fiannce and data bank

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Description

Relevant
Decision Factors

63. The following costs relate to a variety of
decision settings:

Cost

Decision

1.

Allocated corporate overhead

Closing a
money-losing department

2.

Cost of an old car

Vehicle
replacement

3.

Direct materials

Make or buy a
product

4.

Salary of marketing manager

Project discontinuance; manager to be transferred
elsewhere in the firm

5.

Home theater installation

Purchase of a
new home

6.

Unavoidable fixed overhead

Plant closure

7.

Research expenditures incurred last
year, related to new product

Product
introduction to marketplace

8.

$4 million advertising program

Whether to promote product A or B with the $4 million
program

9.

Manufactured cost of existing inventory

Whether to discard the goods or sell them to a
third-world country

Required:

Consider each of the nine costs listed and determine
whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain
why.

Relevant Decision Factors

64. Clancy Van Lines is considering the
acquisition of two new trucks. Because
of improved mileage, these vehicles are expected to have a lower operating cost
per mile than the trucks the company plans to replace. Management is studying whether the firm would
be better-off keeping the older vehicles or going ahead with the replacement,
and has identified the following decision factors to evaluate:

1. Cost
and book value of the old trucks

2. Moving revenues,
which are not expected to change with the acquisition

3. Operating costs
of the new and old vehicles

4. New truck
purchase price and related depreciation charges

5. Proceeds from
sale of the old vehicles

6. The 8% return on
alternative investments that Clancy will forego by tying up cash in the new trucks

7. Drivers’ wages
and fringe benefits

Required:

Classify
the seven decision factors listed into the following categories (note: factors
may be used more than once):

A.
Relevant
costs.

B.
Opportunity
costs.

C.
Sunk
costs.

D.
Factors
to be considered in the decision.

Relevant
Costs

65. Attleboro Company recently discontinued the
manufacture of product J15. The standard
costs for this product were:

Direct
material

$ 50

Direct labor

20

Variable
overhead

14

Fixed
overhead

35

Total

$119

There
are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and
the following alternatives are being considered:

1. Dispose of as scrap. The proceeds from the sale will equal the cost
of transportation to the disposal site.

2. Sell to an exporter for sale in a
developing country. The sales price to
the exporter would be $12 per unit.

3. Remanufacture the products to convert them
into model J16, a model that normally sells for $200. The additional cost to convert the J15 units
would be $45; the standard cost to manufacture J16 is $125. Presently, there is sufficient capacity to
manufacture product J16 directly or to do the necessary conversion work on J15.

Required:

A. Determine the current carrying value of
the J15 inventory.

B. Evaluate each alternative and determine
the financial benefit to Attleboro if the alternative is pursued.

Relevant Costs

66.
Mystic, Inc.,
produces a variety of products that carry the logos of teams in Southern
Football League (SFL). The company
recently paid the league $85,000 for the rights to market a popular player
jersey and immediately began production.
The following information is available:

Number of
jerseys manufactured: 25,000

Cost of jerseys
manufactured: $625,000

Amount of
manufacturing costs paid to-date: $410,000

Number of
jerseys sold to-date: 0

Estimated
future marketing costs: $330,000

Anticipated
selling price per jersey: $42

The SFL is about to file a lawsuit to stop jersey
sales and is demanding another $50,000 from Mystic for the manufacturing
rights. Conversations with Mystic’s
attorneys indicate that the league has a strong case and is likely to win the
suit. If this situation arises, Mystic
will be unable to recover any amounts paid to the SFL.

Required:

Mystic’s sales department anticipates very strong
demand and a sellout of all jerseys manufactured.

A.
Determine the
overall profitability of the jersey product line if Mystic settles the
disagreement with the SFL and the anticipated sellout occurs.

B.
Should the
company pay the additional $50,000 demanded by the league or should the jersey
program be dropped? Show computations to
support your answer.

