The Islamic University

of Gaza
Faculty of Commerce
Department of Accounting

Advanced Managerial Accounting.

First Term Final Exam (2012/2013).
Master for Accounting and Finance
&
Master of Business Administration.

Please read the following instructions before

answering the questions:
a Time Allowed for this exam: Three hours.
b Answer Eight Questions only.
c For each Question 6.25 Mark.
d Use the provided answer book.
e Insert your name and student No. below.
Student Name
Student No
Prof. Salem Abdalla Helles
6 Jan., 2013

Question One:
The Gaza Fruit Farm has always hired workers to pick its annual
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cherry crop. Ahmad Ali, the farm manager, has just received
information on a cherry picking machine that is being purchased by
many, fruit farms. The machine is a motorized device that shakes the
cherry tree, causing the cherries to fall onto plastic tarps that funnel
the cherries into bins. Mr. Ahmad has gathered the following
information to decide whether a cherry picker would be a profitable
investment for the Gaza Fruit Farm.
a Currently, the Farm is paying an average of $40,000 per year to
workers to pick the cherries.
b The cherry picker would cost $94,500, and it would have an
estimated 12-year useful life. The Farm uses straight-line
depreciation on all assets and considers salvage value in
computing depreciation deductions. The estimated salvage value
of the cherry picker is $4,500.
c Annual out-of-pocket costs associated with the cherry picker would
be: cost of an operator and an assistant, $14,000; insurance, $200;
fuel, $1,800; and a maintenance contract, $3,000.
Required:
1 Determine the annual savings in cash operating costs that would
be realized if the cherry picker were purchased.
2 Compute the simple rate of return expected from the cherry picker.
Would the cherry picker be purchased if Gaza Fruit Farm's
required rate of return is 16%?
3 Compute the payback period on the cherry picker. The Gaza Fruit
Farm will not purchase equipment unless it has a payback period
of five years or less. Would the cherry picker be purchased?
4 Compute (to the nearest whole percent) the internal rate of return
promised by the cherry picker. Based on this computation, does it
appear that the simple rate of return is an accurate guide in
investment decisions?

Question Two:
Suppose a MS Company is considering entering the online digital
lockbox business by renting server space to customers to store any type
of computer file. The company's managers believe this business has a
large potential market as more individuals and small business are moving
their file backups to secure online servers that can be accessed around the
clock. Here is a summary of data projections for this business:
Selling price per year per customer
$95
account:
Direct Supplies
$23
Direct Labor
8
Overhead
6
Selling expense
5
Variable costs per unit
$42
Overhead
$195,000
Advertising
55,000
Administrative expense
68,000
Total annual fixed costs
$318,000
Required:
1 Compute the annual breakeven point in customer
accounts.
2 Suppose managers projects sales to 6,500 customer
accounts next year. If that projection is accurate,
how much profit will the company realize?
3 To improve profitability, management is considering
the following four alternative courses of action. (in
performing the required steps, use the figures from
items 1 and 2, and treat each alternative
independently.)
a Calculate the number of digital lockbox accounts
that must be sold to generate a targeted profit of
$95,400. Assume that costs and selling price
remain constant.
b Calculate the operating income if the company
increases the number of accounts sold by 20
percents and cuts the selling price by $5 per
account.
c Determine the number of accounts that must be
sold to break even if advertising costs (fixed
costs) increase by $47,700.
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d Find the number of accounts that must be sold to

generate a targeted profit of $120,000 if variable
costs decrease by 10 percent.

Question Three:
LG Products, Inc., produces a broad line of sports equipment
and uses a standard cost system for control purposes. Last year
the company produced 8,000 varsity footballs. The standard
costs associated with this football, along with the actual costs
incurred last year, are given below (per football):
Standard
Cost
Direct materials:
Standard: 3.7 feet at $5.00 per football
Actual: 4.0 feet at $4.80 per football...
Direct labor:
Standard: 0.9 hour at $7.50 per hour .
Actual: 0.8 hour at $8.00 per hour ....
Variable manufacturing overhead:
Standard: 0.9 hour at $2.50 per hour .
Actual: 0.8 hour at $2.75 per hour
Total cost per football

