MANAGEMENT ADVISORY SERVICES

QUESTIONS AND ANSWERS

THEORY
1. Which of the following costs should consider the tax shield effect in computing the costs of capital?
A A. Cost of debt
B. Cost of common stock
C. Cost of preferred stock
D. Cost of retained earnings

2. Which of the following is not considered in the cash conversion cycle?

B A. Receivable collection period
B. Debt repayment period
C. Inventory conversion period
D. Payable deferral period

3. Cash flows from capital budgeting projects are assumed to be received

C A. At the beginning of the year
B. Evenly during the year
C. At the end of the year
D. At a certain point of the year

4. In the absence of shutdown costs,

B A. Shutdown point is higher than breakeven point
B. Shutdown point is equal to the breakeven point
C. Shutdown point is lower than breakeven point
D. One cannot determine the relationship between shutdown point and breakeven point

5. The balanced scorecard approach does not require looking at performance from which of the
following perspectives?
C A. Customer
B. Employees
C. Competitor
D. Internal business processes

6. Contribution margin profit after interests and preferred dividends =

C A. Degree of operation leverage
B. Degree of financial leverage
C. Degree of total leverage
D. No meaningful amount

7. If an increase in product price by 5% causes a decrease in quantity demanded by the same

percentage, then the demand for the product is said to be
B A. Elastic
B. Unit-elastic
C. Inelastic
D. Perfectly Elastic

8. Under the high-low method, the unit variable cost closely resembles the math concept of
C A. Y-intercept
B. X-intercept
C. Slope of the line
D. Independent variable

9. Profit under variable costing fluctuates with

A A. Sales only
B. Production only
C. Both sales and production
D. Neither sales nor production

10. The path that has the highest slack time in the PERT network is
C A. Critical path
B. Longest path
C. Shortest path
D. Psychopath

11.Which of the following is an invalid measure of productivity?

C A. Partial operational
B. Partial financial
C. Total operational
D. Total financial

12.Which of the following situations is among the concerns of a controller (as opposed to those of a
treasurer)?
D A. The company is in need of financing from external sources.
B. The company is already late in filing its monthly VAT returns.
C. The company is guilty of unplanned material bank overdraft.
D. The company is in default of its account payable to suppliers.

13. A firms working capital financing requirements may be divided into

B A. Aggressive and conservative
B. Seasonal and permanent
C. Current and non-current
D. Internal and external

14. Dividend yield multiplied by price-earnings ratio

A A. Pay-out ratio
B. Retention ratio
C. Equity ratio
D. Earnings per share

15. A term descriptive of managerial accounting.

C A. Historical financial statements
B. Generally accepted accounting principles
C. Discretionary
D. Regulatory

16. Identify the term that does not belong to the group.
A A. Differential cost
B. Prevention cost
C. Appraisal cost
D. Internal failure cost

17. Which of the following capital budgeting techniques is non-discounted?

A A. Simple rate of return
B. Sophisticated rate of return
C. Benefit-cost ratio
D. Net present value

18. Identify the term that does not belong to the group.
A A. Probability analysis
B. Regression analysis
C. High-low method
D. Scattergraph method

19. A system not used in inventory management.

A A. Lockbox system
B. Economic order quantity
C. Materials requirement planning system
D. ABC system

20. A factor that is dealt with by both linear programming and best product combination.
D A. Efficiency
B. Productivity
C. Solvency
D. Scarcity

21. A(n) ________ cost increases or decreases in intervals as activity changes.

a. historical cost
b. fixed cost
c. step cost
d. budgeted cost
ANS: C

22. which of the following is not a product cost component?

a. rent on a factory building
 b. indirect production labor wages
c. janitorial supplies used in a factory
d. commission on the sale of a product
ANS: D

23. Which of the following always has a direct cause-effect relationship to a cost?

Predicto Cost
r driver

a. yes yes
b. yes no
c. no yes
d. no no

ANS: C

24.The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non-controllable.
b. is variable or fixed.
c. can be conveniently and physically traced to a cost object under
consideration.
d. will increase with changes in levels of activity.
ANS: C

