MANAGEMENT ADVISORY SERVICES C.

Total operational
THEORY D. Total financial
1. Which of the following costs should consider the tax
shield effect in computing the costs of capital? 12.Which of the following situations is among the
A A. Cost of debt concerns of a controller (as opposed to those of a
B. Cost of common stock treasurer)?
C. Cost of preferred stock D A. The company is in need of financing from
D. Cost of retained earnings external sources.
B. The company is already late in filing its
2. Which of the following is not considered in the cash monthly VAT returns.
conversion cycle? C. The company is guilty of unplanned material
B A. Receivable collection period bank overdraft.
B. Debt repayment period D. The company is in default of its account
C. Inventory conversion period payable to suppliers.
D. Payable deferral period
13. A firm’s working capital financing requirements may
3. Cash flows from capital budgeting projects are be divided into
assumed to be received B A. Aggressive and conservative
C A. At the beginning of the year B. Seasonal and permanent
B. Evenly during the year C. Current and non-current
C. At the end of the year D. Internal and external
D. At a certain point of the year
14. Dividend yield multiplied by price-earnings ratio
4. In the absence of shutdown costs, A A. Pay-out ratio
B A. Shutdown point is higher than breakeven point B. Retention ratio
B. Shutdown point is equal to the breakeven point C. Equity ratio
C. Shutdown point is lower than breakeven point D. Earnings per share
D. One cannot determine the relationship between
shutdown point and breakeven point 15. A term descriptive of managerial accounting.
C A. Historical financial statements
5. The balanced scorecard approach does not B. Generally accepted accounting principles
require looking at performance from which of C. Discretionary
D. Regulatory
the following perspectives?
C A. Customer
16. Identify the term that does not belong to the group.
B. Employees
A A. Differential cost
C. Competitor
B. Prevention cost
D. Internal business processes
C. Appraisal cost
D. Internal failure cost
6. Contribution margin ÷ profit after interests and
preferred dividends = 17. Which of the following capital budgeting techniques is
C A. Degree of operation leverage non-discounted?
B. Degree of financial leverage A A. Simple rate of return
C. Degree of total leverage B. Sophisticated rate of return
D. No meaningful amount C. Benefit-cost ratio
D. Net present value
7. If an increase in product price by 5% causes a
decrease in quantity demanded by the same 18. Identify the term that does not belong to the group.
percentage, then the demand for the product is said A A. Probability analysis
to be B. Regression analysis
B A. Elastic C. High-low method
B. Unit-elastic D. Scattergraph method
C. Inelastic
D. Perfectly Elastic 19. A system not used in inventory management.
A A. Lockbox system
8. Under the high-low method, the unit variable cost B. Economic order quantity
closely resembles the math concept of C. Materials requirement planning system
C A. Y-intercept D. ABC system
B. X-intercept
C. Slope of the line 20. A factor that is dealt with by both ‘linear
D. Independent variable programming’ and ‘best product combination.’
D A. Efficiency
9. Profit under variable costing fluctuates with B. Productivity
A A. Sales only C. Solvency
B. Production only D. Scarcity
C. Both sales and production
D. Neither sales nor production 21. A(n) ________ cost increases or decreases in
intervals as activity changes.
10. The path that has the highest slack time in the PERT a. historical cost
network is b. fixed cost
C A. Critical path c. step cost
B. Longest path d. budgeted cost
C. Shortest path ANS: C
D. Psychopath
22. which of the following is not a product cost component?
11.Which of the following is an invalid measure of a. rent on a factory building
productivity? b. indirect production labor wages
C A. Partial operational c. janitorial supplies used in a factory
B. Partial financial
d. commission on the sale of a product ANS: B
ANS: D
23. Which of the following always has a direct 32. If a firm uses variable costing, fixed manufacturing
cause-effect relationship to a cost? overhead will be included
Predictor Cost driver only on the balance sheet.
a. yes yes only on the income statement.
b. yes no on both the balance sheet and income statement.
c. no yes on neither the balance sheet nor income statement.
d. no no ANS: B
ANS: C
33. The costing system that classifies costs by both functional
24. The distinction between direct and indirect costs group and behavior is
depends on whether a cost process costing.
a. is controllable or non-controllable. job order costing.
b. is variable or fixed. variable costing.
c. can be conveniently and physically traced to a cost absorption costing.
object under consideration. ANS: C
d. will increase with changes in levels of activity.
ANS: C 34. Unabsorbed fixed overhead costs in an absorption
costing system are
25. Costs that are incurred for monitoring and inspecting are: fixed manufacturing costs not allocated to units produced.
prevention costs appraisal costs variable overhead costs not allocated to units produced.
