Devry ACCT505 week 8 final exam set 2

1. A good example of a common cost which
normally could not be assigned to products on a segmented income statement
except on an arbitrary basis would be:
A) product advertising outlays.
B) salary of a corporation president.
C) direct materials.
D) the product manager’s salary.

2. Turnover is computed by dividing average
operating assets into:
A) invested capital.
B) total assets.
C) net operating income.
D) sales.

3. A segment of a business responsible for both
revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.

4. All other things being equal, if a
division’s traceable fixed expenses increase:
A) the division’s contribution margin ratio
will decrease.
B) the division’s segment margin ratio will
remain the same.
C) the division’s segment margin will decrease.

D) the overall company profit will remain the
same.

5. In computing the margin in a ROI analysis,
which of the following is used?
A) Sales in the denominator
B) Net operating income in the denominator
C) Average operating assets in the denominator
D) Residual income in the denominator

6. Net operating income is defined as:
A) sales minus variable expenses.
B) sales minus variable expenses and traceable
fixed expenses.
C) contribution margin minus traceable and
common fixed expenses.
D) net income plus interest and taxes.

7. Suppose a manager is to be measured by
residual income. Which of the following will not result in an increase in the
residual income figure for this manager, assuming other factors remain
constant?
A) An increase in sales.
B) An increase in the minimum required rate of
return.
C) A decrease in expenses.
D) A decrease in operating assets.

8. During April, Division D of Carney Company
had a segment margin ratio of 15%, a variable expense ratio of 60% of sales,
and traceable fixed expenses of $15,000. Division D’s sales were closest to:
A) $100,000.
B) $60,000.
C) $33,333.
D) $22,500.

9. Cable Company had the following results for
the year just ended:

Net
operating income $2,500
Turnover 4
Return
on investment 20%

Cable
Company’s average operating assets during the year were:
A) $50,000.
B) $200,000.
C) $12,500.
D) $10,000.

Use the following to answer question 10:

Ieso Company has two stores: J and K.
During November, Ieso Company reported a net income of $30,000 and sales
of $450,000. The contribution margin in Store J was $100,000, or 40% of sales.
The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed
expenses are $60,000 in Store J, and $40,000 in Store K.

10. The segment margin ratio in Store J was:
A) 16%.
B) 24%.
C) 40%.
D) 60%.

Use the following to answer questions 11-12:

The following information is available on Company A:

Sales $900,000
Net operating income 36,000
Stockholders’ equity 100,000
Average operating assets 180,000
Minimum required rate of return 15%

11. Company A’s residual income is:
A) $9,000.
B) $21,000.
C) $45,000.
D) $24,000.

12. Company A’s return on investment (ROI) is:
A) 4%.
B) 15%.
C) 20%.
D) 36%.

Use the following to answer question 13:

The following data are available for the South Division
of Redride Products, Inc. and the single product it makes:

Unit selling price $20
Variable cost per unit $12
Annual fixed costs $280,000
Average operating assets $1,500,000

13. If South wants a residual income of $50,000
and the minimum required rate of return is 10%, the annual turnover will have
to be:
A) 0.32.
B) 0.80.
C) 1.25.
D) 1.50.

Use the following to answer question 14:

The following selected data pertain to Beck Co.’s Beam
Division for last year:

Sales $400,000
Variable expenses $100,000
Traceable fixed expenses $250,000
Average operating assets $200,000
Minimum required rate of return 20%

14. How much is the return on the investment?
A) 25%
B) 20%
C) 12.5%
D) 40%

15. Consider a decision facing a firm of either
accepting or rejecting a special offer for one of its products. A cost that is
not relevant is:
A) direct materials.
B) variable overhead.
C) fixed overhead that will be avoided if the
special offer is accepted.
D) common fixed overhead that will continue if
the special offer is not accepted.

