MANAGEMENT ADVISORY SERVICES B.

Employees
C. Competitor
THEORY D. Internal business processes
6. Contribution margin profit after interests and preferred
1. Which of the following costs should consider the tax shield dividends =
effect in computing the costs of capital? A. Degree of operation leverage
A. Cost of debt B. Degree of financial leverage
B. Cost of common stock C. Degree of total leverage
C. Cost of preferred stock D. No meaningful amount
D. Cost of retained earnings 7. If an increase in product price by 5% causes a decrease in
2. Which of the following is not considered in the cash quantity demanded by the same percentage, then the demand
conversion cycle? for the product is said to be
A. Receivable collection period A. Elastic
B. Debt repayment period B. Unit-elastic
C. Inventory conversion period C. Inelastic
D. Payable deferral period D. Perfectly Elastic
3. Cash flows from capital budgeting projects are assumed to 8. Under the high-low method, the unit variable cost closely
be received resembles the math concept of
A. At the beginning of the year A. Y-intercept
B. Evenly during the year B. X-intercept
C. At the end of the year C. Slope of the line
D. At a certain point of the year D. Independent variable
4. In the absence of shutdown costs, 9. Profit under variable costing fluctuates with
A. Shutdown point is higher than breakeven point A. Sales only
B. Shutdown point is equal to the breakeven point B. Production only
C. Shutdown point is lower than breakeven point C. Both sales and production
D. One cannot determine the relationship between shutdown D. Neither sales nor production
point and breakeven point 10. The path that has the highest slack time in the PERT
5. The balanced scorecard approach does not require looking network is
at performance from which of the following perspectives? A. Critical path
A. Customer B. Longest path
C. Shortest path 16. Identify the term that does not belong to the group.
D. Psychopath A. Differential cost
11.Which of the following is an invalid measure of B. Prevention cost
productivity? C. Appraisal cost
A. Partial operational D. Internal failure cost
B. Partial financial 17. Which of the following capital budgeting techniques is
C. Total operational non-discounted?
D. Total financial A. Simple rate of return
12.Which of the following situations is among the concerns of B. Sophisticated rate of return
a controller (as opposed to those of a treasurer)? C. Benefit-cost ratio
A. The company is in need of financing from external sources. D. Net present value
B. The company is already late in filing its monthly VAT returns. 18. Identify the term that does not belong to the group.
C. The company is guilty of unplanned material bank overdraft. A. Probability analysis
D. The company is in default of its account payable to B. Regression analysis
suppliers. C. High-low method
13. A firms working capital financing requirements may be D. Scattergraph method
divided into 19. A system not used in inventory management.
A. Aggressive and conservative A. Lockbox system
B. Seasonal and permanent B. Economic order quantity
C. Current and non-current C. Materials requirement planning system
D. Internal and external D. ABC system
14. Dividend yield multiplied by price-earnings ratio 20. A factor that is dealt with by both linear programming and
A. Pay-out ratio best product combination.
B. Retention ratio A. Efficiency
C. Equity ratio B. Productivity
D. Earnings per share C. Solvency
15. A term descriptive of managerial accounting. D. Scarcity
A. Historical financial statements 21. A(n) ________ cost increases or decreases in intervals as
B. Generally accepted accounting principles activity changes.
C. Discretionary a. historical cost
D. Regulatory
b. fixed cost b. detection costs d. failure costs
c. step cost 28.The estimated maximum potential activity for a specified
d. budgeted time is:
22. Which of the following is not a product cost component? a. theoretical capacity c. normal capacity
a. rent on a factory building b. practical capacity d. expected capacity
b. indirect production labor wages 29. Refer to Zenith Corporation. Assume that Zenith has
c. janitorial supplies used in a factory underapplied overhead of $37,200 and that this amount is
d. commission on the sale of a material. What journal entry is needed to close the overhead
23. Which of the following always has a direct cause-effect account? (Round decimals to nearest whole percent.)
relationship to a cost? a. Debit Work in Process $8,456; Finished Goods $13,294; Cost
Predictor Cost Driver of Goods Sold $15,450 and credit Overhead $37,200
a. yes yes b. Debit Overhead $37,200 and credit Work in Process $8,456;
b. yes no Finished Goods $13,294; Cost of Goods Sold $15,450
c. no yes c. Debit Work in Process $37,200 and credit Overhead $37,200
d. no no d. Debit Cost of Goods Sold $37,200 and credit Overhead
24.The distinction between direct and indirect costs depends $37,200
on whether a cost 30.If a firm produces more units than it sells, absorption
a. is controllable or non-controllable. costing, relative to variable costing, will result in
b. is variable or fixed. a. higher income and assets.
c. can be conveniently and physically traced to a cost object b. higher income but lower assets.
under consideration. c. lower income but higher assets.
d. will increase with changes in levels of activity. d. lower income and assets.