detection costs failure costs excess variable overhead costs.
ANS: C costs that cannot be controlled.
ANS: A
26. Costs that are incurred to preclude defects and improper
processing are: 35. A firm presently has total sales of $100,000. If its
prevention costs appraisal costs sales rise, its
detection costs failure costs net income based on variable costing will go up more
ANS: A than its net income based on absorption costing.
net income based on absorption costing will go up more
27. Costs that are incurred when customers complain than its net income based on variable costing.
are: fixed costs will also rise.
prevention costs appraisal costs per unit variable costs will rise.
detection costs failure costs ANS: A
ANS: D
36. The term cost driver refers to
28. The estimated maximum potential activity for a specified any activity that can be used to predict cost changes.
time is: the attempt to control expenditures at a reasonable
theoretical capacity normal capacity level.
practical capacity expected capacity the person who gathers and transfers cost data to the
ANS: A management accountant.
any activity that causes costs to be incurred.
29. Refer to Zenith Corporation. Assume that Zenith has ANS: D
underapplied overhead of $37,200 and that this amount is
material. What journal entry is needed to close the 37. The term cost driver refers to
overhead account? (Round decimals to nearest whole any activity that can be used to predict cost changes.
percent.) the attempt to control expenditures at a reasonable
Debit Work in Process $8,456; Finished Goods level.
$13,294; Cost of Goods Sold $15,450 and the person who gathers and transfers cost data to the
credit Overhead $37,200 management accountant.
Debit Overhead $37,200 and credit Work in Process any activity that causes costs to be incurred.
$8,456; Finished Goods $13,294; Cost of ANS: D
Goods Sold $15,450
Debit Work in Process $37,200 and credit Overhead 38. Activity-based costing and activity-based
$37,200 management are effective in helping managers do
Debit Cost of Goods Sold $37,200 and credit all of the following except
Overhead $37,200 trace technology costs to products.
ANS: A promote excellence standards.
WIP: 73,150/321,800 = $ 8,456 identify only value-added activities.
FG: 115,000/321,800 = $13,294 analyze performance problems.
EI: 133,650/321,800 = $15,450 ANS: C
39. The amount of time between the development and the
30. If a firm produces more units than it sells, absorption production of a product is
costing, relative to variable costing, will result in the product life cycle.
higher income and assets. lead time.
higher income but lower assets. production time.
lower income but higher assets. value-added time.
lower income and assets. ANS: B
ANS: A
40. In the pharmaceutical or food industries, quality
31. A functional classification of costs would classify control inspections would most likely be viewed as
"depreciation on office equipment" non-value-added activities.
as a business-value-added activities.
product cost. value-added-activities.
general and administrative expense. process-efficiency activities.
selling expense. ANS: C
variable cost.
41. If a firm's net income does not change as its volume
changes, the firm('s) 49. Irrelevant costs generally include
must be in the service industry. Sunk costs Historical costs Allocated costs
must have no fixed costs.
sales price must equal $0. yes yes no
sales price must equal its variable costs. yes no no
ANS: D no no yes
yes yes yes
42. Cost-volume-profit analysis is a technique available to ANS: D
management to understand better the interrelationships
of several factors that affect a firm's profit. As with many 50. The potential rental value of space used for production
such techniques, the accountant oversimplifies the real activities
world by making assumptions. Which of the following is is a variable cost of production.
not a major assumption underlying CVP analysis? represents an opportunity cost of production.
All costs incurred by a firm can be separated into their is an unavoidable cost.
fixed and variable components. is a sunk cost of production.
The product selling price per unit is constant at all ANS: B
volume levels.
Operating efficiency and employee productivity are 51. In a make or buy decision, the reliability of a potential
constant at all volume levels. supplier is
For multi-product situations, the sales mix can vary at all an irrelevant decision factor.
volume levels. relevant information if it can be quantified.
ANS: D an opportunity cost of continued production.
a qualitative decision factor.
43. Consider the equation X = Sales - [(CM/Sales)  ANS: D
(Sales)]. What is X?
net income 52. Which of the following costs is irrelevant in making
fixed costs a decision about a special order price if some of the
contribution margin company facilities are currently idle?
variable costs direct labor
ANS: D equipment depreciation
variable cost of utilities
44. The contribution margin ratio always increases when opportunity cost of production
the ANS: B
variable costs as a percentage of net sales increase.
variable costs as a percentage of net sales decrease. 53. A manager is attempting to determine whether a segment