25.Costs that are incurred for monitoring and inspecting are:

a. prevention costs c. appraisal costs
b. detection costs d. failure costs
ANS: C

26.Costs that are incurred to preclude defects and improper processing are:
a. prevention costs c. appraisal costs
b. detection costs d. failure costs
ANS: A

27. Costs that are incurred when customers complain are:

a. prevention costs c. appraisal costs
b. detection costs d. failure costs
ANS: D

28.The estimated maximum potential activity for a specified time is:

a. theoretical capacity c. normal capacity
b. practical capacity d. expected capacity
ANS: A

29. Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200
and that this amount is material. What journal entry is needed to close the overhead
account? (Round decimals to nearest whole percent.)
a. Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods
Sold $15,450 and credit Overhead $37,200
b. Debit Overhead $37,200 and credit Work in Process $8,456; Finished
Goods $13,294; Cost of Goods Sold $15,450
c. Debit Work in Process $37,200 and credit Overhead $37,200
d. Debit Cost of Goods Sold $37,200 and credit Overhead $37,200
ANS: A
WIP: 73,150/321,800 = $
 8,456
FG: 115,000/321,800 =
$13,294
EI: 133,650/321,800 =
$15,450

30.If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in
a. higher income and assets.
b. higher income but lower assets.
c. lower income but higher assets.
d. lower income and assets.
ANS: A

31. A functional classification of costs would classify "depreciation on office equipment"

as a
a. product cost.
b. general and administrative expense.
c. selling expense.
d. variable cost.
ANS: B

32. If a firm uses variable costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
ANS: B

33.The costing system that classifies costs by both functional group and behavior is
a. process costing.
b. job order costing.
c. variable costing.
d. absorption costing.
ANS: C
34. Unabsorbed fixed overhead costs in an absorption costing system are
a. fixed manufacturing costs not allocated to units produced.
b. variable overhead costs not allocated to units produced.
c. excess variable overhead costs.
d. costs that cannot be controlled.
ANS: A

35. A firm presently has total sales of $100,000. If its sales rise, its
a. net income based on variable costing will go up more than its net
income based on absorption costing.
b. net income based on absorption costing will go up more than its net
income based on variable costing.
c. fixed costs will also rise.
d. per unit variable costs will rise.
ANS: A
36.The term cost driver refers to
a. any activity that can be used to predict cost changes.
b. the attempt to control expenditures at a reasonable level.
c. the person who gathers and transfers cost data to the management
accountant.
d. any activity that causes costs to be incurred.
ANS: D
37.The term cost driver refers to
a. any activity that can be used to predict cost changes.
b. the attempt to control expenditures at a reasonable level.
c. the person who gathers and transfers cost data to the management
accountant.
d. any activity that causes costs to be incurred.
ANS: D

38. Activity-based costing and activity-based management are effective in helping managers
do all of the following except
a. trace technology costs to products.
b. promote excellence standards.
c. identify only value-added activities.
d. analyze performance problems.
ANS: C
39.The amount of time between the development and the production of a product is
a. the product life cycle.
b. lead time.
c. production time.
d. value-added time.
ANS: B

40. In the pharmaceutical or food industries, quality control inspections would most likely be
viewed as
a. non-value-added activities.
b. business-value-added activities.
c. value-added-activities.
d. process-efficiency activities.
ANS: C

41.If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.
ANS: D

42. Cost-volume-profit analysis is a technique available to management to understand better

the interrelationships of several factors that affect a firm's profit. As with many such
techniques, the accountant oversimplifies the real world by making assumptions. Which
of the following is not a major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and
variable components.
b. The product selling price per unit is constant at all volume levels.
c. Operating efficiency and employee productivity are constant at all
volume levels.
d. For multi-product situations, the sales mix can vary at all volume
levels.
ANS: D

43.Consider the equation X = Sales - [(CM/Sales) (Sales)]. What is X?

a. net income
 b. fixed costs
c. contribution margin
d. variable costs
ANS: D

44. The contribution margin ratio always increases when the

a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.
ANS: B

45. In a multiple-product firm, the product that has the highest contribution margin per unit
will
a. generate more profit for each $1 of sales than the other products.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold.
d. have the lowest variable costs per unit.
ANS: C