Special
(Custom) Order

67. Howard Robinson builds custom homes in
Cincinnati. Robinson was approached not
too long ago by a client about a potential project, and he submitted a bid of
$483,800, derived as follows:

Land

$ 80,000

Construction
materials

100,000

Subcontractor
labor costs

120,000

$300,000

Construction
overhead: 25% of direct costs

75,000

Allocated
corporate overhead

35,000

Total cost

$410,000

Robinson adds an 18% profit margin
to all jobs, computed on the basis of total cost. In this client’s case the profit margin
amounted to $73,800 ($410,000 x 18%), producing a bid price of $483,800. Assume that 70% of construction overhead is
fixed.

Required:

A.
Suppose
that business is presently very slow, and the client countered with an offer on
this home of $390,000. Should Robinson
accept the client’s offer? Why?

B.
If
Robinson has more business than he can handle, how much should he be willing to
accept for the home? Why?

B.
483,800
price. This way he can cover all of his
costs and make his normal 18% profit margin.

Special Order,
Outsourcing

68. Cornell Corporation manufactures
faucets. Several weeks ago, the firm
received a special-order inquiry from Yale, Inc. Yale desires to market a faucet similar to
Cornell’s model no. 55 and has offered to purchase 3,000 units. The following data are available:

·
Cost
data for Cornell’s model no. 55 faucet: direct materials, $45; direct labor,
$30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35
per hour).

·
The
normal selling price of model no. 55 is $180; however, Yale has offered Cornell
only $115 because of the large quantity it is willing to purchase.

·
Yale
requires a design modification that will allow a $4 reduction in
direct-material cost.

·
Cornell’s
production supervisor notes that the company will incur $8,700 in additional
set-up costs and will have to purchase a $3,300 special device to manufacture
these units. The device will be
discarded once the special order is completed.

·
Total
manufacturing overhead costs are applied to production at the rate of $35 per
labor hour. This figure is based, in
part, on budgeted yearly fixed overhead of $624,000 and planned production
activity of 24,000 labor hours.

·
Cornell
will allocate $5,000 of existing fixed administrative costs to the order as
“…part of the cost of doing business.”

Required:

A.
One
of Cornell’s staff accountants wants to reject the special order because
“financially, it’s a loser.”
Do you agree with this conclusion if Cornell currently has excess
capacity? Show calculations to support
your answer.

B.
If
Cornell currently has no excess capacity, should the order be rejected from a
financial perspective? Briefly explain.

C.
Assume
that Cornell currently has no excess capacity.
Would outsourcing be an option that Cornell could consider if management
truly wanted to do business with Yale?
Briefly discuss, citing several key considerations for Cornell in your
answer.

Outsourcing

69. St. Joseph Hospital has been hit with a
number of complaints about its food service from patients, employees, and
cafeteria customers. These complaints,
coupled with a very tight local labor market, have prompted the organization to
contact Nationwide Institutional Food Service (NIFS) about the possibility of
an outsourcing arrangement.

The
hospital’s business office has provided the following information for food
service for the year just ended: food costs, $890,000; labor, $85,000; variable
overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria food sales,
$80,000.

Conversations
with NIFS personnel revealed the following information:

·
NIFS
will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been “marked
up” by NIFS to reflect the firm’s cost of operating the hospital
cafeteria.

·
St.
Joseph’s 250-bed facility operates throughout the year and typically has an
average occupancy rate of 70%.

·
Labor
is the primary driver for variable overhead.
If an outsourcing agreement is reached, hospital labor costs will drop
by 90%. NIFS plans to use St. Joseph
facilities for meal preparation.

·
Cafeteria
food sales are expected to increase by 15% because NIFS will offer an improved
menu selection.

Required:

A.
What
is meant by the term “outsourcing”?

B.
Should
St. Joseph outsource its food-service operation to NIFS?

C.
What
factors, other than dollars, should St. Joseph consider before making the final
decision?

Store Closure

70. Papa Fred’s Pizza store no. 16 has fallen on
hard times and is about to be closed. The
following figures are available for the period just ended:

Sales

$205,000

Cost of sales

67,900

Building
occupancy costs:

Rent

36,500

Utilities

15,000

Supplies used

5,600

Wages

77,700

Miscellaneous

2,400

Allocated
corporate overhead

16,800

All
employees except the store manager would be discharged. The manager, who earns $27,000 annually, would
be transferred to store no. 19 in a neighboring suburb. Also, no. 16’s furnishings and equipment are
fully depreciated and would be removed and transported to Papa Fred’s warehouse
at a cost of $2,800.