25.Costs that are incurred for monitoring and inspecting are: 31. A functional classification of costs would classify
a. prevention costs c. appraisal costs "depreciation on office equipment" as a
b. detection costs d. failure costs a. product cost.
26.Costs that are incurred to preclude defects and improper b. general and administrative expense.
processing are: c. selling expense.
a. prevention costs c. appraisal costs d. variable cost.
b. detection costs d. failure costs 32. If a firm uses variable costing, fixed manufacturing
27. Costs that are incurred when customers complain are: overhead will be included
a. prevention costs c. appraisal costs
a. only on the balance sheet.
b. only on the income statement. a. any activity that can be used to predict cost changes.
c. on both the balance sheet and income statement. b. the attempt to control expenditures at a reasonable level.
d. on neither the balance sheet nor income statement. c. the person who gathers and transfers cost data to the
33.The costing system that classifies costs by both functional management accountant.
group and behavior is d. any activity that causes costs to be incurred.
a. process costing. 38. Activity-based costing and activity-based management are
b. job order costing. effective in helping managers do all of the following except
c. variable costing. a. trace technology costs to products.
d. Absorption costing. b. promote excellence standards.
34. Unabsorbed fixed overhead costs in an absorption costing c. identify only value-added activities.
system are d. analyze performance problems.
a. fixed manufacturing costs not allocated to units produced. 39.The amount of time between the development and the
b. variable overhead costs not allocated to units produced. production of a product is
c. excess variable overhead costs. a. the product life cycle.
d. costs that cannot be controlled. b. lead time.
35. A firm presently has total sales of $100,000. If its sales rise, c. production time.
its d. value-added time.
a. net income based on variable costing will go up more than 40. In the pharmaceutical or food industries, quality control
its net income based on absorption costing. inspections would most likely be viewed as
b. net income based on absorption costing will go up more a. non-value-added activities.
than its net income based on variable costing. b. business-value-added activities.
c. fixed costs will also rise. c. value-added-activities.
d. per unit variable costs will rise. d. process-efficiency activities.
36.The term cost driver refers to 41.If a firm's net income does not change as its volume
a. any activity that can be used to predict cost changes. changes, the firm('s)
b. the attempt to control expenditures at a reasonable level. a. must be in the service industry.
c. the person who gathers and transfers cost data to the b. must have no fixed costs.
management accountant. c. sales price must equal $0.
d. any activity that causes costs to be incurred. d. sales price must equal its variable costs.
37.The term cost driver refers to
42. Cost-volume-profit analysis is a technique available to d. have the lowest variable costs per
management to understand better the interrelationships of 46 .If a company's fixed costs were to increase, the effect on a
several factors that affect a firm's profit. As with many such profit-volume graph would be that the
techniques, the accountant oversimplifies the real world by a. contribution margin line would shift upward parallel to the
making assumptions. Which of the following is not a major present line.
assumption underlying CVP analysis? b. contribution margin line would shift downward parallel to
a. All costs incurred by a firm can be separated into their fixed the present line.
and variable components. c. slope of the contribution margin line would be more
b. The product selling price per unit is constant at all volume pronounced (steeper).
levels. d. slope of the contribution margin line would be less
c. Operating efficiency and employee productivity are constant pronounced (flatter).
at all volume levels. 47. If a cost is irrelevant to a decision, the cost could not be
d. For multi-product situations, the sales mix can vary at all a. a sunk cost.
volume levels. b. a future cost.
43.Consider the equation X = Sales - [(CM/Sales) (Sales)]. c. a variable cost.
What is X? d. an incremental
a. net income 48.The term incremental cost refers to
b. fixed costs a. the profit foregone by selecting one choice instead of
c. contribution margin another.
d. variable b. the additional cost of producing or selling another product
44. The contribution margin ratio always increases when the or service.
a. variable costs as a percentage of net sales increase. c. a cost that continues to be incurred in the absence of
b. variable costs as a percentage of net sales decrease. activity.
c. break-even point increases. d. a cost common to all choices in question and not clearly or
d. break-even point feasibly allocable to any of them.
