Portland Community College

BA 213 Instructor: Usha Ramanujam

Review.Test3 Key

1. The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues
over which he has control.
TRUE
2. Some investment opportunities that should be accepted from the viewpoint of the entire company may be
rejected by a manager who is evaluated on the basis of:
A. return on investment.
b. residual income.
c. contribution margin.
d. segment margin.

3. In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of
$480,000 and net operating income of $46,200. The company uses residual income, with a minimum required
rate of return of 11%, to evaluate the performance of its divisions. What was the Universal Solutions Division's
residual income in November?
A. -$6,600
b. $5,082
c. $6,600
d. -$5,082
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Residual income = Net operating income - (Average operating assets Minimum required rate of return)
= $46,200 - ($480,000 11%) = $46,200 - $52,800 = -$6,600

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

Note: the traceable fixed expenses do not include any interest expense.


4. How much is the residual income?
a. $400,000
B. $200,000
c. $300,000
d. $500,000
Residual income = Net operating income - (Average operating assets Minimum required rate of return)
= $300,000 - ($500,000 20%) = $300,000 - $100,000 = $200,000

5. How much is the return on the investment?
a. 25%
b. 45%
c. 20%
D. 60%
2
ROI = Net operating income Average operating assets
= $300,000 $500,000 = 60%

Cecille Products is a division of a major corporation. Last year the division had total sales of $7,940,000, net
operating income of $254,080, and average operating assets of $2,000,000. The company's minimum required
rate of return is 12%.

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6. The division's margin is closest to:
A. 3.2%
b. 25.2%
c. 12.7%
d. 28.4%
Margin = Net operating income Sales = $254,080 $7,940,000 = 3.2%

7. The division's turnover is closest to:
a. 0.13
b. 3.52
C. 3.97
d. 31.25
Turnover = Sales Average operating assets = $7,940,000 $2,000,000 = 3.97

8. The division's return on investment (ROI) is closest to:
a. 2.6%
B. 12.7%
c. 0.4%
d. 50.4%
ROI = Net operating income Average operating assets
= $254,080 $2,000,000 = 12.7%

9. The division's residual income is closest to:
a. $(698,720)
b. $494,080
c. $254,080
D. $14,080
Residual income = Net operating income - (Average operating assets Minimum required rate of return)
= $254,080 - ($2,000,000 12%) = $254,080 - $240,000 = $14,080

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Deanda Products is a division of a major corporation. The following data are for the last year of operations:


10. The division's margin is closest to:
A. 4.0%
b. 16.4%
c. 24.4%
d. 28.4%
Margin = Net operating income Sales = $1,145,200 $28,630,000 = 4.0%

11. The division's turnover is closest to:
A. 4.09
b. 0.16
c. 25.00
d. 3.51
Turnover = Sales Average operating assets = $28,630,000 $7,000,000 = 4.09
12. The division's return on investment (ROI) is closest to:
A. 16.4%
b. 3.2%
c. 67.1%
d. 0.6%
ROI = Net operating income Average operating assets
= $1,145,200 $7,000,000 = 16.4%
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13. The division's residual income is closest to:
a. $(4,008,200)
b. $2,405,200
C. $(114,800)
d. $1,145,200
Residual income = Net operating income - (Average operating assets Minimum required rate of return)
= $1,145,200 - ($7,000,000 18%) = $1,145,200 - $1,260,000 = $(114,800)

14. A future cost that does not vary among alternatives under consideration is irrelevant.
TRUE



15. In a special order situation, any fixed cost associated with the order would be irrelevant.
FALSE


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16. The Jabba Company manufactures the "Snack Buster" which consists of a wooden snack chip bowl with an
attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip
bowls or buy them from an outside supplier?

a.
B.
c.
d.

17. Beaver Company (a multi-product firm) produces 5,000 units of Product X each year. Each unit of Product
X sells for $8 and has a contribution margin of $5. If Product X is discontinued, $18,000 of fixed overhead
would be eliminated. As a result of discontinuing Product X, the company's overall operating income would:
a. decrease by $25,000
b. increase by $43,000
C. decrease by $7,000
d. increase by $7,000


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18. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and
management is considering discontinuing the product altogether. Data from the company's accounting system
appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further
investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling
and administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the
company's overall net operating income if product U23N were dropped?
a. Overall net operating income would increase by $15,000.
b. Overall net operating income would increase by $143,000.
C. Overall net operating income would decrease by $143,000.
d. Overall net operating income would decrease by $15,000.
Net operating income would decline by $143,000 if product U23N were dropped. Therefore, the product should
not be dropped.
*$234,000 - $144,000 = $90,000
**$161,000 - $93,000 = $68,000

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19. Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are
produced and used every year. The company's Accounting Department reports the following costs of producing
the part at this level of activity:

An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is
accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The
special equipment used to make the part was purchased many years ago and has no salvage value or other use.
The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if
the part were purchased instead of produced internally. In addition, the space used to make part U16 could be
used to make more of one of the company's other products, generating an additional segment margin of $25,000
per year for that product. What would be the impact on the company's overall net operating income of buying
part U16 from the outside supplier?
a. Net operating income would increase by $25,000 per year.
B. Net operating income would decline by $79,000 per year.
c. Net operating income would decline by $35,400 per year.
d. Net operating income would increase by $14,600 per year.
The total cost of the make alternative is lower by $79,000 ($283,400 - $362,400). Thus, net operating income
would decline by $79,000 if the offer from the supplier were accepted. Therefore, the company should continue
to make the part itself.