16. A study has been conducted to determine if
Product A should be dropped. Sales of the product total $200,000 per year;
variable expenses total $140,000 per year. Fixed expenses charged to the
product total $90,000 per year. The company estimates that $40,000 of these
fixed expenses will continue even if the product is dropped. These data
indicate that if Product A is dropped, the company’s overall net operating
income would:
A) decrease by $20,000 per year.
B) increase by $20,000 per year.
C) decrease by $10,000 per year.
D) increase by $30,000 per year.

17. Manor Company plans to discontinue a
department that has a contribution margin of $24,000 and $48,000 in fixed
costs. Of the fixed costs, $21,000 cannot be avoided. The effect of this
discontinuance on Manor’s overall net operating income would be a(an):
A) decrease of $3,000.
B) increase of $3,000.
C) decrease of $24,000.
D) increase of $24,000.

18. Manor Company plans to discontinue a
department that has a contribution margin of $25,000 and $50,000 in fixed
costs. Of the fixed costs, $21,000 cannot be eliminated. The effect on the
profit of Manor Company of discontinuing this department would be:
A) a decrease of $4,000.
B) an increase of $4,000.
C) a decrease of $25,000.
D) an increase of $25,000.

19. Green Company produces 1,000 parts per year,
which are used in the assembly of one of its products. The unit product cost of
these parts is:

Variable
manufacturing cost $12
Fixed
manufacturing cost 9
Unit
product cost $21
aaa

The part
can be purchased from an outside supplier at $20 per unit. If the part is
purchased from the outside supplier, two thirds of the fixed manufacturing
costs can be eliminated. The annual impact on the company’s net operating
income as a result of buying the part from the outside supplier would be:
A) $1,000 increase.
B) $1,000 decrease.
C) $5,000 increase.
D) $2,000 decrease.

20. Pitkin Company produces a part used in the
manufacture of one of its products. The unit product cost of the part is $33,
computed as follows:

Direct
materials $12
Direct
labor 8
Variable
manufacturing overhead 3
Fixed
manufacturing overhead . 10
Unit
product cost $33
aaa

An
outside supplier has offered to provide the annual requirement of 10,000 of the
parts for only $27 each. The company estimates that 30% of the fixed
manufacturing overhead costs above will continue if the parts are purchased
from the outside supplier. Assume that direct labor is an avoidable cost in
this decision. Based on these data, the per unit dollar advantage or
disadvantage of purchasing the parts from the outside supplier would be:
A) $3 advantage.
B) $1 advantage.
C) $1 disadvantage.
D) $4 disadvantage.

21. Cardinal Company needs 20,000 units of a
certain part to use in one of its products. The following information is
available:

Cost to
Cardinal to make the part:
Direct
materials $ 4
Direct labor 16
Variable
manufacturing overhead . 8
Fixed
manufacturing overhead . 10
$38
aaa
Cost to buy the part from
the Oriole Company $36

Oriole
Company has offered to sell this part to Cardinal company for $36 each. If
Cardinal buys the part from Oriole instead of making it, Cardinal would not
have any use for the released capacity. In addition, 60% of the fixed
manufacturing overhead costs will continue regardless of what decision is made.
Assume that direct labor is an avoidable cost in this decision. In deciding
whether to make or buy the part, the total relevant costs to make the part are:

A) $560,000.
B) $640,000.
C) $720,000.
D) $760,000.

22. Products A, B, and C are produced from a
single raw material input. The raw material costs $90,000, from which 5,000
units of A, 10,000 units of B, and 15,000 units of C can be produced each
period. Product A can be sold at the split-off point for $2 per unit, or it can
be processed further at a cost of $12,500 and then sold for $5 per unit.
Product A should be:
A) sold at the split-off point, since further
processing would result in a loss of $0.50 per unit.
B) processed further, since this will increase
profits by $2,500 each period.
C) sold at the split-off point, since further
processing will result in a loss of $2,500 each period.
D) processed further, since this will increase
profits by $12,500 each period.