45. In a multiple-product firm, the product that has the highest 49. Irrelevant costs generally include
contribution margin per unit will Sunk costs Historical costs Allocated costs
a. generate more profit for each $1 of sales than the other a. yes yes no
products. b. yes no no
b. have the highest contribution margin ratio. c. no no yes
c. generate the most profit for each unit sold.
d. yes yes yes a. product line contribution margin.
50.The potential rental value of space used for production b. product line segment margin.
activities c. product line operating income.
a. is a variable cost of production. d. corporate net income.
b. represents an opportunity cost of production. 55. A linear programming problem can have
c. is an unavoidable cost. a. no more than three resource constraints.
d. is a sunk cost of production. b. only one objective function.
51. In a make or buy decision, the reliability of a potential c. no more than two dependent variables for each constraint
supplier is equation.
a. an irrelevant decision factor. d. no more than three independent variables.
b. relevant information if it can be quantified. 56. Contracting with vendors outside the organization to
c. an opportunity cost of continued production. obtain or acquire goods and/or services is called
d. a qualitative decision a. target costing.
52. Which of the following costs is irrelevant in making a b. insourcing.
decision about a special order price if some of the company c. outsourcing.
facilities are currently idle? d. product harvesting.
a. direct labor 57.An outside firm selected to provide services to an
b. equipment depreciation organization is called a
c. variable cost of utilities a. contract vendor.
d. opportunity cost of production b. lessee.
53.A manager is attempting to determine whether a segment c. network organization.
of the business should be eliminated. The focus of attention d. centralized insourcer.
for this decision should be on 58.Which of the following costs would not be accounted for in
a. the net income shown on the segment's income statement. a company's recordkeeping system?
b. sales minus total expenses of the segment. a. an unexpired cost
c. sales minus total direct expenses of the segment. b. an expired cost
d. sales minus total variable expenses and avoidable fixed c. a product cost
expenses of the segment. d. an opportunity cost
54.An increase in direct fixed costs could reduce all of the 59. The basis for measuring the cost of capital derived from
following except bonds and preferred stock, respectively, is the
a. pre-tax rate of interest for bonds and stated annual dividend 63. When using one of the discounted cash flow methods to
rate less the expected earnings per share for preferred stock. evaluate the desirability of a capital budgeting project, which
b. pre-tax rate of interest for bonds and stated annual dividend of the following factors is generally not important?
rate for preferred stock. a. method of financing the project under consideration
c. after-tax rate of interest for bonds and stated annual b. timing of cash flows relating to the project
dividend rate less the expected earnings per share for c. impact of the project on income taxes to be paid
preferred stock. d. amounts of cash flows relating to the project
d. after-tax rate of interest for bonds and stated annual 64.When a project has uneven projected cash inflows over its
dividend rate for preferred stock. life, an analyst may be forced to use _______ to find the
60.All other factors equal, a large number is preferred to a project's internal rate of return.
smaller number for all capital project evaluation measures a. a screening decision
except b. a trial-and-error approach
a. net present value. c. a post investment audit
b. payback period. d. a time line
c. internal rate of return. 65. In capital budgeting, a firm's cost of capital is frequently
d. profitability used as the
61. If investment A has a payback period of three years and a. internal rate of return.
investment B has a payback period of four years, then b. accounting rate of return.
a. A is more profitable than B. c. discount rate.
b. A is less profitable than B. d. profitability index.
c. A and B are equally profitable. 66. The net present value method of evaluating proposed
d. the relative profitability of A and B cannot be determined investments
from the information given. a. measures a project's internal rate of return.
62. The time value of money is explicitly recognized through b. ignores cash flows beyond the payback period.
the process of c. applies only to mutually exclusive investment proposals.
a. interpolating. d. discounts cash flows at a minimum desired rate of return.
b. discounting. 67. Strategic planning is
c. annuitizing. a. planning activities for promoting products for the future.
d. budgeting b. planning for appropriate assignments of resources.
c. setting standards for the use of important but hard-to-find
materials.
 3. If the following data are estimated for next year, what unit
d. stating and establishing long-term plans. sales would be needed to earn P 150,000 after taxes?
