AC 560 Tax Research and the IRS Unit 4 Quiz

1. Smelly Cigars has two divisions: the Rolling Division and the Box Division. The Box Division produces boxes that can be used by the Rolling Division. The Box Division incurs variable cost of $2.00 per unit, and its fixed cost is $ .50 per unit. The Rolling Division can purchase similar boxes from external suppliers for $3.40. The Box Division sells its boxes to outside companies for $3.50 each. Assuming the Box Division has enough excess capacity to supply all of the Rolling Division’s needs, which of the following is the range at which a negotiated transfer price between the two divisions should occur? (Points : 5)
$2.50 to $3.50
$2.00 to $3.40
$2.00 to $3.50
$2.50 to $3.40
There will be no transfer of containers from the Box Division to the Rolling Division.

2.
Sales revenue $1,500,000
Gross margin 600,000
Net income 90,000
Average operating assets 450,000
Owners’ equity 200,000
Playback’s turnover is: (Points : 5)
16.67.
20.00.
3.33.
5.00.

3.
Sales revenue $1,500,000
Gross margin 600,000
Net income 90,000
Average operating assets 450,000
Owners’ equity 200,000
Playback’s margin is: (Points : 5)
40%.
20%.
15%.
6%.

4. Art-Frames Co. manufactures standard sized frames, and expects the following number of frames to be sold during the last three months of 20X5:
October: 20,000
November: 25,000
December: 40,000
Art-Frame tries to have inventory on hand at the end of each month to equal 20% of the following month’s sales. How many frames should Art-Frame produce during November? (Points : 5)
33,000
28,000
26,000
23,000

5. Fragrance, Inc. has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division incurs variable cost of $2.00 per unit, and its fixed cost is $.50 per unit. The Cologne Division can purchase similar containers from external suppliers for $2.90. The Bottle Division sells its containers to outside companies for $3.00 each. Assuming all of the containers produced by the bottle Division can be sold to outside companies, which of the following is the range at which a negotiated transfer price between the two divisions should occur? (Points : 5)
A transfer price between $2.00 to $3.00
A transfer price between $2.00 to $2.90
A transfer price between $2.50 to $2.90
A transfer price between $2.50 to $3.00
There will be no transfer of containers from the Bottle Division to the Cologne Division.

6. Indicate which of the following statements about evaluating investment centers is false. (Points : 5)
The use of the original cost of plant and equipment as part of operating assets (rather than book value) would help to eliminate the age of equipment as a factor in ROI computations.
Residual income as a performance measure encourages managers to accept all investment projects that will benefit the company as a whole.
Return on Investment would decrease if the turnover decreases.
The use of residual income makes it easy to compare investment centers of different sizes.

7. Pitkins Company collects 20% of a month’s sales in the month of sale, 70% in the month following sale, and 6% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next four months are:
Budgeted sales
January $200,000 20 %
February $300,000 70 %
March $350,000 6%
April $250,000
Cash collections in April are budgeted to be: (Points : 5)
$321,000.
$292,000.
$320,000.
$313,000.

8. Vern’s makes all sales on account, and has the following collection pattern: 20% are collected in the month of sale; 70% are collected in the first month after sale; and 10% are collected in the second month after sale. Sales for the last quarter of the year are budgeted as follows:
October $70,000
November $60,000
December $50,000
What should be the budgeted receivables balance on December 31? (Points : 5)
$40,000
$46,000
$51,000
$59,000

9. Which of the following depicts the logical order for preparing the production budget, the cash budget, the sales budget, and the direct-labor budget? (Points : 5)

1. production budget
2. direct-labor budget
3. sales budget
4. cash budget

1. sales budget
2. direct-labor budget
3. production budget
4. cash budget

1. sales budget
2. production budget
3. cash budget
4. direct-labor budget

1. sales budget
2. production budget
3. direct-labor budget
4. cash budget

10. Wilson Corporation prepares its budget on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a: (Points : 5) ANSWER SHOULD BE ROLLING BUDGET
pro-forma budget.
revised budget.
continuous budget.
capital budget.

11. Which of the following statements about budgeting is true? (Points : 5)
If the budgeting process is to be effective, managers must believe they will be rewarded significantly only if they perform better than budgeted expectations.
A company whose sales fluctuate significantly due to changes in the economy should invest less effort in budgeting than a business whose business activity is more stable.
A budget that is prepared to determine whether or not a new manufacturing facility (plant) should be constructed is called a “master budget.”
The primary responsibility for preparing the budgets should not be left to the accountants.

12. The following information is available on Xebra Company:
Sales: $90,000
Net operating income: 3,600
Average operating assets: 30,000
Stockholders’ equity: 25,000
Minimum required rate of return: 10%
Xebra Company’s residual income would be: (Points : 5)
$ 600.
$ 360.
$5,400.
$1,100.

13. Adams Sporting Goods sells bicycles throughout the southeastern United States. The following data were taken from the most recent quarterly sales forecast:
Expected Sales End-of-Month Desired Inventory
April 1,400 units 315 units
May 1,575 units 412 units
June 1,650 units 425 units
On the basis of the information presented, how many bicycles should the company purchase in May? (Points : 5)
1,672
1,575
1,562
1,478

14. O’Neill, Incorporated’s income statement for the most recent month is given below.
Total Store A Store B
Sales $300,000 $100,000 $200,000
Variable expenses 192,000 72,000 120,000
Contribution margin 108,000 28,000 80,000
Traceable fixed expenses 76,000 21,000 55,000
Segment margin 32,000 $ 7,000 $ 25,000
Common fixed expenses 32,000
Net Income $ 5,000
The marketing department believes that a promotional campaign at Store A costing $5,000 will increase sales by $15,000. If its plan is adopted, overall company net income should:
(Points : 5)
decrease by $ 3,950.
decrease by $ 800.
increase by $10,000.
increase by $ 4,200.

15. Which of the following statements about budgeting is false? (Points : 5)
In the master budgeting process, the budgeted income statement is the last step.
Zero-based budgeting assumes that nothing should be funded this year just because it was funded last year.
Coordinating the planned activities of different departments is one advantage of the budgeting process.
When preparing the master budget, depreciation costs must be budgeted even though they are non-cash costs and are expected to be fixed.

16. ROI is most appropriately used to evaluate the performance of: (Points : 5)
revenue center managers.
cost center managers.
investment center managers.
profit center managers.