break-even point increases. of the business should be eliminated. The focus of
break-even point decreases. attention for this decision should be on
ANS: B the net income shown on the segment's income
statement.
45. In a multiple-product firm, the product that has the sales minus total expenses of the segment.
highest contribution margin per unit will sales minus total direct expenses of the segment.
generate more profit for each $1 of sales than the other sales minus total variable expenses and avoidable fixed
products. expenses of the segment.
have the highest contribution margin ratio. ANS: D
generate the most profit for each unit sold.
have the lowest variable costs per unit. 54. An increase in direct fixed costs could reduce all of
ANS: C the following except
product line contribution margin.
46. If a company's fixed costs were to increase, the effect on product line segment margin.
a profit-volume graph would be that the product line operating income.
contribution margin line would shift upward parallel to corporate net income.
the present line. ANS: A
contribution margin line would shift downward parallel to
the present line. 55. A linear programming problem can have
slope of the contribution margin line would be more no more than three resource constraints.
pronounced (steeper). only one objective function.
slope of the contribution margin line would be less no more than two dependent variables for each
pronounced (flatter). constraint equation.
ANS: B no more than three independent variables.
ANS: B
47. If a cost is irrelevant to a decision, the cost could not be
a sunk cost. 56. Contracting with vendors outside the organization to
a future cost. obtain or acquire goods and/or services is called
a variable cost. target costing.
an incremental cost. insourcing.
ANS: D outsourcing.
product harvesting.
48. The term incremental cost refers to ANS: C
the profit foregone by selecting one choice instead of
another. 57. An outside firm selected to provide services to an
the additional cost of producing or selling another organization is called a
product or service. contract vendor.
a cost that continues to be incurred in the absence of lessee.
activity. network organization.
a cost common to all choices in question and not clearly centralized insourcer.
or feasibly allocable to any of them. ANS: A
ANS: B
58. Which of the following costs would not be accounted for 63. When using one of the discounted cash flow methods to
in a company's recordkeeping system? evaluate the desirability of a capital budgeting project,
an unexpired cost which of the following factors is generally not important?
an expired cost method of financing the project under consideration
a product cost timing of cash flows relating to the project
an opportunity cost impact of the project on income taxes to be paid
ANS: D amounts of cash flows relating to the project
ANS: A
59. The basis for measuring the cost of capital derived
from bonds and preferred stock, respectively, is the 64. When a project has uneven projected cash inflows over its
pre-tax rate of interest for bonds and stated annual life, an analyst may be forced to use _______ to find the
dividend rate less the expected earnings per share project's internal rate of return.
for preferred stock. a screening decision
pre-tax rate of interest for bonds and stated annual a trial-and-error approach
dividend rate for preferred stock. a post investment audit
after-tax rate of interest for bonds and stated annual a time line
dividend rate less the expected earnings per share ANS: B
for preferred stock.
after-tax rate of interest for bonds and stated annual 65. In capital budgeting, a firm's cost of capital is frequently
dividend rate for preferred stock. used as the
ANS: D internal rate of return.
accounting rate of return.
60. All other factors equal, a large number is preferred discount rate.
to a smaller number for all capital project profitability index.
evaluation measures except ANS: C
net present value.
payback period. 66. The net present value method of evaluating proposed
internal rate of return. investments
profitability index. measures a project's internal rate of return.
ANS: B ignores cash flows beyond the payback period.
applies only to mutually exclusive investment proposals.
61. If investment A has a payback period of three years discounts cash flows at a minimum desired rate of return.
and investment B has a payback period of four years, ANS: D
then
A is more profitable than B. 67. Strategic planning is
A is less profitable than B. planning activities for promoting products for the future.
A and B are equally profitable. planning for appropriate assignments of resources.
the relative profitability of A and B cannot be determined setting standards for the use of important but hard-to-
from the information given. find materials.
ANS: D stating and establishing long-term plans.
ANS: D
62. The time value of money is explicitly recognized through
the process of 68. Chronologically, the first part of the master budget to be
interpolating. prepared would be the
discounting. sales budget.
annuitizing. production budget.
budgeting. cash budget.
ANS: B pro forma financial statements.
ANS: A