Actual
Cost

$18.50
$19.20
6.75
6.40
2.25
$27.50

2.20
$27.80

The president was elated when he saw that actual costs exceeded standard
costs by only $0.30 per football. He stated, "I was afraid that our unit cost
might get out of hand when we gave out those raises last year in order to
stimulate output. But it's obvious our costs are well under control." There
was no inventory of materials on hand to start the year. During the year,
32,000 feet of materials were purchased and used in production.
Required:
a For direct materials: Compute the price and quantity variances for
the year.
b For direct labor: Compute the rate and efficiency variances.
c Compute the variable overhead spending and efficiency variances.
d Was the president correct in his statement that "our
costs are well under control"? Explain.
Question Four:
The cordless phone manufacturing division of a Denver-based consumer
electronics company uses activity-based costing. For simplicity, assume
that its accountants have identified only the following three activities and
related cost drivers for indirect production costs:
Activity
Cost Driver
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Materials handling
Direct-materials cost
Engineering
Engineering change notices
Power
Kilowatt hours
Three types of cordless phones are produced: SA2, SA5, and SA9.
Direct costs and cost-driver activity for each product for a recent month
are as follows:
SA2
SA5
SA9
Direct-materials cost
$25,000 $50,000 $125,000
Direct-labor cost
$4,000
$1,000
$3,000
Kilowatt hours
50,000
200,000 150,000
Engineering change notices 13
5
2
Indirect production cost for the month was:
Materials handling
$ 8,000
Engineering
20,000
Power
16,000
Total indirect production cost $44,000
1 Compute the indirect production cost allocated to
each product with the activity-based costing system.
2 Suppose all indirect production costs had been
allocated to products in proportion to their directlabor costs. Compute the indirect production costs
allocated to each product.
3 In which product costs, those in number 1 or those in
number 2, do you have the most confidence? Why?

Question Five:
Part (A)
" Balanced Scorecard" :


:

Part (B)
Watertown paper corporation is considering adding
another machine for the manufacture of corrugated
cardboard. The machine would cost $900,000. It would
have an estimated life of 6 years and no salvage value.
The company estimates that annual revenues would
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increase by $430,000 and that annual expenses excluding

depreciation would increase by $190,000. It uses the
straight-line method to compute depreciation expense.
Management has a required rate of return of 9%.
Compute the accounting rate of return.

Question Six:
Suppose a loan officer at Bank of Palestine has been analyzing Home Services,
Inc., to determine whether the bank should grant it a loan. Home Service has
been in business for ten years, and its services now include S1, S2, S3, and S4.
The following data pertaining to those services were available for analysis:

Home Services, Inc.

Segmented Income Statement
For the Year Ended December 31, 2012
Sales
Less Variable costs:
Direct labor
Operating supplies
Small tools
Replacement parts
Truck costs
Selling costs
Other variable costs
Contribution
margin
Less direct fixed
costs
Segment margin

S1

S2

S3

$297,50
0

$114,300 $126,400 $97.600 $635,800

$119,000
14,785
11,900
59,500
44,625
5,950

$40,005
5,715
4,572
22,860
11,430
17,145
2,286

$44,240
6,320
5,056
25,280
12,640
18,960
2,528

$34,160
4,880
7,808
14,640
9,760
1,952

$41,650

$10,287

$11,376

$24,400 $87,713

35,800

16,300

24,100

5,200

$5,850

($6,013)

($12,724
)

$19,200 $6,313

(-)Common fixed
Costs
Operating
income/loss

S4

Total

$237,405
31,790
29,336
107,640
38,710
90,490
12,716

81,400

32,100
($25,787
)

Home Services' profitability has decreased over the past two years, and to
increase the likelihood that the company will qualify for a loan, the loan officer
has advised its owner to determine which service lined are not meeting the
company's profit targets. Once the owner has identified the unprofitable service
lines, he can either eliminate them or set higher prices. If he sets higher prices,
those prices will have to cover all variable and fixed operating, selling, and
general administration costs.

Required:
1 Analyze the performance of the four service lines.
Should the owner eliminate any of them? Explain
your answer.
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2 Why might the owner want to continue providing

unprofitable service lines?

Question Seven:
Ali Saed has recently opened a store specializing in fashionable stockings.
Mr. Saed has just completed a course in managerial accounting and he
believes that he can apply certain aspects of the course to his business. He is
particularly interested in adopting the cost- volume- profit (CVP) approach
to decision making .Thus, he has prepared the following analysis:
Sales price per pair of
stockings.................
Variable expense per pair of stockings......
Contribution margin per pair of stockings...
Fixed expenses per year:
Building rental ...........................................
Equipment depreciation ............................
Selling.......................................................
Administrative............................................
Total fixed expenses ..................................