Required:

A.
What
is store no. 16’s reported loss for the period just ended?

B.
Should
the store be closed? Why?

C.
Would
Papa Fred’s likely lose all $205,000 of sales revenue if store no. 16 were
closed? Explain.

Evaluation of a Service
Line

71. “It’s close to a $40,000 loser and we
ought to devote our efforts elsewhere,” noted Kara Whitmore, after
reviewing financial reports of her company’s attempt to offer a reduced-price
daycare service to employees. The
daycare’s financial figures for the year just ended follow.

Revenues

$120,000

Variable costs

45,000

Traceable fixed costs

89,000

Allocated corporate
overhead

24,000

If
the daycare service/center is closed, 70% of the traceable fixed cost will be
avoided. In addition, the company will
incur one-time closure costs of $6,800.

Required:

A.
Show
calculations that support Kara Whitmore’s belief that the daycare center lost
almost $40,000.

B.
Should
the center be closed? Show calculations
to support your answer.

C.
What
problem might the company experience if the center is closed?

Make or Buy, Capacity
Constraint

72. Fowler Industries produces two bearings: C15
and C19. Data regarding these two
bearings follow.

C15

C19

Machine hours required per unit

2.00

2.50

Standard cost per unit:

Direct material

$ 2.50

$ 4.00

Direct labor

5.00

4.00

Manufacturing overhead:

Variable*

3.00

2.50

Fixed**

4.00

5.00

Total

$14.50

$15.50

*Applied on the
basis of direct labor hours

**Applied on the basis of machine hours

The
company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote
additional machine time to other product lines, resulting in only 31,000
machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler
the bearings at prices of $13.50 for C15 and $13.50 for C19.

Required:

A.
Assume
that Fowler decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased.

B.
Compute
the net benefit to the firm of manufacturing (rather than purchasing) a unit of
C15. Repeat the calculation for a unit
of C19.

C.
Fowler
lacks sufficient machine time to produce all of the C15s and C19s needed. Which
component (C15 or C19) should Fowler manufacture first with the limited machine
hours available? Why? Be sure to show all supporting computations.

Use of Excess Production
Capacity

73. Lee Company has met all production
requirements for the current month and has an opportunity to manufacture
additional units with its excess capacity. Unit selling prices and unit costs for three
product lines follow.

Plain

Regular

Super

Selling price

$40

$55

$65

Direct
material

12

16

22

Direct labor
(at $20 per hour)

10

15

20

Variable
overhead

8

12

16

Fixed
overhead

6

7

8

Variable
overhead is applied on the basis of direct labor dollars, whereas fixed
overhead is applied on the basis of machine hours. There is sufficient demand for the additional
manufacture of all products.

Required:

A.
If Lee
Company has excess machine capacity and can add more labor as needed (i.e.,
neither machine capacity nor labor is a constraint), which product is the most
attractive to produce?

B.
If Lee
Company has excess machine capacity but a limited amount of labor time
available, which product or products should be manufactured in the excess
capacity?

Joint Costs:
Allocation and Decision Making

74. Riverside Company manufactures G and H in a
joint process. The joint costs amount to
$80,000 per batch of finished goods. Each
batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is $8.75 per liter, and
the selling price of H is $15.00 per liter.

Required:

A.
If
the joint costs are allocated on the basis of the products’ sales value at the
split-off point, what amount of joint cost will be charged to each
product?

B.
Riverside
has discovered a new process by which G can be refined into Product GG, which
has a sales price of $12 per liter. This
additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs,
should the company use the new process? Show
calculations.

Joint Costs: Allocation, Focus on Decision Making

75.
Stowers
Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint
processing costs during the period just ended and had the following data that
related to production:

Sales Values and Additional

Cost if Processed Beyond Split-off

Product

Sales Value at Split-off

Sales Value

Additional Cost

J

$400,000

$550,000

$130,000

K

350,000

540,000

240,000

L

850,000

975,000

118,000

An analysis revealed that all costs incurred after the
split-off point are variable and directly traceable to the individual product
line.

Required:

A.
If Stowers
allocates joint costs on the basis of the products’ sales values at the
split-off point, what amount of joint cost would be allocated to product J?