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20. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and
sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate
to annual operations at 15,000 watches:

Ignace normally sells its watches for $42 each. A discount chain is interested in purchasing Ignace's excess
capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignace's
profits for the year will increase as long as the price on this special order exceeds:
a. $12.00
b. $13.50
C. $16.00
d. $31.00


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21. Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20
each. Product A90's unit product cost is $16.20, determined as follows:

Direct labor is a variable cost. The special order would have no effect on the company's total fixed
manufacturing overhead costs. The customer would like modifications made to product A90 that would increase
the variable costs by $4.20 per unit and that would require an investment of $21,000 in special molds that would
have no salvage value.
This special order would have no effect on the company's other sales. The company has ample spare capacity
for producing the special order. If the special order is accepted, the company's overall net operating income
would increase (decrease) by:
a. ($18,600)
b. ($16,200)
c. $30,000
D. $5,400


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Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures. The unit product
cost of this part is computed as follows:

An outside supplier has offered to sell the company all of these parts it needs for $46.60 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 $560,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.
However, $13.60 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.

22. How much of the unit product cost of $55.40 is relevant in the decision of whether to make or buy the part?
a. $34.30
b. $17.50
c. $55.40
D. $41.80
Relevant cost per unit:


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23. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
a. $560,000
b. $704,000
C. $176,000
d. ($384,000)
Relevant cost per unit:
Net advantage (disadvantage):


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Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of
this part are produced and used every year. The company's Accounting Department reports the following costs
of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $20.80 each. If this offer is
accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special
equipment used to make the part was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were
accepted, only $4,000 of these allocated general overhead costs would be avoided.

24. If management decides to buy part Z43 from the outside supplier rather than to continue making the part,
what would be the annual impact on the company's overall net operating income?
a. Net operating income would decline by $34,500 per year.
b. Net operating income would decline by $30,500 per year.
C. Net operating income would decline by $15,500 per year.
d. Net operating income would decline by $38,500 per year.
The total cost of the make alternative is lower by $15,500. Thus, net operating income would decline by
$15,500 if the offer from the supplier were accepted.


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Elfving Company produces a single product. The cost of producing and selling a single unit of this product at
the company's normal activity level of 80,000 units per month is as follows:

The normal selling price of the product is $71.10 per unit.
An order has been received from an overseas customer for 1,000 units to be delivered this month at a special
discounted price. This order would have no effect on the company's normal sales and would not change the total
amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per
unit on this order than on normal sales.
Direct labor is a variable cost in this company.

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25. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special
discounted price on the special order is $63.70 per unit. By how much would this special order increase
(decrease) the company's net operating income for the month?
a. $7,400
b. ($5,900)
C. $18,900
d. ($2,100)
Variable cost per unit on normal sales:


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Browning Company makes four products in a single facility. These products have the following unit product
costs:

Additional data concerning these products are listed below.

The grinding machines are potentially the constraint in the production facility. A total of 24,500 minutes are
available per month on these machines.
Direct labor is a variable cost in this company.


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26. How many minutes of grinding machine time would be required to satisfy demand for all four products?
a. 21,500
B. 27,100
c. 13,000
d. 24,500
Demand on the grinding machine:
Total time required for all products = 10,400 + 3,600 + 7,500 + 5,600 = 27,100

27. Which product makes the LEAST profitable use of the grinding machines?
a. Product A
b. Product B
C. Product C
d. Product D
Optimal production plan:


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28. Which product makes the MOST profitable use of the grinding machines?
a. Product A
b. Product B
c. Product C
D. Product D
Optimal production plan:

29. When using the payback method, any cash flows for a project that occur after the payback period are not
considered in computing the payback period for that project.
TRUE

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30. (Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This
project will initially require a $25,000 investment in equipment and a $3,000 working capital investment. The
useful life of this project is 5 years with an expected salvage value of zero on the equipment. The working
capital will be released at the end of the 5 years. The new system is expected to generate net cash inflows of
$9,000 per year in each of the 5 years. Nevus' discount rate is 14%. The net present value of this project is
closest to:
a. $(3,088)
b. $3,383
C. $4,454
d. $5,897