68. Chronologically, the first part of the master budget to be Forecast sales (P 30 per unit) P 600,000
prepared would be the Variable costs 240,000
a. sales budget. Manufacturing fixed costs 90,000
b. production budget. Administrative fixed costs 120,000
c. cash budget. Assumed tax rate 40%
d. pro forma financial statements. A. 13,333 units
B. 18,889 units
PROBLEMS C. 20,000 units
1. Jonlee Corporation reported sales of P 80,000 in 2006, P D. 25,556 units
96,000 in 2007 and P 112,000 in 2008. In an index analysis 4. If the economy is facing demand-pull inflation, which of the
where 2007 is used as the base year, the respective sales following would be a logical action by the government?
percentages would be A. Increase income taxes
A. 80%; 96%; 112% B. Lower the discount rate
B. 83%; 100%; 117% C. Buy government securities
C. 80%; 100%; 120% D. Increase government spending
D. 100%; 120%; 140% 5. A supplier extends a credit term of 2/10, n/60 (EOM). The
2. Green Company plans to purchase new equipment costing P EOM (end-of-month) term has effectively extended credit
140,000 plus freight and installation costs estimated at P period up to an average of 75 days from the last day of the
23,000. The purchase of the new equipment will prevent the discount period.
company from having to incur costs of P 30,000 to repair Using a 365-day year, what is the nominal annual cost of trade
equipment now in service. Depreciation on the new equipment credit?
has been estimated at P 20,000 each year. The income tax rate A. 11.45%
is 40%. The net investment in the new equipment for capital B. 11.30%
investment planning is C. 9.93%
A. P 173,000 D. 9.80%
B. P 153,000 6. Red Company established a standard cost for raw materials
C. P 145,000 at P 25.00 per unit. During the year, a total of 10,000 units
D. P 131,000 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. 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
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. 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:
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
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.
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.
13. Return on equity is 20%. Return on investment is 5%.
Determine the debt-equity ratio.
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?
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?

15. Yellow Corporations estimated its after-tax cost of capital

is 7.8%. It has the following capital structure: 20. Net profit ratio contribution margin ratio = __________
Common stock 50%
Preferred stock 20%
Long-term debt 30% PROBLE 21-24
Assuming the companys cost of common equity is 10%, the
cost of preferred equity is 8%, and the firms tax rate is 40%, Langley Corporation
what is the pre-tax cost of long-term debt? Round-off answer Langley Corporation has the following standard costs
to two decimal places. (2 minutes) associated with the manufacture and sale of one of its
products:
16. 10% is the profit margin when sales level last year reached Direct material $3.00 per unit
P 100,000. If the operating leverage last year was 4 times, then Direct labor 2.50 per unit
what would have been the variable costs last year to break- Variable manufacturing overhead 1.80 per unit
even? Fixed manufacturing overhead 4.00 per unit (based on
an est. of 50,000 units per year)
17. If the annual percentage rate of interest is 10 percent Variable selling expenses .25 per unit
compounded quarterly and payments are to be made Fixed SG&A expense $75,000 per year
quarterly, then how many percent is the effective annual rate?
(Round-off answer to two decimal places) 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.
18. Plowback ratio is 40% while dividend yield is 20%. If
earnings per share is P 20, then how much would be the initial 21. Refer to Langley Corporation. Under absorption costing,
public offering per share? the standard production cost per unit for the current year was
a. $11.30. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour
b. $ 7.30. of Function 2 at $7 per hour, and 6 hours of Function 3 at $18
c. $11.55. per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2,
d. $13.05. and 3, respectively. Smithson produces 800 units of A and
22. Refer to Langley Corporation. The volume variance under 8,000 units of B each period.
absorption costing is
a. $8,000 F. 25.Refer to Smithson Company If total overhead is assigned to
b. $4,000 F. A and B on the basis of overhead activity hours used, the total
c. $4,000 U. product cost per unit assigned to Product A will be
d. $8,000 U. a. $86.32.
23. Refer to Langley Corporation. Under variable costing, the b. $95.00.
standard production cost per unit for the current year was c. $115.50.
a. $11.30. d. None of the responses are correct.
b. $7.30. 26. Refer to Smithson Company If total overhead is assigned to
c. $7.55. A and B on the basis of overhead activity hours used, the total
d. $11.55. product cost per unit assigned to Product B will be
24. Refer to Langley Corporation. Based on variable costing, a. $115.50.
the income before income taxes for the year was b. $73.32.
a. $570,600. c. $34.60.
b. $560,000. d. None of the responses are correct.
c. $562,600. 27. A firm estimates that it will sell 100,000 units of its sole
d. $547,500. 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.