46.If a company's fixed costs were to increase, the effect on a profit-volume graph would be
that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present
line.
c. slope of the contribution margin line would be more pronounced
(steeper).
d. slope of the contribution margin line would be less pronounced (flatter).
ANS: B

47. If a cost is irrelevant to a decision, the cost could not be

a. a sunk cost.
b. a future cost.
c. a variable cost.
d. an incremental cost.
ANS: D

48.The term incremental cost refers to

a. the profit foregone by selecting one choice instead of another.
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly
allocable to any of them.
ANS: B

49. Irrelevant costs generally include

Sunk costs Historical costs Allocated costs

a. yes yes no
b. yes no no
c. no no yes
d. yes yes yes

ANS: D

50.The potential rental value of space used for production activities

a. is a variable cost of production.
 b. represents an opportunity cost of production.
c. is an unavoidable cost.
d. is a sunk cost of production.
ANS: B

51.In a make or buy decision, the reliability of a potential supplier is

a. an irrelevant decision factor.
b. relevant information if it can be quantified.
c. an opportunity cost of continued production.
d. a qualitative decision factor.
ANS: D

52. Which of the following costs is irrelevant in making a decision about a special order
price if some of the company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production
ANS: B

53.A manager is attempting to determine whether a segment of the business should be

eliminated. The focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the
segment.
ANS: D

54.An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin.
b. product line segment margin.
c. product line operating income.
d. corporate net income.
ANS: A
55. A linear programming problem can have
a. no more than three resource constraints.
b. only one objective function.
c. no more than two dependent variables for each constraint equation.
d. no more than three independent variables.
ANS: B
56.Contracting with vendors outside the organization to obtain or acquire goods and/or
services is called
a. target costing.
b. insourcing.
c. outsourcing.
d. product harvesting.
ANS: C
57.An outside firm selected to provide services to an organization is called a
a. contract vendor.
b. lessee.
c. network organization.
d. centralized insourcer.
ANS: A
58.Which of the following costs would not be accounted for in a company's recordkeeping
system?
a. an unexpired cost
b. an expired cost
c. a product cost
d. an opportunity cost
ANS: D
59. The basis for measuring the cost of capital derived from bonds and preferred stock,
respectively, is the
a. pre-tax rate of interest for bonds and stated annual dividend rate less
the expected earnings per share for preferred stock.
b. pre-tax rate of interest for bonds and stated annual dividend rate for
preferred stock.
c. after-tax rate of interest for bonds and stated annual dividend rate less
the expected earnings per share for preferred stock.
d. after-tax rate of interest for bonds and stated annual dividend rate for
preferred stock.
ANS: D

60.All other factors equal, a large number is preferred to a smaller number for all capital
project evaluation measures except
a. net present value.
b. payback period.
c. internal rate of return.
d. profitability index.
ANS: B

61. If investment A has a payback period of three years and investment B has a payback
period of four years, then
a. A is more profitable than B.
b. A is less profitable than B.
c. A and B are equally profitable.
d. the relative profitability of A and B cannot be determined from the
information given.
ANS: D

62.The time value of money is explicitly recognized through the process of

a. interpolating.
b. discounting.
c. annuitizing.
d. budgeting.
ANS: B

63.When using one of the discounted cash flow methods to evaluate the desirability of a
capital budgeting project, which of the following factors is generally not important?
a. method of financing the project under consideration
b. timing of cash flows relating to the project
c. impact of the project on income taxes to be paid
d. amounts of cash flows relating to the project
ANS: A

64.When a project has uneven projected cash inflows over its life, an analyst may be forced to
use _______ to find the project's internal rate of return.
a. a screening decision
 b. a trial-and-error approach
c. a post investment audit
d. a time line
ANS: B

65.In capital budgeting, a firm's cost of capital is frequently used as the

a. internal rate of return.
b. accounting rate of return.
c. discount rate.
d. profitability index.
ANS: C

66. The net present value method of evaluating proposed investments

a. measures a project's 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: D
67. Strategic planning is
a. planning activities for promoting products for the future.
b. planning for appropriate assignments of resources.
c. setting standards for the use of important but hard-to-find materials.
d. stating and establishing long-term plans.
ANS: D