PROBLEMS 3. If the following data are estimated for next year,

what unit sales would be needed to earn P 150,000
1. Jonlee Corporation reported sales of P after taxes?
80,000 in 2006, P 96,000 in 2007 and P Forecast sales (P 30 per unit) P 600,000
112,000 in 2008. In an index analysis where Variable costs 240,000
Manufacturing fixed costs 90,000
2007 is used as the base year, the respective
Administrative fixed costs 120,000
sales percentages would be Assumed tax rate 40%
B A. 80%; 96%; 112%
B. 83%; 100%; 117% D A. 13,333 units
C. 80%; 100%; 120% B. 18,889 units
D. 100%; 120%; 140% C. 20,000 units
D. 25,556 units
2. Green Company plans to purchase new equipment
costing P 140,000 plus freight and installation
4. If the economy is facing demand-pull
costs estimated at P 23,000. The purchase of the
new equipment will prevent the company from inflation, which of the following would be a
having to incur costs of P 30,000 to repair logical action by the government?
equipment now in service. Depreciation on the A A. Increase income taxes
new equipment has been estimated at P 20,000 B. Lower the discount rate
each year. The income tax rate is 40%. The net C. Buy government securities
investment in the new equipment for capital D. Increase government spending
investment planning is
C A. P 173,000 5. A supplier extends a credit term of 2/10, n/60
B. P 153,000 (EOM). The EOM (end-of-month) term has
C. P 145,000 effectively extended credit period up to an average
D. P 131,000 of 75 days from the last day of the discount
period.
 Using a 365-day year, what is the nominal 11. Assuming a current ratio of 3.5 and a quick ratio of
annual cost of trade credit? 1.4, determine the amount inventory of a company
C A. 11.45% whose current liabilities are P 120,000 and long-
B. 11.30% term liabilities P 480,000.
C. 9.93% ANSWER: P 252,000
D. 9.80% 12. Blue, Inc. uses a learning curve of 80% for all new
products it develops. A trial run of 500 units of a
6. Red Company established a standard cost for raw new product shows total labor-related costs
materials at P 25.00 per unit. During the year, (direct, indirect labor, and fringe benefits) of P
120,000. Management plans to produce 1,500
a total of 10,000 units were purchased of
units of the new product during the next year.
which 50% was at P 24.70 each, 20% was at Determine the unit cost of production for next year
P 24.90 each, and the balance, P 25.60 each. for labor-related costs. Round-off answer to the
The raw materials cost variance is nearest whole amount.
A A. P 100 debit ANSWER: P 125
B. P 100 credit
C. P 900 debit 13. Return on equity is 20%. Return on investment is
D. P 900 credit 5%. Determine the debt-equity ratio.
ANSWER: 3x or 3:1 or 300%
7. On January 1, 2008, Brown Company has a
receivable balance of P 1 M. During 2008, it 14. Purchases = 80% of cost of sales; Fixed overhead
generated sales amounting to P 20 M, of which is, on the average, 20% of inventory cost. If cost
60% is made on credit. 2008 receivable collections of goods sold is P 250,000, then how much is the
amounted to P 9,000,000. The accounts difference in income reported under absorption
receivable turnover is costing and variable costing?
C A. 12.4 x ANSWER: P 10,000
B. 6.0 x
C. 4.8 x 15. Yellow Corporation’s estimated its after-tax cost of
D. 2.4 x capital is 7.8%. It has the following capital
structure:
8. A careful study by a company’s cost analyst Common stock 50%
has determined that if a truck is driven Preferred stock 20%
Long-term debt 30%
120,000 miles during a year, the average
Assuming the company’s cost of common equity is
operating cost is P 11.6 per mile. If a truck 10%, the cost of preferred equity is 8%, and the
is driven only 80,000 miles, the average firm’s tax rate is 40%, what is the pre-tax cost of long-
operating cost increases to P 13.6 per mile. term debt? Round-off answer to two decimal places.
Using the high-low method, estimate the unit (2 minutes)
variable cost. ANSWER: 6.67%
A A. 7.6
B. 12.4 16. 10% is the profit margin when sales level last year
C. 12.6 reached P 100,000. If the operating leverage last
D. 20,000 year was 4 times, then what would have been the
variable costs last year to break-even?
9. Pink Construction needs an on-site office for its ANSWER: P 45,000
Forbidden Kingdom Construction project. Pink can
rent a house trailer for this purpose at a rate of P 17. If the annual percentage rate of interest is 10
100 per month. As an alternative, Pink can percent compounded quarterly and payments are
construct an on-site office. Pink estimates that the to be made quarterly, then how many percent is
construction of an on-site office would require the effective annual rate? (Round-off answer to
materials costing P 1,500 (20 percent of which are two decimal places)
salvageable upon dismantling) and labor costing P ANSWER: 10.38%
1,000. Ignoring interest and income tax effects,
Pink will realize a net benefit by constructing its 18. Plowback ratio is 40% while dividend yield is 20%.
own on-site office of Forbidden Kingdom project If earnings per share is P 20, then how much
only if the length of the project is estimated would be the initial public offering per share?
ANSWER: P 60
to be at least:
C A. 18 months
19. Black Merchandising has an optimal order quantity
B. 20 months
of 2,000 units. Black’s customers demand 50,000
C. 22 months
units each year. Transaction cost incurred is P 12
D. 25 months
per order. If Black also maintains a safety stock of
100 units, then how much is the total annual
10. Assuming P 20,000 net annual cash inflows from a
carrying costs?
4-year P 59,120-capital investment project, the
ANSWER: P 330.00
break-even rate of return (IRR) for the project is
closest to
20. Net profit ratio ÷ contribution margin ratio =
C A. 11.1%
__________
B. 12.2%
ANSWER: Margin of safety ratio (or safety margin
C. 13.3%
percentage)
D. 14.4%

