PortlandCommunityCollege

BA213Instructor:UshaRamanujam

Review.Test3Key

1.Thebasicobjectiveofresponsibilityaccountingistochargeeachmanagerwiththosecostsand/orrevenues
overwhichhehascontrol.
TRUE
2.Someinvestmentopportunitiesthatshouldbeacceptedfromtheviewpointoftheentirecompanymaybe
rejectedbyamanagerwhoisevaluatedonthebasisof:
A.returnoninvestment.
b.residualincome.
c.contributionmargin.
d.segmentmargin.

3.InNovember,theUniversalSolutionsDivisionofKeaffaberCorporationhadaverageoperatingassetsof
$480,000andnetoperatingincomeof$46,200.Thecompanyusesresidualincome,withaminimumrequired
rateofreturnof11%,toevaluatetheperformanceofitsdivisions.WhatwastheUniversalSolutionsDivision's
residualincomeinNovember?
A.$6,600
b.$5,082
c.$6,600
d.$5,082

Residualincome=Netoperatingincome(Averageoperatingassets Minimumrequiredrateofreturn)
=$46,200($480,000 11%)=$46,200$52,800=$6,600

ThefollowingselecteddatapertaintoBeckCo.'sBeamDivisionforlastyear:

Note:thetraceablefixedexpensesdonotincludeanyinterestexpense.

4.Howmuchistheresidualincome?
a.$400,000
B.$200,000
c.$300,000
d.$500,000

Residualincome=Netoperatingincome(Averageoperatingassets Minimumrequiredrateofreturn)
=$300,000($500,000 20%)=$300,000$100,000=$200,000

5.Howmuchisthereturnontheinvestment?
a.25%
b.45%
c.20%
D.60%

ROI=Netoperatingincome Averageoperatingassets
=$300,000 $500,000=60%

CecilleProductsisadivisionofamajorcorporation.Lastyearthedivisionhadtotalsalesof$7,940,000,net
operatingincomeof$254,080,andaverageoperatingassetsof$2,000,000.Thecompany'sminimumrequired
rateofreturnis12%.

6.Thedivision'smarginisclosestto:
A.3.2%
b.25.2%
c.12.7%
d.28.4%
Margin=Netoperatingincome Sales=$254,080 $7,940,000=3.2%

7.Thedivision'sturnoverisclosestto:
a.0.13
b.3.52
C.3.97
d.31.25
Turnover=Sales Averageoperatingassets=$7,940,000 $2,000,000=3.97

8.Thedivision'sreturnoninvestment(ROI)isclosestto:
a.2.6%
B.12.7%
c.0.4%
d.50.4%
ROI=Netoperatingincome Averageoperatingassets
=$254,080 $2,000,000=12.7%

9.Thedivision'sresidualincomeisclosestto:
a.$(698,720)
b.$494,080
c.$254,080
D.$14,080
Residualincome=Netoperatingincome(Averageoperatingassets Minimumrequiredrateofreturn)
=$254,080($2,000,000 12%)=$254,080$240,000=$14,080

DeandaProductsisadivisionofamajorcorporation.Thefollowingdataareforthelastyearofoperations:

10.Thedivision'smarginisclosestto:
A.4.0%
b.16.4%
c.24.4%
d.28.4%
Margin=Netoperatingincome Sales=$1,145,200 $28,630,000=4.0%

11.Thedivision'sturnoverisclosestto:
A.4.09
b.0.16
c.25.00
d.3.51
Turnover=Sales Averageoperatingassets=$28,630,000 $7,000,000=4.09
12.Thedivision'sreturnoninvestment(ROI)isclosestto:
A.16.4%
b.3.2%
c.67.1%
d.0.6%
ROI=Netoperatingincome Averageoperatingassets
=$1,145,200 $7,000,000=16.4%

13.Thedivision'sresidualincomeisclosestto:
a.$(4,008,200)
b.$2,405,200
C.$(114,800)
d.$1,145,200
Residualincome=Netoperatingincome(Averageoperatingassets Minimumrequiredrateofreturn)
=$1,145,200($7,000,000 18%)=$1,145,200$1,260,000=$(114,800)

14.Afuturecostthatdoesnotvaryamongalternativesunderconsiderationisirrelevant.
TRUE

15.Inaspecialordersituation,anyfixedcostassociatedwiththeorderwouldbeirrelevant.
FALSE

16.TheJabbaCompanymanufacturesthe"SnackBuster"whichconsistsofawoodensnackchipbowlwithan
attachedporcelaindipbowl.WhichofthefollowingwouldberelevantinJabba'sdecisiontomakethedip
bowlsorbuythemfromanoutsidesupplier?

a.
B.
c.
d.