68.Chronologically, the first part of the master budget to be prepared would be the
a. sales budget.
b. production budget.
c. cash budget.
d. pro forma financial statements.
ANS: A

PROBLEMS
1. Jonlee Corporation reported sales of P 80,000 in 2006, P 96,000 in 2007 and P 112,000 in 2008. In
an index analysis where 2007 is used as the base year, the respective sales percentages would be
B A. 80%; 96%; 112%
B. 83%; 100%; 117%
C. 80%; 100%; 120%
D. 100%; 120%; 140%

2. Green Company plans to purchase new equipment costing P 140,000 plus freight and installation
costs estimated at P 23,000. The purchase of the new equipment will prevent the company from
having to incur costs of P 30,000 to repair equipment now in service. Depreciation on the new
equipment has been estimated at P 20,000 each year. The income tax rate is 40%. The net
investment in the new equipment for capital investment planning is
C A. P 173,000
B. P 153,000
C. P 145,000
D. P 131,000

3. If the following data are estimated for next year, what unit sales would be needed to earn P 150,000
after taxes?
Forecast sales (P 30 per unit) P 600,000
Variable costs 240,000
Manufacturing fixed costs 90,000
Administrative fixed costs 120,000
Assumed tax rate 40%

D A. 13,333 units
B. 18,889 units
 C. 20,000 units
D. 25,556 units

4. If the economy is facing demand-pull inflation, which of the following would be a logical action by the
government?
A A. Increase income taxes
B. Lower the discount rate
C. Buy government securities
D. Increase government spending

5. A supplier extends a credit term of 2/10, n/60 (EOM). The EOM (end-of-month) term has effectively
extended credit period up to an average of 75 days from the last day of the discount period.

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, a
total of 10,000 units were purchased of which 50% was at P 24.70 each, 20% was at P 24.90 each,
and the balance, P 25.60 each. The raw materials cost variance is
A A. P 100 debit
B. P 100 credit
C. P 900 debit
D. P 900 credit

7. On January 1, 2008, Brown Company has a receivable balance of P 1 M. During 2008, it generated
sales amounting to P 20 M, of which 60% is made on credit. 2008 receivable collections amounted to
P 9,000,000. The accounts receivable turnover is
C A. 12.4 x
B. 6.0 x
C. 4.8 x
D. 2.4 x

8. A careful study by a companys cost analyst has determined that if a truck is driven 120,000 miles
during a year, the average operating cost is P 11.6 per mile. If a truck is driven only 80,000 miles,
the average operating cost increases to P 13.6 per mile. Using the high-low method, estimate the
unit variable cost.
A A. 7.6
B. 12.4
C. 12.6
D. 20,000

9. Pink Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink can
rent a house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink can
construct an on-site office. Pink estimates that the construction of an on-site office would require
materials costing P 1,500 (20 percent of which are salvageable upon dismantling) and labor costing
P 1,000. Ignoring interest and income tax effects, Pink will realize a net benefit by constructing its
own on-site office of Forbidden Kingdom project only if the length of the project is estimated to be at
least:
C A. 18 months
B. 20 months
C. 22 months
D. 25 months

10. Assuming P 20,000 net annual cash inflows from a 4-year P 59,120-capital investment project, the
break-even rate of return (IRR) for the project is closest to
C A. 11.1%
B. 12.2%
C. 13.3%
D. 14.4%

11. Assuming a current ratio of 3.5 and a quick ratio of 1.4, determine the amount inventory of a
company whose current liabilities are P 120,000 and long-term liabilities P 480,000.

ANSWER: P 252,000

12. Blue, Inc. uses a learning curve of 80% for all new products it develops. A trial run of 500 units of a
new product shows total labor-related costs (direct, indirect labor, and fringe benefits) of P 120,000.
Management plans to produce 1,500 units of the new product during the next year.
 Determine the unit cost of production for next year for labor-related costs. Round-off answer to the
nearest whole amount.