B.
If production of
J totaled 50,000 gallons for the period, determine the relevant cost per gallon
that should be used in decisions that explore whether to sell at the split-off
point or process further? Briefly
explain your answer.

C.
At the beginning
of the current year, Stowers decided to process all three products beyond the
split-off point. If the company desired
to maximize income, did it err in regards to its decision with product J? Product K? Product L?
By how much?

J

DISCUSSION QUESTIONS

Characteristics of
Information for Decision Making

76. Information is said to be useful in decision
making if it possesses three characteristics.

Required:

A.
List
the three characteristics of useful information.

B.
Frequently,
there is a conflict between two of the characteristics requested in part
“A.” Briefly explain what this
conflict is.

C.
What
distinguishes relevant from irrelevant information?

Distinctions Between Sunk
Costs and Opportunity Costs

77. Sunk costs and opportunity costs are inherent
in decision making.

Required:

A.
Define
the terms “sunk cost” and “opportunity cost.”

B.
How
are sunk costs treated when making decisions?

C.
“Information
about sunk costs can be found in the financial statements and accounting
records; however, information about opportunity costs is omitted.” Do you agree with this statement? Explain.

A. .

Capacity Restrictions

78. Capacity restrictions often change the way
that managers make decisions. For
example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding
which new products to carry? How would
this differ, say, from a concert promoter that desires to bring a rock group to
an arena-type facility?

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Description

31. Torrey
Pines is studying whether to outsource its Human Resources (H/R)
activities. Salaried professionals who
earn $390,000 would be terminated; in contrast, administrative assistants who
earn $120,000 would be transferred elsewhere in the organization. Miscellaneous departmental overhead (e.g.,
supplies, copy charges, overnight delivery) is expected to decrease by $30,000,
and $25,000 of corporate overhead, previously allocated to Human Resources,
would be picked up by other departments.
If Torrey Pines can secure needed H/R services locally for $410,000, how
much would the company benefit by outsourcing?

A. $10,000.

B. $35,000.

C. $130,000.

D. $155,000.

E. Nothing, as it would be cheaper to keep the
department open.

32. Donnelly, a division of Dakota Enterprises,
currently makes 100,000 units of a product that has created a number of
manufacturing problems. Donnelly’s costs
follow.

Manufacturing costs:

Variable

$420,000

Fixed

150,000

Allocated corporate
administrative cost

70,000

If
Donnelly were to discontinue production, fixed manufacturing costs would be
reduced by 80%. The relevant cost of
deciding whether the division should purchase the product from an outside
supplier is:

A. $420,000.

B. $490,000.

C. $540,000.

D. $570,000.

E. $640,000.

33. Maddox, a division of Stanley Enterprises,
currently performs computer services for various departments of the firm. One of the services has created a number of
operating problems, and management is exploring whether to outsource the
service to a consultant. Traceable
variable and fixed operating costs total $80,000 and $25,000, respectively, in
addition to $18,000 of corporate administrative overhead allocated from
Stanley. If Maddox were to use the
outside consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Maddox’s outsourcing
decision total:

A. $17,500.

B. $18,000.

C. $25,000.

D. $25,500.

E. some other amount.

34. Which of the following statements regarding
costs and decision making is correct?

A. Fixed costs must be considered only on a
per-unit basis.

B. Per-unit fixed cost amounts are valid only
for make-or-buy decisions.

C. Per-unit fixed costs can be misleading
because such amounts appear to behave as variable costs when, in actuality, the
amounts are related to fixed expenditures.

D. Sunk costs can be misleading in make-or-buy
decisions because these amounts appear to be relevant differential costs.

E. Opportunity costs should be ignored when
evaluating decision alternatives.

35. An architecture firm currently offers
services that appeal to both individuals and commercial clients. If the firm decides to discontinue services to
individuals because of ongoing losses, which of the following costs could the
company likely avoid?