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
$ 0.082568807 $ 64,403.67 800 $ $ $ 115.50
780,000 80.50 35.00
(7,200/87,200)

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
(80,000/87,200)

27. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It projects the sales price at $40
per unit, the CM ratio at 60 percent, and profit at $500,000. What is the firm budgeting for fixed costs in the coming period?
a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000
ANS: D
Profit + Fixed Cost = (100,000 units * $60/unit CM)
Fixed Cost = (100,000 units * $24/unit CM) - Profit
= $2,400,000 - $500,000
= $1,900,000

28. Sombrero Company manufactures a western-style hat that sells for $10 per unit. This is its sole product and it has
projected the break-even point at 50,000 units in the coming period. If fixed costs are projected at $100,000, what is the
projected contribution margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent
ANS: B
Fixed Costs=Contribution Margin at Breakeven Point
= $100,000
Breakeven Sales: $500,000
CM Ratio: $(100,000/500,000) = 20%

29. The following information pertains to Saturn Company’s cost-volume-profit relationships:

Break-even point in units sold 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 year’s net income by:
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.
ANS: B
Contribution margin: $40,000
Net profit: $(40,000 - 30,000) = $10,000

20% CM increase: $40,000 * 1.20 = $48,000

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

Increase in profit $8,000

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

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

X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,000
Y: 5,000 hrs/8 hrs per unit 625 units * $64 CM/unit 40,000
Total $240,000
======

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, Doyle’s income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.
ANS: C
Sales foregone $(1,000,000)
COGS avoided
Variable $600,000
Fixed 120,000 720,000
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 Overhead 3.00
Variable Selling Exp 1.00
Production Costs $18.50
Additional profit per
unit 5.00
Sales price/unit $23.50
=====

36. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it can make. The
following data are pertinent to each respective product:
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, February (2,500) units
Production scheduled for February 25,700 units

47. Production of Product X has been budgeted at 200,000 units for May. One unit of X requires 2 lbs. of raw material. The
projected beginning and ending materials inventory for May are:

Beginning inventory: 2,000 lbs.

Ending inventory: 10,000 lbs.
How many lbs. of material should be purchased during May?
a. 192,000
b. 208,000
c. 408,000
d. 416,000
ANS: C
Ending inventory--May 10,000 lbs.
Production needs: 200,000 units * 2 lbs/unit 400,000 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: 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 * 70%) $105,000
May sales (160,000 * 15%) 24,000
April sales (140,000 * 14%) 19,600
Total cash collections--June $148,600