ANSWER: P 125

13. Return on equity is 20%. Return on investment is 5%. Determine the debt-equity ratio.

ANSWER: 3x or 3:1 or 300%

14. Purchases = 80% of cost of sales; Fixed overhead is, on the average, 20% of inventory cost. If cost
of goods sold is P 250,000, then how much is the difference in income reported under absorption
costing and variable costing?

ANSWER: P 10,000

15. Yellow Corporations estimated its after-tax cost of capital is 7.8%. It has the following capital
structure:
Common stock 50%
Preferred stock 20%
Long-term debt 30%
Assuming the companys cost of common equity is 10%, the cost of preferred equity is 8%, and
the firms tax rate is 40%, what is the pre-tax cost of long-term debt? Round-off answer to two
decimal places. (2 minutes)

ANSWER: 6.67%

16. 10% is the profit margin when sales level last year reached P 100,000. If the operating leverage
last year was 4 times, then what would have been the variable costs last year to break-even?

ANSWER: P 45,000

17. If the annual percentage rate of interest is 10 percent compounded quarterly and payments are to
be made quarterly, then how many percent is the effective annual rate? (Round-off answer to two
decimal places)

ANSWER: 10.38%

18. Plowback ratio is 40% while dividend yield is 20%. If earnings per share is P 20, then how much
would be the initial public offering per share?

ANSWER: P 60

19. Black Merchandising has an optimal order quantity of 2,000 units. Blacks customers demand 50,000
units each year. Transaction cost incurred is P 12 per order. If Black also maintains a safety stock of
100 units, then how much is the total annual carrying costs?

ANSWER: P 330.00

20. Net profit ratio contribution margin ratio = __________

ANSWER: Margin of safety ratio (or safety margin percentage)

PROBLE 21-24
Langley Corporation

Langley Corporation has the following standard costs associated with the manufacture
and sale of one of its products:

Direct material $3.00 per unit

Direct labor 2.50 per unit
Variable manufacturing overhead 1.80 per unit
Fixed manufacturing overhead 4.00 per unit (based on an
estimate
of 50,000 units per
year)
Variable selling expenses .25 per unit
Fixed SG&A expense $75,000 per year
 During its first year of operations Langley manufactured 51,000 units and
sold 48,000. The selling price per unit was $25. All costs were equal to
standard.

21. Refer to Langley Corporation. Under absorption costing, the standard production cost per
unit for the current year was
a. $11.30.
b. $ 7.30.
c. $11.55.
d. $13.05.
ANS: A
DM + DL + VFOH + FFOH = Standard Cost per Unit
$3.00 + $2.50 + $1.80 + $4.00 = $11.30

22. Refer to Langley Corporation. The volume variance under absorption costing is
a. $8,000 F.
b. $4,000 F.
c. $4,000 U.
d. $8,000 U.
ANS: B

1,000 favorable units production variance * $4.00 fixed factory

overhead = $4,000 F

23. Refer to Langley Corporation. Under variable costing, the standard production cost per
unit for the current year was
a. $11.30.
b. $7.30.
c. $7.55.
d. $11.55.
ANS: B

DM + DL + VOH = Standard Production Cost per Unit

$3.00 + $2.50 + $1.80 = $7.30

24. Refer to Langley Corporation. Based on variable costing, the income before income taxes
for the year was
a. $570,600.
b. $560,000.
c. $562,600.
d. $547,500.
ANS: C
Sales: $1,200,000
Variable Expenses 362,400
Contribution Margin $ 837,600
Fixed Expenses
Overhead $ 200,000
75,000
Net Income $ 562,600
=========

Problem 25-26

Smithson Company
 Smithson Company produces two products (A and B). Direct material and labor costs for
Product A total $35 (which reflects 4 direct labor hours); direct material and labor costs
for Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functions
are needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1
hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product B
uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800
units of A and 8,000 units of B each period.