17.BeaverCompany(amultiproductfirm)produces5,000unitsofProductXeachyear.EachunitofProduct
Xsellsfor$8andhasacontributionmarginof$5.IfProductXisdiscontinued,$18,000offixedoverhead
wouldbeeliminated.AsaresultofdiscontinuingProductX,thecompany'soveralloperatingincomewould:
a.decreaseby$25,000
b.increaseby$43,000
C.decreaseby$7,000
d.increaseby$7,000

18.ProductU23NhasbeenconsideredadragonprofitsatJinkersonCorporationforsometimeand
managementisconsideringdiscontinuingtheproductaltogether.Datafromthecompany'saccountingsystem
appearbelow:

Inthecompany'saccountingsystemallfixedexpensesofthecompanyarefullyallocatedtoproducts.Further
investigationhasrevealedthat$144,000ofthefixedmanufacturingexpensesand$93,000ofthefixedselling
andadministrativeexpensesareavoidableifproductU23Nisdiscontinued.Whatwouldbetheeffectonthe
company'soverallnetoperatingincomeifproductU23Nweredropped?
a.Overallnetoperatingincomewouldincreaseby$15,000.
b.Overallnetoperatingincomewouldincreaseby$143,000.
C.Overallnetoperatingincomewoulddecreaseby$143,000.
d.Overallnetoperatingincomewoulddecreaseby$15,000.

Netoperatingincomewoulddeclineby$143,000ifproductU23Nweredropped.Therefore,theproductshould
notbedropped.
*$234,000$144,000=$90,000
**$161,000$93,000=$68,000

19.PartU16isusedbyMcveanCorporationtomakeoneofitsproducts.Atotalof13,000unitsofthispartare
producedandusedeveryyear.Thecompany'sAccountingDepartmentreportsthefollowingcostsofproducing
thepartatthislevelofactivity:

Anoutsidesupplierhasofferedtomakethepartandsellittothecompanyfor$29.80each.Ifthisofferis
accepted,thesupervisor'ssalaryandallofthevariablecosts,includingthedirectlabor,canbeavoided.The
specialequipmentusedtomakethepartwaspurchasedmanyyearsagoandhasnosalvagevalueorotheruse.
Theallocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany,noneofwhichwouldbeavoidedif
thepartwerepurchasedinsteadofproducedinternally.Inaddition,thespaceusedtomakepartU16couldbe
usedtomakemoreofoneofthecompany'sotherproducts,generatinganadditionalsegmentmarginof$25,000
peryearforthatproduct.Whatwouldbetheimpactonthecompany'soverallnetoperatingincomeofbuying
partU16fromtheoutsidesupplier?
a.Netoperatingincomewouldincreaseby$25,000peryear.
B.Netoperatingincomewoulddeclineby$79,000peryear.
c.Netoperatingincomewoulddeclineby$35,400peryear.
d.Netoperatingincomewouldincreaseby$14,600peryear.

Thetotalcostofthemakealternativeislowerby$79,000($283,400$362,400).Thus,netoperatingincome
woulddeclineby$79,000iftheofferfromthesupplierwereaccepted.Therefore,thecompanyshouldcontinue
tomakethepartitself.

20.IgnaceTimekeepers,Inc.manufacturesandsellswristwatches.Ignacehasthecapacitytomanufactureand
sell20,000watcheseachyearbutiscurrentlyonlymanufacturingandselling15,000.Thefollowingcostsrelate
toannualoperationsat15,000watches:

Ignacenormallysellsitswatchesfor$42each.AdiscountchainisinterestedinpurchasingIgnace'sexcess
capacityof5,000watches.Thisspecialorderwouldnotaffectregularsalesorthecoststructureabove.Ignace's
profitsfortheyearwillincreaseaslongasthepriceonthisspecialorderexceeds:
a.$12.00
b.$13.50
C.$16.00
d.$31.00

10

21.GalleraniCorporationhasreceivedarequestforaspecialorderof6,000unitsofproductA90for$21.20
each.ProductA90'sunitproductcostis$16.20,determinedasfollows:

Directlaborisavariablecost.Thespecialorderwouldhavenoeffectonthecompany'stotalfixed
manufacturingoverheadcosts.ThecustomerwouldlikemodificationsmadetoproductA90thatwouldincrease
thevariablecostsby$4.20perunitandthatwouldrequireaninvestmentof$21,000inspecialmoldsthatwould
havenosalvagevalue.
Thisspecialorderwouldhavenoeffectonthecompany'sothersales.Thecompanyhasamplesparecapacity
forproducingthespecialorder.Ifthespecialorderisaccepted,thecompany'soverallnetoperatingincome
wouldincrease(decrease)by:
a.($18,600)
b.($16,200)
c.$30,000
D.$5,400

