pair.Richmond Steel Corporation
The capital budgeting committee of the Richmond Steel Corporation is evaluating thepossibility of replacing its old pipe-bending machine with a more advanced model.Information on the existing machine and the new model follows:Existing machine New machineOriginal cost $200,000 $400,000Market value now 80,000Market value in year 5 0 20,000Annual cash operating costs 40,000 10,000Remaining life 5 yrs. 5 yrs.38. Refer to Richmond Steel Corporation. The major opportunity cost associated with thecontinued use of the existing machine isa. $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: A39. Datasoft Industries is considering the purchase of a $100,000 machine that is expectedto result in a decrease of $15,000 per year in cash expenses. This machine, which hasno residual value, has an estimated useful life of 10 years and will be depreciated on astraight-line basis. For this machine, the accounting rate of return would bea. 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 infixed costs per year, and requires an initial investment of $5,000. Given a cost of goodssold of 60 percent of sales, what is the payback period in years?a. 2.50b. 5.00c. 2.00d. 1.25ANS: ANet cash flow = $10,000 - $6,000- $2,000Net cash flow = $2,000$5,000/$2,000 = 2.50 yearsWebber Corporation is considering an investment in a labor-saving machine. Informationon this machine follows:Cost $30,000Salvage value in five years $0Estimated life 5 yearsAnnual depreciation $6,000Annual reduction in existing costs $8,00041. Refer to Webber Corporation. What is the internal rate of return on this project (round tothe 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: CIRR = $30,000 / $8,000 = 3.75Using PV of Annuity Table 5 years. The constant of 3.75 corresponds toa rate of 10.5%Rhodes CorporationRhodes Corporation is involved in the evaluation of a new computer-integratedmanufacturing system. The system has a projected initial cost of $1,000,000. It has anexpected life of six years, with no salvage value, and is expected to generate annual costsavings of $250,000. Based on Rhodes Corporations analysis, the project has a netpresent value of $57,625.42. Refer to Rhodes Corporation. What discount rate did the company use to compute thenet present value? Present value tables or a financial calculator are required.a. 10%b. 11%c. 12%d. 13%ANS: BNPV = $ 57,625Initial Cost = $1,000,000PV of Cash Inflows = $1,057,625Annual Cost Savings =$ 250,000$1,057,625/$250,000 = 4.2305 PV of AnnuityConstantAt 6 years, the constant corresponds to adiscount rate of 11%.DIF: Moderate OBJ: 14-343. Refer to Rhodes Corporation. What is the projects profitability index?a. 1.058b. .058c. .945d. 1.000ANS: API = $1,057,625/1,000,000= 1.058DIF: Moderate OBJ: 14-344. Refer to Rhodes Corporation. What is the projects internal rate of return? Presentvalue tables or a financial calculator are required.a. between 12.5 and 13.0 percentb. between 11.0 and 11.5 percentc. between 11.5 and 12.0 percentd. between 13.0 and 13.5 percentANS: A$1,000,000/$250,000 = 4.000Using the Present Value of Annuity Table for 6 years, the ratefalls between 12.5% and 13%45.Budgeted sales for the first six months for Porter Corp. are listed below:JANUARY FEBRUARY MARCH APRIL MAY JUNEUNITS: 6,000 7,000 8,000 7,000 5,000 4,000
Porter Corp. has a policy of maintaining an inventory of finished goods equal to 40percent of the next months budgeted sales. If Porter Corp. plans to produce 6,000 unitsin June, what are budgeted sales for July?a. 3,600 unitsb. 1,000 unitsc. 9,000 unitsd. 8,000 unitsANS: CBeginning Inventory for June 1,600 units (4,000 * 40%)Produced in June 6,000 unitsDeduct: June sales (4,000) unitsEnding inventory for June 3,600 units3,600/0.40 = 9,000 units46.Budgeted sales for Knox Inc. for the first quarter the year are shown below:JANUARY FEBRUARY MARCHUNITS: 35,000 25,000 32,000The company has a policy that requires the ending inventory in each period to be 10percent of the following periods sales. Assuming that the company follows this policy,what quantity of production should be scheduled for February?a. 24,300 unitsb. 24,700 unitsc. 25,000 unitsd. 25,700 unitsANS: DEnding Inventory, February 3,200 unitsFebruary Sales 25,000unitsRequirements for Month 28,200unitsLess Beginning Inventory,February(2,500)unitsProduction scheduled forFebruary25,700units47.Production of Product X has been budgeted at 200,000 units for May. One unit of Xrequires 2 lbs. of raw material. The projected beginning and ending materials inventoryfor May are:Beginning inventory: 2,000 lbs.Ending inventory: 10,000 lbs.How many lbs. of material should be purchased during May?a. 192,000b. 208,000c. 408,000d. 416,000ANS: CEnding inventory--May 10,000 lbs.Production needs: 200,000 units * 2lbs/unit400,000 lbs.Inventory needed 410,000 lbs.Beginning inventory--May (2,000) lbs.Total purchase requirements 408,000 lbs.
48.Edwards Company has the following expected pattern of collections on credit sales: 70percent 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 isnever collected.At the end of May, Edwards Company has the following accounts receivable balances:From April sales $21,000From May sales 48,000Edwards expected sales for June are $150,000. How much cash will Edwards Companyexpect to collect in June?a. $127,400b. $129,000c. $148,600d. $152,520ANS: CJune sales ($150,000 *70%)$105,000May sales (160,000 *15%)24,000April sales (140,000 *14%)19,600Total cash collections--June$148,600