25.Refer to Smithson Company If total overhead is assigned to A and B on the basis of

overhead activity hours used, the total product cost per unit assigned to Product A will
be
a. $86.32.
b. $95.00.
c. $115.50.
d. None of the responses are correct.
ANS: C

Total OH Proportion Allocated Units OH per DM and Total

OH Produced Unit DL/Unit
$ 0.08256880 $ 800 $ $ $
780,000 7 64,403.67 80.50 35.00 115.50
(7,200/87,2
00)

26. Refer to Smithson Company If total overhead is assigned to A and B on the basis of
overhead activity hours used, the total product cost per unit assigned to Product B will
be
a. $115.50.
b. $73.32.
c. $34.60.
d. None of the responses are correct.
ANS: D

Total OH Proportion Allocated Units OH per DM and Total

OH Produced Unit DL/Unit
$ 0.917431193 $ 8000 $ $ $
780,000 715,596.33 89.44 22.00 111.44
(80,000/87,2
00)

27. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It
projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at
$500,000. What is the firm budgeting for fixed costs in the coming period?
a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000
ANS: D
Profit + Fixed Cost = (100,000 units * $60/unit
CM)
Fixed Cost = (100,000 units * $24/unit
CM) - Profit
= $2,400,000 - $500,000
= $1,900,000
28. Sombrero Company manufactures a western-style hat that sells for $10 per unit. This is
its sole product and it has projected the break-even point at 50,000 units in the coming
period. If fixed costs are projected at $100,000, what is the projected contribution
margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent
ANS: B
Fixed Costs=Contribution Margin at
Breakeven Point
= $100,000
Breakeven Sales: $500,000
CM Ratio: $(100,000/500,000) = 20%

29. The following information pertains to Saturn Companys cost-volume-profit relationships:

Break-even point in units sold 1,000

Variable costs per unit $500
Total fixed costs $150,000

How much will be contributed to profit before taxes by the 1,001st unit sold?
a. $650
b. $500
c. $150
d. $0
ANS: C
Fixed Cost = Contribution Margin
= $150,000
Contribution Margin/Unit = Contribution
Margin/Units
$150,000/1,000 units = $150/unit

30. Ledbetter Company reported the following results from sales of 5,000 units of Product A
for June:

Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000

Assume that Ledbetter increases the selling price of Product A by 10 percent in July. How
many units of Product A would have to be sold in July to generate an operating income
of $20,000?
a. 4,000
b. 4,300
c. 4,545
d. 5,000
ANS: A
If sales price per unit is increased by 10 percent, less units will have to be
sold to generate gross revenues of $200,000.
Sales price per unit = $200,000/5,000 units = $40/unit
$40/unit * 1.10 = $44/unit
$(200,000 / 44/unit) = 4,545 units
31.Knox Company uses 10,000 units of a part in its production process. The costs to make a
part are: direct material, $12; direct labor, $25; variable overhead, $13; and applied
fixed overhead, $30. Knox has received a quote of $55 from a potential supplier for this
part. If Knox buys the part, 70 percent of the applied fixed overhead would continue.
Knox Company would be better off by
a. $50,000 to manufacture the part.
b. $150,000 to buy the part.
c. $40,000 to buy the part.
d. $160,000 to manufacture the part.
ANS: C
Cost to make: $55/unit * 10,000 units = $550,000
Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units =
$40,000

32.Unique Company manufactures a single product. In the prior year, the company had sales
of $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects its
cost structure and sales price per unit to remain the same in the current year, however
total sales are expected to increase by 20 percent. If the current year projections are
realized, net income should exceed the prior years net income by:
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.
ANS: B
Contribution margin: $40,000
Net profit: $(40,000 - 30,000) =
$10,000

20% CM increase: $40,000 * 1.20 =

$48,000
Net profit: $(48,000 - 30,000) =
$18,000

Increase in profit $8,000

$8,000/$10,000 = 80%

33.Paulson Company has only 25,000 hours of machine time each month to manufacture its
two products. Product X has a contribution margin of $50, and Product Y has a
contribution margin of $64. Product X requires 5 hours of machine time, and Product Y
requires 8 hours of machine time. If Paulson Company wants to dedicate 80 percent of
its machine time to the product that will provide the most income, the company will have
a total contribution margin of
a. $250,000.
b. $240,000.
c. $210,000.
d. $200,000.
ANS: B
Assume 80% of capacity applied to
Product X