Use the following to answer question 23:

The Tolar Company has 400 obsolete desk calculators that
are carried in inventory at a total cost of $26,800. If these calculators are
upgraded at a total cost of $10,000, they can be sold for a total of $30,000.
As an alternative, the calculators can be sold in their present condition for
$11,200.

23. The sunk cost in this situation is:
A) $10,000.
B) $26,800.
C) $11,200.
D) $0

Use the following to answer question 24:

Aholt Company makes 40,000 units per year of a part it
uses in the products it manufactures. The unit product cost of this part is
computed as follows:

Direct materials $11.30
Direct labor 22.70
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 24.70
Unit product
cost $59.90
aaaaa

An outside
supplier has offered to sell the company all of these parts it needs for $46.20
a unit. If the company accepts this offer, the facilities now being used to
make the part could be used to make more units of a product that is in high
demand. The additional contribution margin on this other product would be
$264,000 per year.
If the part were
purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $21.90 of the fixed manufacturing overhead cost
being applied to the part would continue even if the part were purchased from
the outside supplier. This fixed manufacturing overhead cost would be applied
to the company’s remaining products.

24. How much of the unit product cost of $59.90
is relevant in the decision of whether to make or buy the part?
A) $38.00
B) $59.90
C) $35.20
D) $22.70

Use the following to answer question 25:

The Madison Company produces three products with the
following costs and selling prices:

A B C
Selling price per unit $16 $21 $21
Variable cost per unit 7 11 13
Contribution margin per unit $ 9 $10 $ 8
Direct labor hours per unit 1 1.5 2
Machine hours per unit 4.5 2 2.5

25. If direct labor-hours is the company’s
production constraint, then the three products should be produced in the order:

A) A, B, C.
B) B, C, A.
C) C, A. B.
D) A, C, B.

Use the following to answer questions 26-27:

Austin Wool Products purchases raw wool and processes it
into yarn. The spindles of yarn can then be sold directly to stores or they can
be used by Austin Wool Products to make afghans. Each afghan requires one
spindle of yarn. Current cost and revenue data for the spindles of yarn and for
the afghans are as follows:

Data for one spindle of yarn:
Selling price $12
Variable
production cost 8
Fixed
production cost (based on 4,000 spindles
of yarn produced) 2

Data for one afghan:
Selling price $32
Production cost per spindle of yarn 10
Variable production cost to process the
yarn into an
afghan 9
Avoidable fixed production cost to process
the yarn into
an afghan (based on 4,000
afghans
produced) 5

Each month 4,000 spindles of yarn are produced that can
either be sold outright or processed into afghans.

26. If Austin chooses to produce 4,000 afghans
each month, the change in the monthly net operating income as compared to
selling 4,000 spindles of yarn is:
A) $24,000 decrease.
B) $24,000 increase.
C) $16,000 decrease.
D) $16,000 increase.

27. What is the lowest price Austin should be
willing to accept for one afghan as long as it can sell spindles of yarn to the
outside market for $12 each?
A) $32
B) $30
C) $28
D) $26

28. (Ignore income taxes in this problem.) How is
depreciation handled by the following capital budgeting techniques?

Internal Simple
Rate of
Return Rate of Return Payback
A)
Excluded Included Excluded
B)
Included Excluded Included
C)
Excluded Excluded Included
D)
Included Included Excluded

29. The payback method measures:
A) how quickly investment dollars may be
recovered.
B) the cash flow from an investment.
C) the economic life of an investment.
D) the profitability of an investment.

30. The evaluation of an investment having uneven
cash flows using the payback method:
A) cannot be done.
B) can be done only by matching cash inflows
and investment outflows on a year-by-year basis.
C) will product essentially the same results as
those obtained through the use of discounted cash flow techniques.
D) requires the use of a sophisticated
calculator or computer software.