A. Allocated corporate overhead.

B. Building depreciation.

C. Insurance.

D. Variable operating costs.

E. Monthly installment payments on
general-purpose, computer drafting equipment.

36. Occidental is contemplating dropping a
product because of ongoing losses. Costs
that would be relevant in this situation would include variable manufacturing
costs as well as:

A. factory depreciation.

B. avoidable fixed costs.

C. unavoidable fixed costs.

D. allocated corporate administrative costs.

E. general corporate advertising.

37. Coastal Airlines has a significant presence
at the San Jose International Airport and therefore operates the Emerald Club,
which is across from gate 36 in terminal 1.
The Emerald Club provides food and business services (e.g., data ports)
for the company’s frequent flyers.
Consider the following selected costs of Club operation:

1. Receptionist
and supervisory salaries

2. Catering

3. Terminal depreciation (based on square
footage)

4. Airport fees (computed as a percentage of
club revenue)

5. Allocated Coastal administrative overhead

Management
is exploring whether to close the club and expand the seating area for gate
36. Which of the preceding expenses
would the airline classify as unavoidable?

A. 3.

B. 4.

C. 5.

D. 3, 5.

E. The correct answer is not listed.

38. The Shoe Department at the Baton Rouge
Department Store is being considered for closure. The following information relates to shoe
activity:

Sales revenue

$350,000

Variable costs:

Cost
of goods sold

280,000

Sales
commissions

30,000

Fixed operating costs

90,000

If
70% of the fixed operating costs are avoidable, should the Shoe Department be
closed?

A. Yes, Baton Rouge would be better off by
$23,000.

B. Yes, Baton Rouge would be better off by
$50,000.

C. No, Baton Rouge would be worse off by
$13,000.

D. No, Baton Rouge would be worse off by
$40,000.

E. None of the above.

39. Somerset Corporation is composed of five
divisions, and each division is allocated a share of Somerset overhead to make
divisional managers aware of the cost of running the corporate
headquarters. The following information
relates to the Metro Division:

Sales

$7,500,000

Variable operating costs

5,100,000

Traceable fixed operating
costs

1,900,000

Allocated corporate
overhead

300,000

If
the Metro Division is closed, 100% of the traceable fixed operating costs can
be eliminated. What will be the impact
on Somerset’s overall profitability if the Metro Division is closed?

A. Decrease by $200,000.

B. Decrease by $500,000.

C. Decrease by $2,100,000.

D. Decrease by $2,400,000.

E. None of the above.

40. Ortega Interiors provides design services to
residential and commercial clients. The
residential services produce a contribution margin of $450,000 and have
traceable fixed operating costs of $480,000.
Management is studying whether to drop the residential operation. If closed, the fixed operating costs will
fall by $370,000 and Ortega’s net income will:

A. increase by $30,000.

B. increase by $80,000.

C. increase by $340,000.

D. decrease by $80,000.

E. decrease by $340,000.

Use the following
to answer questions 41-42:

HiTech
manufactures two products: Regular and Super. The results of operations for 20×1 follow.

Regular

Super

Total

Units

10,000

3,700

13,700

Sales

$240,000

$740,000

$980,000

Less: Cost of
goods sold

180,000

481,000

661,000

Gross margin

$ 60,000

$259,000

$319,000

Less: Selling
expenses

60,000

134,000

194,000

Operating
income

$ 0

$125,000

$125,000

Fixed
manufacturing costs included in cost of goods sold amount to $3 per unit for Regular
and $20 per unit for Super. Variable
selling expenses are $4 per unit for Regular and $20 per unit for Super;
remaining selling amounts are fixed.

41. HiTech wants to drop the Regular product
line. If the line is dropped,
company-wide fixed manufacturing costs would fall by 10% because there is no
alternative use of the facilities. What
would be the impact on operating income if Regular is discontinued?

A. $0.

B. $10,400 increase.

C. $20,000 increase.

D. $39,600 decrease.

E. None of the above.

42. Disregard the information in the previous
question. If HiTech eliminates Regular
and uses the available capacity to produce and sell an additional 1,500 units
of Super, what would be the impact on operating income?