X: 20,000 hrs/5 hrs 4,000 units * $50 $200,00

per unit CM/unit 0
Y: 5,000 hrs/8 hrs per 625 units * $64 40,000
unit CM/unit
Total $240,00
0
 =====
=

34.Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the
following for the year ended December 31:

Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative 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, 60
percent are avoidable if the division is closed. All of the selling expenses relate to the
division and would be eliminated if Division R were eliminated. Of the administrative
expenses, 90 percent are applied from corporate costs. If Division R were eliminated,
Doyles income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.
ANS: C
Sales foregone $(1,000,000)
COGS avoided
Variable $600,000
Fixed 120,0 720,000
00
Selling Expense Avoided 100,000
Administrative Expense Avoided 25,000
Decrease in income $( 155,000)
=========

35. Thomas Company is currently operating at a loss of $15,000. The sales manager has
received a special order for 5,000 units of product, which normally sells for $35 per unit.
Costs associated with the product are: direct material, $6; direct labor, $10; variable
overhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The special
order would allow the use of a slightly lower grade of direct material, thereby lowering
the price per unit by $1.50 and selling expenses would be decreased by $1. If Thomas
wants this special order to increase the total net income for the firm to $10,000, what
sales price must be quoted for each of the 5,000 units?
a. $23.50
b. $24.50
c. $27.50
d. $34.00
ANS: A
In order to increase income to $10,000, there must be an increase of $25,000 or $5 per
unit.
Direct materials $ 4.50
Direct Labor 10.00
Variable 3.00
Overhead
Variable Selling 1.00
Exp
Production Costs $18.50
Additional profit
per unit 5.00
 Sales $23.50
price/unit =====

36.Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of
either product it can make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05

Total fixed overhead is $380,000.

The company has 40,000 machine hours available for production. What sales mix will
maximize profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs
ANS: A

Brushes have a contribution margin of $8.50 per unit; combs have a

contribution margin of $2.65 per unit.

The combination of 320,000 brushes and 0 combs provides a net profit of

$340,000.

37. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs
of military combat boots to the Armed Forces. The company's costs per pair of boots are
as follows:

Direct material $8
Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1

Assuming that there would be no commission on this potential sale, the lowest price the
firm can bid is some price greater than
a. $23.
b. $20.
c. $17.
d. $14.
ANS: C
The lowest price would have to be greater than the sum of all variable
manufacturing costs.
Variable manufacturing costs total $17; therefore the price would have to
be greater than $17 per pair.

Richmond Steel Corporation

 The capital budgeting committee of the Richmond Steel Corporation is evaluating the
possibility of replacing its old pipe-bending machine with a more advanced model.
Information on the existing machine and the new model follows:

Existing machine New machine

Original cost $200,000 $400,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

38. Refer to Richmond Steel Corporation. The major opportunity cost associated with the
continued use of the existing machine is
a. $30,000 of annual savings in operating costs.
b. $20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing machine.
d. $400,000 cost of the new machine.
ANS: A

39. Datasoft Industries is considering the purchase of a $100,000 machine that is expected
to result in a decrease of $15,000 per year in cash expenses. This machine, which has
no residual value, has an estimated useful life of 10 years and will be depreciated on a
straight-line basis. For this machine, the accounting rate of return would be
a. 10 percent.
b. 15 percent.
c. 30 percent.
d. 35 percent.
ANS: C
$15,000/($100,000/2)
= 30%

40. An investment project is expected to yield $10,000 in annual revenues, has $2,000 in
fixed costs per year, and requires an initial investment of $5,000. Given a cost of goods
sold of 60 percent of sales, what is the payback period in years?
a. 2.50
b. 5.00
c. 2.00
d. 1.25
ANS: A

Net cash flow = $10,000 - $6,000

- $2,000
Net cash flow = $2,000
$5,000/$2,000 = 2.50 years

Webber Corporation is considering an investment in a labor-saving machine. Information

on this machine follows:

Cost $30,000
Salvage value in five years $0
Estimated life 5 years
Annual depreciation $6,000
Annual reduction in existing costs $8,000

41. Refer to Webber Corporation. What is the internal rate of return on this project (round to
the nearest 1/2%)? Present value tables or a financial calculator are required.
a. 37.5%
b. 25.0%
c. 10.5%
 d. 13.5%
ANS: C
IRR = $30,000 / $8,000 = 3.75
Using PV of Annuity Table 5 years. The constant of 3.75 corresponds to
a rate of 10.5%

Rhodes Corporation

Rhodes Corporation is involved in the evaluation of a new computer-integrated

manufacturing system. The system has a projected initial cost of $1,000,000. It has an
expected life of six years, with no salvage value, and is expected to generate annual cost
savings of $250,000. Based on Rhodes Corporation's analysis, the project has a net
present value of $57,625.