31. (Ignore income taxes in this problem.) Dowlen, Inc., is considering the purchase of a machine that would
cost $150,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of
$23,000. The machine would reduce labor and other costs by $36,000 per year. Additional working capital of
$6,000 would be needed immediately. All of this working capital would be recovered at the end of the life of
the machine. The company requires a minimum pretax return of 12% on all investment projects. The net present
value of the proposed project is closest to:
a. $9,657
b. -$2,004
C. $6,699
d. $13,223


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32. (Ignore income taxes in this problem.) Ryner Corporation is considering three investment projects-S, T, and
U. Project S would require an investment of $20,000, Project T of $69,000, and Project U of $83,000. No other
cash outflows would be involved. The present value of the cash inflows would be $23,200 for Project S,
$77,970 for Project T, and $94,620 for Project U. Rank the projects according to the profitability index, from
most profitable to least profitable.
a. U,T,S
b. T,S,U
c. U,S,T
D. S,U,T


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33. (Ignore income taxes in this problem.) Olinick Corporation is considering a project that would require an
investment of $343,000 and would last for 8 years. The incremental annual revenues and expenses generated by
the project during those 8 years would be as follows:

The scrap value of the project's assets at the end of the project would be $23,000. The payback period of the
project is closest to:
a. 3.0 years
b. 5.1 years
C. 3.2 years
d. 4.8 years
Net annual cash flow = Net operating income + Depreciation
= $67,000 + $40,000 = $107,000
Payback period = Investment required Net annual cash flow
= $343,000 $107,000 = 3.2 years
In this case the salvage value plays no part in the payback period since all of the investment is recovered before
the end of the project.


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34. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project
that would require an investment of $263,000 and would last for 8 years. The annual net operating income from
the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at
the end of the project would be $15,000. The payback period of the project is closest to:
a. 3.8 years
b. 2.6 years
C. 2.7 years
d. 4.0 years
Net annual cash flow = Net operating income + Depreciation
= $66,000 + $31,000 = $97,000
Payback period = Investment required Net annual cash flow
= $263,000 $97,000 = 2.7 years
In this case the salvage value plays no part in the payback period since all of the investment is recovered before
the end of the project.

35. (Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing equipment that
would increase sales revenues by $298,000 per year and cash operating expenses by $143,000 per year. The
equipment would cost $712,000 and have an 8 year life with no salvage value. The annual depreciation would
be $89,000. The simple rate of return on the investment is closest to:
A. 9.3%
b. 21.8%
c. 22.1%
d. 12.5%
The simple rate of return is computed as follows:
Simple rate of return = Annual incremental net operating income Initial investment = $66,000 $712,000 =
9.3%

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36. (Ignore income taxes in this problem.) Crowl Corporation is investigating automating a process by
purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value. By automating the
process, the company would save $132,000 per year in cash operating costs. The new machine would replace
some old equipment that would be sold for scrap now, yielding $21,000. The annual depreciation on the new
machine would be $88,000. The simple rate of return on the investment is closest to:
a. 11.1%
b. 16.7%
C. 5.7%
d. 5.6%
The simple rate of return is computed as follows:
Simple rate of return = Annual incremental net operating income Initial investment = $44,000 $771,000 =
5.7%

37. (Ignore income taxes in this problem.) The management of Ro Corporation is investigating automating a
process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The
new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By
automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of
return on the investment is closest to:
A. 18.1%
b. 11.1%
c. 28.4%
d. 17.3%
The simple rate of return is computed as follows:
Simple rate of return = Annual incremental net operating income Initial investment, less salvage value =
$42,000 ($243,000 - $11,000) = 18.1%

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38. (Ignore income taxes in this problem.) Tiff Corporation has provided the following data concerning a
proposed investment project:

The company uses a discount rate of 16%. The working capital would be released at the end of the project.
Required:
Compute the net present value of the project.


39. (Ignore income taxes in this problem.) Mattice Corporation is considering investing $490,000 in a project.
The life of the project would be 7 years. The project would require additional working capital of $34,000, which
would be released for use elsewhere at the end of the project. The annual net cash inflows would be $123,000.
The salvage value of the assets used in the project would be $49,000. The company uses a discount rate of 11%.
Required:
Compute the net present value of the project.


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40. (Ignore income taxes in this problem.) Hady Company is considering purchasing a machine that would cost
$688,800 and have a useful life of 7 years. The machine would reduce cash operating costs by $118,759 per
year. The machine would have no salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
a. Payback period = Investment required Net annual cash flow
= $688,800 $118,759 = 5.80 years
b. The simple rate of return is computed as follows:

Simple rate of return = Annual incremental net operating income Initial investment = $20,359 $688,800
= 2.96%

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41. (Ignore income taxes in this problem.) Ostermeyer Corporation is considering a project that would require
an initial investment of $247,000 and would last for 7 years. The incremental annual revenues and expenses for
each of the 7 years would be as follows:

At the end of the project, the scrap value of the project's assets would be $16,000.
Required:
Determine the payback period of the project. Show your work!

Payback period = Investment required Net annual cash inflow
= $247,000 $98,000 = 2.52 years


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