Problem 25-26 What is the firm budgeting for fixed costs in the coming
period?
Smithson Company a. $1,600,000
Smithson Company produces two products (A and B). Direct b. $2,400,000
material and labor costs for Product A total $35 (which reflects c. $1,100,000
4 direct labor hours); direct material and labor costs for d. $1,900,000
Product B total $22 (which reflects 1.5 direct labor hours). 28. Sombrero Company manufactures a western-style hat that
Three overhead functions are needed for each product. 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 31.Knox Company uses 10,000 units of a part in its production
period. If fixed costs are projected at $100,000, what is the process. The costs to make a part are: direct material, $12;
projected contribution margin ratio? direct labor, $25; variable overhead, $13; and applied fixed
a. 80 percent overhead, $30. Knox has received a quote of $55 from a
b. 20 percent potential supplier for this part. If Knox buys the part, 70
c. 40 percent percent of the applied fixed overhead would continue. Knox
d. 60 percent Company would be better off by
29. The following information pertains to Saturn Companys a. $50,000 to manufacture the part.
cost-volume-profit relationships: b. $150,000 to buy the part.
Break-even point in units sold 1,000 c. $40,000 to buy the part.
Variable costs per unit $500 d. $160,000 to manufacture the part.
Total fixed costs $150,000 32.Unique Company manufactures a single product. In the
How much will be contributed to profit before taxes by the prior year, the company had sales of $90,000, variable costs of
1,001st unit sold? $50,000, and fixed costs of $30,000. Unique expects its cost
a. $650 structure and sales price per unit to remain the same in the
b. $500 current year, however total sales are expected to increase by
c. $150 20 percent. If the current year projections are realized, net
d. $0 income should exceed the prior years net income by:
30. Ledbetter Company reported the following results from a. 100 percent.
sales of 5,000 units of Product A for June: b. 80 percent.
Sales $200,000 c. 20 percent.
Variable costs (120,000) d. 50 percent.
Fixed costs (60,000) 33.Paulson Company has only 25,000 hours of machine time
Operating income $ 20,000 each month to manufacture its two products. Product X has a
Assume that Ledbetter increases the selling price of Product A contribution margin of $50, and Product Y has a contribution
by 10 percent in July. How many units of Product A would have margin of $64. Product X requires 5 hours of machine time,
to be sold in July to generate an operating income of $20,000? and Product Y requires 8 hours of machine time. If Paulson
a. 4,000 Company wants to dedicate 80 percent of its machine time to
b. 4,300 the product that will provide the most income, the company
c. 4,545 will have a total contribution margin of
d. 5,000
a. $250,000. order would allow the use of a slightly lower grade of direct
b. $240,000. material, thereby lowering the price per unit by $1.50 and
c. $210,000. selling expenses would be decreased by $1. If Thomas wants
d. $200,000. this special order to increase the total net income for the firm
34.Doyle Company has 3 divisions: R, S, and T. Division R's to $10,000, what sales price must be quoted for each of the
income statement shows the following for the year ended 5,000 units?
December 31: a. $23.50
Sales $ 1,000,000 b. $24.50
Cost of goods sold (800,000) c. $27.50
Gross profit $ 200,000 d. $34.00
Selling expenses $100,000 36.Glamorous Grooming Corporation makes and sells brushes
Administrative expenses 250,000 (350,000) and combs. It can sell all of either product it can make. The
Net loss $ (150,000) following data are pertinent to each respective product:
Brushes Comb
Cost of goods sold is 75 percent variable and 25 percent fixed. Units of output per machine hour 8 20
Of the fixed costs, 60 percent are avoidable if the division is Selling price per unit $12.00 $4.00
closed. All of the selling expenses relate to the division and Product cost per unit
would be eliminated if Division R were eliminated. Of the Direct material $1.00 $1.20
administrative expenses, 90 percent are applied from Direct labor 2.0 0.10
corporate costs. If Division R were eliminated, Doyles income Variable overhead 0.50 0.05
would Total fixed overhead is $380,000.
a. increase by $150,000.
b. decrease by $ 75,000. The company has 40,000 machine hours available for
c. decrease by $155,000. production. What sales mix will maximize profits?
d. decrease by $215,000. a. 320,000 brushes and 0 combs
35. Thomas Company is currently operating at a loss of b. 0 brushes and 800,000 combs
$15,000. The sales manager has received a special order for c. 160,000 brushes and 600,000 combs
5,000 units of product, which normally sells for $35 per unit. d. 252,630 brushes and 252,630 combs
Costs associated with the product are: direct material, $6; 37. Houston Footwear Corporation has been asked to submit a
direct labor, $10; variable overhead, $3; applied fixed bid on supplying 1,000 pairs of military combat boots to the
overhead, $4; and variable selling expenses, $2. The special
Armed Forces. The company's costs per pair of boots are as a. $30,000 of annual savings in operating costs.
follows: b. $20,000 of salvage in 5 years on the new machine.