A. $28,000 increase

B. $45,000 increase

C. $55,000 increase

D. $85,000 increase

E. None of the above.

43. When deciding whether to sell a product at
the split-off point or process it further, joint costs are not usually
relevant because:

A. such amounts do not help to increase sales
revenue.

B. such amounts only slightly increase a
company’s sales margin.

C. such amounts are sunk and do not change with
the decision.

D. the sales revenue does not decrease to the
extent that it should, if compared with separable processing.

E. such amounts reflect opportunity costs.

44. Product costs incurred after the split-off
point in a joint processing environment are termed:

A. separable processing costs.

B. joint product costs.

C. non-relevant costs.

D. scrap costs.

E. spoilage costs.

45. Foster Company is considering whether to sell
Retox at the split-off point or subject it to further processing and produce a
more refined product known as Retox-F. Consider
the following items:

I.
The
selling price of Retox-F

II.
The
joint processing cost of Retox.

III.
The
separable cost of producing Retox-F.

Which
of the above items is (are) relevant to Foster’s decision to process Retox into
Retox-F?

A. I only.

B. II only.

C. III only.

D. I and II.

E. I and III.

46. Lido manufactures A and B from a joint
process (cost = $80,000). Five thousand
pounds of A can be sold at split-off for $20 per pound or processed further at
an additional cost of $20,000 and then sold for $25. Ten thousand pounds of B can be sold at
split-off for $15 per pound or processed further at an additional cost of
$20,000 and later sold for $16. If Lido
decides to process B beyond the split-off point, operating income will:

A. increase by $10,000.

B. increase by $20,000.

C. decrease by $10,000.

D. decrease by $20,000.

E. decrease by $58,000.

47. India Corporation has $200,000 of joint
processing costs and is studying whether to process J and K beyond the
split-off point. Information about J and
K follows.

Product J

Product K

Tons produced

25,000

15,000

Separable
variable processing costs beyond split-off

$64,000

$100,000

Selling price per ton at
split-off

15

52

Selling price per ton after
additional processing

21

58

If
India desires to maximize total company income, what should the firm do with
regard to Products J and K?

Product J

Product K

A.

Sell at
split-off

Sell at
split-off

B.

Sell at
split-off

Process
beyond split-off

C.

Process
beyond split-off

Sell at
split-off

D.

Process beyond
split-off

Process
beyond split-off

E.

There is not
enough information to judge.

48. A company that is operating at full capacity
should emphasize those products and services that have the:

A. lowest total per-unit costs.

B. highest contribution margin per unit.

C. highest contribution margin per unit of
scarce resource.

D. highest operating income.

E. highest sales volume.

49. A firm that decides to emphasize those goods
with the highest contribution margin per unit may have made an incorrect
decision when the company:

A. is highly automated.

B. has excess capacity.

C. has capacity constraints in the form of
limited resources.

D. has a high fixed-cost structure.

E. has a high level of sunk costs.

50. Wright Enterprises, which produces various
goods, has limited processing hours at its manufacturing plant. The following data apply to product no. 607:

Sales
price per unit: $9.60

Variable
cost per unit: $6.20

Process
time per unit: 4 hours

Management
is now studying whether to devote the firm’s limited hours to product no. 607
or to other products. What key dollar
amount should management focus on when determining no. 607’s “value”
to the firm and deciding the best course of action to follow?

A. $0.85.

B. $2.40.

C. $3.40.

D. $6.20.

E. $9.60.

51. Smith Manufacturing has 27,000 labor hours
available for producing X and Y.
Consider the following information:

Product X
Product Y

Required labor time per
unit (hours)

2

3

Maximum demand (units)

6,000

8,000

Contribution margin per
unit

$5.00

$6.00

Contribution margin per
labor hour

$2.50

$2.00

If
Smith follows proper managerial accounting practices, which of the following
production schedules should the company set?

Product X

Product Y

A.

0 units

8,000 units

B.

1,500 units

8,000 units

C.

6,000 units

0 units

D.

6,000 units

5,000 units

E.

6,000 units

8,000 units

52. Bush Manufacturing has 31,000 labor hours
available for producing M and N.
Consider the following information:

Product M

Product N

Required labor time per
unit (hours)

2

3

Maximum demand (units)

6,500

8,000

Contribution margin per
unit

$5.00

$5.70

Contribution margin per
labor hour

$2.50

$1.90

If
Bush follows proper managerial accounting practices in terms of setting a
production schedule, how much contribution margin would the company expect to
generate?