31. If the net present value of a project is zero
based on a discount rate of sixteen percent, then the time-adjusted rate of
return:
A) is equal to sixteen percent.
B) is less than sixteen percent.
C) is greater than sixteen percent.
D) cannot be determined from the information
given.

32. (Ignore income taxes in this problem.) A
company with $800,000 in operating assets is considering the purchase of a
machine that costs $75,000 and which is expected to reduce operating costs by
$20,000 each year. The payback period for this machine in years is closest to:
A) 0.27 years.
B) 10.7 years.
C) 3.75 years.
D) 40 years.

33. (Ignore income taxes in this problem.) Denny
Corporation is considering replacing a technologically obsolete machine with a
new state-of-the-art numerically controlled machine. The new machine would cost
$450,000 and would have a ten-year useful life. Unfortunately, the new machine
would have no salvage value. The new machine would cost $20,000 per year to
operate and maintain, but would save $100,000 per year in labor and other
costs. The old machine can be sold now for scrap for $50,000. The simple rate
of return on the new machine is closest to:
A) 8.75%.
B) 20.00%.
C) 7.78%.
D) 22.22%.

34. Perkins Company is considering several
investment proposals, as shown below:

Investment
Proposal
A B
C D
Investment
required $80,000 $100,000 $60,000 $75,000
Present
value of
future
net cash flows 96,000 150,000
84,000 120,000

Rank the
proposals in terms of preference using the profitability index:
A) D, B, C, A.
B) B, D, C, A.
C) B, D, A, C.
D) A, C, B, D.

35. (Ignore income taxes in this problem.) The
following data pertain to an investment proposal:

Cost of
the investment $20,000
Annual
cost savings $ 5,000
Estimated
salvage value $ 1,000
Life of
the project 8 years
Discount
rate 16%

The net
present value of the proposed investment is:
A) $1,720.
B) $6,064.
C) $2,154.
D) $2,025.

36. (Ignore income taxes in this problem.) Sam
Weller is thinking of investing $70,000 to start a bookstore. Sam plans to
withdraw $15,000 from the business at the end of each year for the next five
years. At the end of the fifth year, Sam plans to sell the business for
$110,000 cash. At a 12% discount rate, what is the net present value of the
investment?
A) $54,075.
B) $62,370.
C) $46,445.
D) $70,000.

Use the following to answer question 37:

(Ignore income taxes in this problem.) The Finney Company
is reviewing the possibility of remodeling one of its showrooms and buying some
new equipment to improve sales operations. The remodeling would cost $120,000
now and the useful life of the project is 10 years. Additional working capital
needed immediately for this project would be $30,000; the working capital would
be released for use elsewhere at the end of the 10-year period. The equipment
and other materials used in the project would have a salvage value of $10,000
in 10 years. Finney’s discount rate is 16%.

37. The immediate cash outflow required for this
project would be:
A) $(120,000).
B) $(150,000).
C) $(90,000).
D) $(130,000).

Use the following to answer questions 38-40:

(Ignore income taxes in this problem.) The Becker Company
is interested in buying a piece of equipment that it needs. The following data
have been assembled concerning this equipment:

Cost of required equipment $250,000
Working capital required $100,000
Annual operating cash inflows $ 80,000
Cash repair at end of 4 years $ 40,000
Salvage value at end of 6 years $ 90,000

This equipment is expected to have a useful life of 6
years. At the end of the sixth year the working capital would be released for
use elsewhere. The company’s discount rate is 10%.

38. The present value of all future operating
cash inflows is closest to:
A) $480,000.
B) $452,300.
C) $348,400.
D) $278,700.

39. The present value of the net cash flows (all
cash inflows less all cash outflows) occurring during year 4 is:
A) $40,000.
B) $27,320.
C) $54,640.
D) $42,790.

40. The present value of the net cash flows (all
cash inflows less all cash outflows) occurring during year 6 is closest to:
A) $270,000.
B) $195,900.
C) $107,200.
D) $152,300.

udgeting Decisions….91