42. Refer to Rhodes Corporation. What discount rate did the company use to compute the
net present value? Present value tables or a financial calculator are required.
a. 10%
b. 11%
c. 12%
d. 13%
ANS: B
NPV = $ 57,625
Initial Cost = $1,000,000
PV of Cash Inflows = $1,057,625
Annual Cost Savings =$ 250,000
$1,057,625/$250,000 = 4.2305 PV of Annuity
Constant
At 6 years, the constant corresponds to a discount
rate of 11%.

DIF: Moderate OBJ: 14-3

43. Refer to Rhodes Corporation. What is the project's profitability index?

a. 1.058
b. .058
c. .945
d. 1.000
ANS: A
PI = $1,057,625/1,000,000
= 1.058

DIF: Moderate OBJ: 14-3

44. Refer to Rhodes Corporation. What is the project's internal rate of return? Present
value tables or a financial calculator are required.
a. between 12.5 and 13.0 percent
b. between 11.0 and 11.5 percent
c. between 11.5 and 12.0 percent
d. between 13.0 and 13.5 percent
ANS: A
$1,000,000/$250,000 = 4.000
Using the Present Value of Annuity Table for 6 years, the rate
falls between 12.5% and 13%

45.Budgeted sales for the first six months for Porter Corp. are listed below:

JANUARY FEBRUARY MARCH APRIL MAY JUNE

UNITS: 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 40
percent of the next month's budgeted sales. If Porter Corp. plans to produce 6,000 units
in June, what are budgeted sales for July?
a. 3,600 units
b. 1,000 units
c. 9,000 units
d. 8,000 units
ANS: C
Beginning Inventory for June 1,600 units (4,000 * 40%)
Produced in June 6,000 units
Deduct: June sales (4,000) units
Ending inventory for June 3,600 units

3,600/0.40 = 9,000 units

46.Budgeted sales for Knox Inc. for the first quarter the year are shown below:

JANUARY FEBRUARY MARCH

UNITS: 35,000 25,000 32,000

The company has a policy that requires the ending inventory in each period to be 10
percent of the following period's sales. Assuming that the company follows this policy,
what quantity of production should be scheduled for February?
a. 24,300 units
b. 24,700 units
c. 25,000 units
d. 25,700 units
ANS: D
Ending Inventory, February 3,200 units
February Sales 25,000
units
Requirements for Month 28,200
units
Less Beginning Inventory, (2,500)
February units
Production scheduled for 25,700
February units
47.Production of Product X has been budgeted at 200,000 units for May. One unit of X
requires 2 lbs. of raw material. The projected beginning and ending materials inventory
for May are:

Beginning inventory: 2,000 lbs.

Ending inventory: 10,000 lbs.
How many lbs. of material should be purchased during May?
a. 192,000
b. 208,000
c. 408,000
d. 416,000
ANS: C
Ending inventory--May 10,000 lbs.
Production needs: 200,000 units * 2 400,000 lbs.
lbs/unit
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: 70
percent collected in the month of sale, 15 percent in the month after the month of sale,
and 14 percent in the second month after the month of sale. The remaining 1 percent is
never collected.

At the end of May, Edwards Company has the following accounts receivable balances:

From April sales $21,000

From May sales 48,000

Edwards expected sales for June are $150,000. How much cash will Edwards Company
expect to collect in June?
a. $127,400
b. $129,000
c. $148,600
d. $152,520
ANS: C
June sales ($150,000 * $105,000
70%)
May sales (160,000 * 24,000
15%)
April sales (140,000 * 19,600
14%)
Total cash collections-- $148,600
June