A. $31,450.

B. $63,100.

C. $66,700.

D. $78,100.

E. None of the above.

Use the
following to answer questions 53-54:

Johnson Company
makes two products: Carpet Kleen and Floor Deodorizer. Operating information
from the previous year follows.

Carpet Kleen

Floor Deodorizer

Units
produced and sold

5,000

4,000

Machine hours
used

5,000

2,000

Sales price
per unit

$7

$10

Variable cost
per unit

$4

$8

Fixed costs of
$20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed
costs would remain the same.

53. The contribution margin per machine hour for
Floor Deodorizer is:

A. $0.25.

B. $2.00.

C. $4.00.

D. $5.00.

E. $20.00.

54. Assuming there is unlimited demand for both
products and Johnson has 10,000 machine hours available, how many units of each
product should be produced and sold?

Carpet Kleen

Floor Deodorizer

A.

0 units

0 units

B.

0 units

20,000
units

C.

5,000
units

10,000
units

D.

8,000
units

4,000
units

E.

10,000
units

0 units

55. A technique that is useful in exploring what
would happen if a key decision prediction or assumption proved wrong is termed:

A. sensitivity analysis.

B. uncertainty analysis.

C. project analysis.

D. linear programming.

E. the theory of constraints.

56. Which of the following characteristics would
best explain the use of probabilities and expected values in a decision
analysis?

A. Limited resources.

B. Uncertainty.

C. Inflation.

D. Multiple products and services.

E. Production bottlenecks.

57. Consider the following statements about
relevant costing and activity-based costing:

I.
The
concept of relevant costs and benefits cannot be used in conjunction
with an activity-based costing system.

II.
The
concept of relevant costs and benefits must be modified for use with an
activity-based costing system.

III.
Generally
speaking, the decision maker can better associate relevant costs with the
activities that drive them under an activity-based costing system than under a
conventional product-costing system.

Which
of the above statements is (are) true?

A. I only.

B. II only.

C. III only.

D. I and II.

E. II and III.

58. Linear programming would be used by decision
makers when there are:

A. limited resources for labor.

B. scarce resources for machine hours.

C. scarce resources for both labor and machine
hours.

D. multiple scarce resources.

E. limited resources for material.

59. A constraint function in a linear-programming
problem might focus on:

A. sales dollars.

B. labor hours.

C. variable costs.

D. fixed costs.

E. qualitative factors.

60. When using a graphical solution to a linear
programming problem, the optimal solution will lie in an area commonly known as
the:

A. region of maximization.

B. feasible region.

C. objective region.

D. constraint region.

E. curvilinear region.

Use the
following to answer questions 61-62:

Prudential
Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time
available and can sell no more than 800 units of product X. Other pertinent data follow.

Product X

Product Y

Selling price

$8.00

$19.00

Variable cost

3.00

5.00

Fixed cost

3.50

6.25

Machine time
per unit

2 hours

3 hours

61. Which of the following is Prudential’s
objective function?

A. Maximize Z = 2X + 3Y.

B. Maximize Z = 8X + 19Y.

C. Maximize Z = 5X + 14Y.

D. Maximize Z = 1.50X + 7.75Y.

E. Minimize Z = 6.50X + 11.25Y.

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MULTIPLE CHOICE QUESTIONS

5.2 The Determinants of Interest Rates


3)

Which of the following statements is false?

A)

The yield curve changes over time.

B)

The formulas for computing present values of annuities and
perpetuities cannot be used in situations in which cash flows need to be discounted
at different rates.

C)

We can use the term structure to compute the present and
future values of a risk-free cash flow over different investment horizons.

D)

The yield curve tends to be inverted as the economy comes
out of a recession.

Skill: Conceptual

6)

Which of the following formulas is incorrect?

A)

i =

– 1

B)

1 + rr =

C)

rr ? ir


D)

rr=

7)

If the current inflation rate is 5%, then the nominal rate
necessary for you to earn an 8% real interest rate on your investment is
closest to:

A)

13.0%

B)

13.4%

C)

4.9%

D)

3.0%

Answer:

B

8)

If the current inflation rate is 4% and you have an
investment opportunity that pays 10%, then the real rate of interest on your
investment is closest to:

A)

10.0%

B)

14.0%

C)

6.0%

D)

5.8%

Use the table for the question(s) below.

