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MANAGEMENT ADVISORY SERVICES QUESTIONS & ANSWERS COMPILED BY: MA. CRISTINA P. OBESO, CPA 1.

The following pertains to Sure Company: Sales (50,000 units) Direct Materials and Direct Labor Factory Overhead Variable Fixed Selling and General Expenses Variable Fixed

P1,000,000 300,000 40,000 70,000 10,000 60,000

How much was Sure's break-even point in number of units? a. 9,848 b. 10,000 c. 18,571

d. 15,700

2. Michael Company began its operations on Jan. 1,2008 and produces a single product that sells for P10/unit. Michael uses the actual (historical) cost system. In 2008, 100,000 units were produced and 80,000 units were sold. There was no work-in-process inventory at Dec. 31, 2008. Manufacturing costs and selling and administrative expenses for 2008 were as follows: Fixed costs Variable costs Raw materials 2.00/unit produced Direct labor 1.25/unit produced Factory overhead 120,000 0.75/unit produced Selling and administrative 70,000 1.00/unit produced What would be Michael's finished goods inventory at Dec. 31, 2008 under absorption costing method? a. 80,000 b. 104,000 c. 110,000 d. 210,000 3. Hope Company manufactures Part P for use in its production cycle. The cost per unit for 10,000 units of part P are as follows: Direct materials 3 Direct labor 15 Variable overhead 6 Fixed overhead 8 32 Hope can buy 10,000 units of Part P at P30 per unit. If Hope buys Part P. the released facilities could be used to save P45,000 in relevant costs in the manufacture of Part T. In addition, P5/unit of the fixed overhead applied to Part P would be totally eliminated. What alternative is more desirable and by what amount is it more desirable? a. Manufacture P10,000

b. c. d.

Manufacture P15,000 Buy P35,000 none of the choices

4. Bonifacio Company makes and sells a popular product and its average annual sales is 14,000 units at P65 each. Details of its costs are as follows:

Variable manufacturing costs per unit Variable selling expenses per unit Annual fixed manufacturing overhead Annual fixed selling and administrative

37 8 112,000 65,000

Sales are expected to go down to 1,200 units during the next three months due to road construction. Hence, management plans to close for three months and avoid 60% of all fixed costs. But additional shut down costs of P10,500 will be incurred. The company should operate since its expected sales in 3 months exceed a. 803 units b. 1,000 units c. 574 units d. 790 units 5. Right Corporation projects the following transactions for 2009, its first year of operations: Proceeds from issuance of common stock 1,000,000 Sales on account 2,200,000 Collections of accounts receivable 1,800,000 Cost of goods sold 1,400,000 Disbursements for purchases of merchandise and expenses 1,200,000 Disbursements for income tax 250,000 Disbursements for purchase of fixed assets 800,000 Depreciation on fixed assets 150,000 Proceeds from borrowings 700,000 Payments on borrowings 80,000 The projected cash balance at Dec. 31, 2009 is a. 1,170,000 b. 1,220,000 c. 1,370,000

d. 1,500,000

6. KC Corporation is planning to invest P80,000 in a three-year project.KC's expected rate of return is 10%. The present value of P1 is at 10% for one year is .909, for two years is .826, and for three years is .751. The cash flow, net of income tax, will be P30,000, for the first year (present value of P27, 270) and P36,000 for the second year (present value of of P29,736). Assuming the rate of return is exactly 10%, what will be the cash flow, net of income tax, for the third year? a. P22,000 b. P22, 994 c. P30,618 d. 27,270 7. The Dec. 31, 2007 balance sheet of Cyber Inc is presented below. These are only acounts in Cyber's balance sheet. Amounts indicated by a question mark (?) can be calculated from the additional information given

Assets Cash Accounts receivable (net) Inventory Property, plant and equipment (net) 25,000 ? ? 294,000 432,000

Liabilities & Stockholders' Equity Current ratio (at year end) Total liabilities divided by total stockholders' equity Inventory turnover (based on ending inventory) Cost of sales for 2007

1.5 to 1 0.8 10.5 times 735,000

What was Cybers' Dec. 31, 2007 inventory? a. 21,000 b. 30,000 c. 70,000

d. 88,000

8. The Heaven Co. makes and sells a single product called Zoom. Overhead costs are applied to products on a basis of direct labor hours. The following data applies to the company's activities for the month of November: Actual fixed overhead cost incurred 161,450 Budgeted direct labor hours (denominator activity) 40,000 Number of zoom completed 21,000 Fixed overhead budget variance - favorable 11,450 Standard direct labor hours allowed per Zoom 2 Standard overhead rate 5 The volume variance for November is: a. 6,800 unfavorable c. 7,500 favorable

b. 6,800 favorable d. cannot be determined

9. The following information pertains to material R which is used by Barney Co. Annual usage in units 20,000 Working days per year 250 Safety stock in units 800 Normal lead time in working days 30 Units of material R will be required evenly throughout the year. The order point is a. 1,600 b. 2,400 c. 3,200 d. 3,600

ANSWERS 1. B Total fixed costs (expenses) Div. by Contribution margin per unit Selling price (P1,000,000/50,000) Variable cost (350,000/50,000) Break-even point in units P130,000 20 7

13 10,000

2. B

Total manufacturing costs per unit: P4.00 + P1.20 = P5.20 Finished goods inventory: (20,000 x P5.20) = P104,000 If part P is purchased: Decrease in costs (savings): Variable manufacturing (P10,000 x P24) Fixed manufacturing eliminated (10,000 x P5) Relevant costs savings Total decrease in costs Increase in cost (purchase price): (10,000 x P30) Net cost savings if part P is bought Shut down costs: Fixed costs in 3 months (P177,000 x 1/4) Less: Avoidable cost (loss) div. by Contribution margin per unit Shutdown point

3. C

240,000 50,000 45,000 335,000 300,000 35,000

4. A

44,250 28,200 16,050 20 802.5

5. A

Cash receipts: Issuance of common stock Collection of accounts receivable Proceeds from borrowings Cash disbursements Disbursements for purchases of merchandise and expenses Disbursements for income tax Purchase of fixed assets Payments on borrowings Present value of cash flow: Cash flow PV Factor 30,000 x 0.909 36,000 x 0.826

1,000,000 1,800,000 700,000

3,500,000

1,200,000 250,000 800,000 80,000

2,330,000

6. C Year 1 Year 2

27,270.00 29,736.00

Year 3 ? x 0.75 Present value of cash flow: Investment outlay Net present value using 10% rate of return Total present value for the three years Less: Present value for 2 years( P27,270+29736) Present value of cash flow for the third year Divide by PV factor for the third year Cash flow for the third year 7. C Inventory turnover = Cost of sales = Inventory, end 10.5

? ? 80,000 0 80,000 57,006 22,994 0.751 30,618

10.5 =

735,000 ? Inventory, Dec. 31 = P735,000/10.5 = 70,000 8C Budget based on standard hours: Budgeted fixed overhead (P161,450-11,450) (Fixed overhead rate: 150,000/40,000= 3.75) Variable overhead 42,000 hrs x (P5.00-3.75) Standard overhead cost: 42,000 hours x P5.00 = Volume variance-favorable 9C

150,000 52,500 202,500 210,000 7,500

The order point (reorder point) = lead time usage + safety stock Lead time usage: Daily usage (20,000 units / 250 days) 80 units Normal lead time x 30 Lead time usage 2,400 units Add: Safety stock 800 Order point 3,200 units

1,170,000