Direct material $8 c. lost sales resulting from the inefficient existing machine.
Direct labor 6 d. $400,000 cost of the new machine.
Variable overhead 3 39. Datasoft Industries is considering the purchase of a
Variable selling cost (commission) 3 $100,000 machine that is expected to result in a decrease of
Fixed overhead (allocated) 2 $15,000 per year in cash expenses. This machine, which has no
Fixed selling and administrative cost 1 residual value, has an estimated useful life of 10 years and will
Assuming that there would be no commission on this potential be depreciated on a straight-line basis. For this machine, the
sale, the lowest price the firm can bid is some price greater accounting rate of return would be
than a. 10 percent.
a. $23. b. 15 percent.
b. $20. c. 30 percent.
c. $17. d. 35 percent.
d. $14. 40. An investment project is expected to yield $10,000 in
Richmond Steel Corporation annual revenues, has $2,000 in fixed costs per year, and
The capital budgeting committee of the Richmond Steel requires an initial investment of $5,000. Given a cost of goods
Corporation is evaluating the possibility of replacing its old sold of 60 percent of sales, what is the payback period in
pipe-bending machine with a more advanced model. years?
Information on the existing machine and the new model a. 2.50 b. 5.00 c. 2.00 d. 1.25
follows: Webber Corporation is considering an investment in a labor-
Existing machine New machine saving machine. Information on this machine follows:
Original cost $200,000 $400,000 Cost $30,000
Market value now 80,000 Salvage value in five years $0
Market value in year 5 0 20,000 Estimated life 5 years
Annual cash operating costs 40,000 10,000 Annual depreciation $6,000
Remaining life 5 yrs. 5 yrs. Annual reduction in existing costs $8,000
41. Refer to Webber Corporation. What is the internal rate of
38. Refer to Richmond Steel Corporation. The major return on this project (round to the nearest 1/2%)? Present
opportunity cost associated with the continued use of the value tables or a financial calculator are required.
existing machine is
a. 37.5% d. between 13.0 and 13.5 percent
b. 25.0%
c. 10.5% 45.Budgeted sales for the first six months for Porter Corp. are
d. 13.5% listed below:
Rhodes Corporation JANUARY 6,000 Units
Rhodes Corporation is involved in the evaluation of a new FEBRUARY 7,000
computer-integrated manufacturing system. The system has a MARCH 8,000
projected initial cost of $1,000,000. It has an expected life of six APRIL 7,000
years, with no salvage value, and is expected to generate MAY 5,000
annual cost savings of $250,000. Based on Rhodes JUNE 4,000
Corporation's analysis, the project has a net present value of Porter Corp. has a policy of maintaining an inventory of
$57,625. finished goods equal to 40 percent of the next month's
42. Refer to Rhodes Corporation. What discount rate did the budgeted sales. If Porter Corp. plans to produce 6,000 units in
company use to compute the net present value? Present value June, what are budgeted sales for July?
tables or a financial calculator are required. a. 3,600 units
a. 10% b. 1,000 units
b. 11% c. 9,000 units
c. 12% d. 8,000 units
d. 13% 46.Budgeted sales for Knox Inc. for the first quarter the year
43. Refer to Rhodes Corporation. What is the project's are shown below:
profitability index? JANUARY FEBRUARY MARCH
a. 1.058 UNITS: 35,000 25,000 32,000
b. .058 The company has a policy that requires the ending inventory in
c. .945 each period to be 10 percent of the following period's sales.
d. 1.000 Assuming that the company follows this policy, what quantity
44. Refer to Rhodes Corporation. What is the project's internal of production should be scheduled for February?
rate of return? Present value tables or a financial calculator are a. 24,300 units
required. b. 24,700 units
a. between 12.5 and 13.0 percent c. 25,000 units
b. between 11.0 and 11.5 percent d. 25,700 units
c. between 11.5 and 12.0 percent
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
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