$ 2.00
0.80
$1.20
$12,00
0
3,000
30,000
15,000
$60,00
0

Required:
1 How many pairs of stockings must be sold to break even? What does
this represent in total dollar sales?
2 How many pairs of stockings must be sold to earn a $9,000 target profit
for the first year?
3 Mr. Saed now has one full- time and one part- time salesperson working
in the store. It will cost him an additional $8,000 per year to convert the
part- time position to a full- time position. Mr. Saed believes that the
change would bring in an additional $ 20,000 in sales each year. Should
he convert the position?
4 Refer to the original data. Actual operating results for the first year are
as follows:
Sales
Less variable expenses
Contribution margin
Less fixed expenses
Net operating income

$ 125,000
50,000
75,000
60,000
$ 15,000

aWhat is the store's degree of operating leverage?

b Mr. Saed is confident that with some effort he can increase sales by 20%
next year. What would be the expected percentage increase in net
operating income?

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Question Eight:
Jerusalem Company produces a single product. Variable
manufacturing overhead is applied to products on the basis of direct
labor-hours. The standard costs for one unit of product are as follows:
Direct material; 6 ounces at $0.50 per ounce ..
$3
Direct labor: 1.8 hours at $10 per hour ...
18
Variable manufacturing overhead: 1.8 hours at $5 per hour
9
Total standard variable cost per unit
..
$30
During June, 2,000 units were produced. The costs associated with
June's operations were as follows:
Material purchased: 18,000 ounces at $0.60 per ounce
$10,800
Material used in production:
14,000 ounces
Direct labor :4,000 hours at $9.75 per hour $39,000
Variable manufacturing overhead costs incurred... . $20,800
Required:
Compute the materials, labor, and variable manufacturing overhead
variances.

Question Nine:
GD Company is a retailer that is preparing its budget for the upcoming
fiscal year. Management has prepared the following summary of its
budgeted cash flows:
4th
Quarter
$230,000
$240,000

3rd
Quarter
$210,000
$220,000

2nd
Quarter
$330,000
$230,000

1st
Quarter
$180,000
$260,000

Total cash receipts

Total cash disbursements

The company's beginning cash balance for the upcoming fiscal year
will be $20,000. The company requires a minimum cash balance of
$10,000 and may borrow any amount needed from a local bank at a
quarterly interest rate of 3%. The company may borrow any amount at
the beginning of any quarter and may repay its loans, or any part of its
loans, at the end of any quarter. Interest payments are due on any
principal at the time it is repaid. For simplicity, assume that interest is
not compounded.
Required:
Prepare the company's cash budget for the upcoming fiscal year.

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Question Ten:
DP Company manufactures three products from a common input in a joint
processing operation. Joint processing costs up to the split-off point total
$350,000 per quarter. The company allocates these costs to the joint products
on the basis of their relative sales value at the split-off point. Unit selling
prices and total output at the split-off point are as follows:
Product
A
B
C

Selling Price
$16 per pound
$8 per pound
$25 per pound

Quarterly Output
15,000 pounds
20,000 pounds
4,000 gallons

Each product can be processed further after the split-off point. Additional
processing requires no special facilities. The additional processing costs
(per quarter) and unit selling prices after further processing are given
below:
Product
A
B
C

Additional
processing costs
$63,000
$80,000
$36,000

Selling Price
$20 per pound
$13per pound
$32 per gallon

Required
Which product or products should be sold at the split-off point and which
product or products should be processed further? Show computations.

Question Eleven:
" I know headquarters wants us to add on that new product line, " said F.
Helmy, manager of Sun Product East Division " But I want to see the
numbers before I make a move. Our division has led the company for
three years, and I don't want any letdown".
Sun products is a decentralized company with four autonomous
divisions. The divisions are evaluated on a basis of the return that they are
able to generate on invested assets, with year- end bonuses given to
divisional managers who have the highest ROI figures. Operating results
for the company's East Division for last year are given below:
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Sales .................................................

$21,000,00
0
Less variable expenses ...................... $13,400,00
0
Contribution margin ........................
$7,600,000
Less fixed expenses .........................
$5,920,000
Net operating income........................
$1,680,000
Divisional operating
assets.................
$5,250,000
The company had an overall return on investment ( ROI) of 18% last year
(considering all divisions). The company's East Division has an
opportunity to add a new product line that would require an investment of
$3,000,000. The cost and revenue characteristics of the new product line
per year would be as follows:
Sales ................................................. $9,000,000
Variable expenses ............................. 65% of Sales
Fixed expenses ................................. $2,520,000
Required:
1. Compute the East Division's ROI for last year; also compute the
ROI as it will appear if the new product line is added.
2. If you were in F. Helmy's position , would you be inclined to
accept or reject the new product line? Explain
3. suppose that the company views a return of 15% on invested
assets as being the minimum that any division should earn and that
performance is evaluated by the residual income approach.
Compute the East Division's residual income for last year, also
compute the residual income as it will appear if the new product
line is added.

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Good Luck

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