Suppose the term structure of interest rates is shown
below:

Term

1 year

2 years

3 years

5 years

10 years

20 years

Rate (EAR%)

5.00%

4.80%

4.60%

4.50%

4.25%

4.15%

9)

What is the shape of the yield curve and what expectations
are investors likely to have about future interest rates?

A)

Inverted; Higher

B)

Normal; Higher

C)

Inverted; Lower

D)

Normal; Lower

11)

Consider an investment that pays $1000 certain at the end
of each of the next four years. If the
investment costs $3,500 and has an NPV of $74.26, then the four year risk-free interest
rate is closest to:

A)

4.5%

B)

4.58%

C)

4.55%

D)

4.53%

Use the table for the question(s) below.

Suppose the term structure of interest rates is shown
below:

Term

1 year

2 years

3 years

5 years

10 years

20 years

Rate (EAR%)

5.00%

4.80%

4.60%

4.50%

4.25%

4.15%

14)

After examining the yield curve, what predictions do you
have about interest rates in the future?
About future economic growth and the overall state of the economy?

.

15)

What is the NPV of an investment that costs $2500 and pays
$1000 certain at the end of one, three, and five years ?

5.3 Risk and Taxes


2)

Which of the following statements is false?

A)

The equivalent after-tax interest rate is r – (? × r).

B)

Interest rates vary based on the identity of the borrower.

C)

The ability to deduct the interest expense increases the
effective after-tax
interest rate paid on the loan.

D)

For loans to borrowers other than the U.S. Treasury, the
stated interest rate is the maximum amount that investors will receive.

3)

Which of the following statements is false?

A)

U.S. Treasury securities are widely regarded to be risk-free because
there is virtually no chance the government will default on these bonds.

B)

In general, if the interest rate is r and the tax
rate is ?, then for each $1 invested you will earn interest equal to r
and owe taxes of ? × r on the interest.

C)

Investors may receive less than the stated interest rate if
the borrowing company has financial difficulties and is unable to fully repay
the loan.

D)

Taxes reduce the amount of interest the investor can keep,
and we refer to this reduced amount as the tax effective interest rate.

5)

Assume that you presently have a monthly home mortgage with
a stated interest rate of 7% APR. If
your income tax rate is 20%, then the after tax EAR for your home mortgage is
closest to:

A)

5.6%

B)

7.2%

C)

5.8%

D)

7.0%


Use the table for the question(s) below.

Suppose you have the following Loans / Investments

Credit Card

14.90% APR (Monthly Compounding)

Automobile Loan

5.90% APR (Monthly Compounding)

Home Equity Loan

8.25% APR (Monthly Compounding)

Money Market Fund

5.10% EAR

6)

If your income tax rate is 30%, then the after-tax EAR for
your home equity loan is closest to:

A)

6.0%

B)

5.9%

C)

8.6%

D)

5.8%

7)

If your income tax rate is 30%, then the after-tax return you
receive on your money market fund is closest to:

A)

3.7%

B)

5.1%

C)

3.6%

D)

4.2%

8)

What is the effective after-tax rate of each instrument, expressed as
an EAR?

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1)
A portfolio with a correlation of +1 is not a well-diversified
portfolio. What must you as an investor do to structure a portfolio with
negative correlation?

2)
What macroeconomic variable do you believe has the greatest impact on
interest rates? Inflation? Briefly explain.

3)
Compare and contrast the Capital Asset Pricing Model (CAPM) and Arbitrage
Pricing Theory (APT)? Which model is appropriate for calculating a stock’s
required rate of return? What is the Securities Market Line and which of the
above models is it a product of?

.

4)
How would you determine if a public corporation’s financial statements
are reliable?

5)
What is a straddle? Would you use it when buying/writing options? Why?

.

6)
Are the financial markets efficient, and if so, under what form of
the Efficient Market Hypothesis model?

7)
What is the Bid price for a stock? What is the Ask price for a stock? What is a
Stop Loss for a stock?

8)
Briefly compare and contrast the primary market and the secondary markets.
What types of investors participate in each market? Briefly
describe the investment banking process.

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