11

AhronCompanymakes80,000unitsperyearofapartitusesintheproductsitmanufactures.Theunitproduct
costofthispartiscomputedasfollows:

Anoutsidesupplierhasofferedtosellthecompanyallofthesepartsitneedsfor$46.60aunit.Ifthecompany
acceptsthisoffer,thefacilitiesnowbeingusedtomakethepartcouldbeusedtomakemoreunitsofaproduct
thatisinhighdemand.Theadditionalcontributionmarginonthisotherproductwouldbe$560,000peryear.
Ifthepartwerepurchasedfromtheoutsidesupplier,allofthedirectlaborcostofthepartwouldbeavoided.
However,$13.60ofthefixedmanufacturingoverheadcostbeingappliedtothepartwouldcontinueevenifthe
partwerepurchasedfromtheoutsidesupplier.Thisfixedmanufacturingoverheadcostwouldbeappliedtothe
company'sremainingproducts.

22.Howmuchoftheunitproductcostof$55.40isrelevantinthedecisionofwhethertomakeorbuythepart?
a.$34.30
b.$17.50
c.$55.40
D.$41.80
Relevantcostperunit:

12

23.Whatisthenettotaldollaradvantage(disadvantage)ofpurchasingthepartratherthanmakingit?
a.$560,000
b.$704,000
C.$176,000
d.($384,000)
Relevantcostperunit:

Netadvantage(disadvantage):

13

PenagosCorporationispresentlymakingpartZ43thatisusedinoneofitsproducts.Atotalof5,000unitsof
thispartareproducedandusedeveryyear.Thecompany'sAccountingDepartmentreportsthefollowingcosts
ofproducingthepartatthislevelofactivity:

Anoutsidesupplierhasofferedtoproduceandselltheparttothecompanyfor$20.80each.Ifthisofferis
accepted,thesupervisor'ssalaryandallofthevariablecosts,includingdirectlabor,canbeavoided.Thespecial
equipmentusedtomakethepartwaspurchasedmanyyearsagoandhasnosalvagevalueorotheruse.The
allocatedgeneraloverheadrepresentsfixedcostsoftheentirecompany.Iftheoutsidesupplier'sofferwere
accepted,only$4,000oftheseallocatedgeneraloverheadcostswouldbeavoided.

24.IfmanagementdecidestobuypartZ43fromtheoutsidesupplierratherthantocontinuemakingthepart,
whatwouldbetheannualimpactonthecompany'soverallnetoperatingincome?
a.Netoperatingincomewoulddeclineby$34,500peryear.
b.Netoperatingincomewoulddeclineby$30,500peryear.
C.Netoperatingincomewoulddeclineby$15,500peryear.
d.Netoperatingincomewoulddeclineby$38,500peryear.

Thetotalcostofthemakealternativeislowerby$15,500.Thus,netoperatingincomewoulddeclineby
$15,500iftheofferfromthesupplierwereaccepted.

14

ElfvingCompanyproducesasingleproduct.Thecostofproducingandsellingasingleunitofthisproductat
thecompany'snormalactivitylevelof80,000unitspermonthisasfollows:

Thenormalsellingpriceoftheproductis$71.10perunit.
Anorderhasbeenreceivedfromanoverseascustomerfor1,000unitstobedeliveredthismonthataspecial
discountedprice.Thisorderwouldhavenoeffectonthecompany'snormalsalesandwouldnotchangethetotal
amountofthecompany'sfixedcosts.Thevariablesellingandadministrativeexpensewouldbe$1.50lessper
unitonthisorderthanonnormalsales.
Directlaborisavariablecostinthiscompany.

15

25.Supposethereisampleidlecapacitytoproducetheunitsrequiredbytheoverseascustomerandthespecial
discountedpriceonthespecialorderis$63.70perunit.Byhowmuchwouldthisspecialorderincrease
(decrease)thecompany'snetoperatingincomeforthemonth?
a.$7,400
b.($5,900)
C.$18,900
d.($2,100)
Variablecostperunitonnormalsales:

16

BrowningCompanymakesfourproductsinasinglefacility.Theseproductshavethefollowingunitproduct
costs:

Additionaldataconcerningtheseproductsarelistedbelow.

Thegrindingmachinesarepotentiallytheconstraintintheproductionfacility.Atotalof24,500minutesare
availablepermonthonthesemachines.
Directlaborisavariablecostinthiscompany.

17

26.Howmanyminutesofgrindingmachinetimewouldberequiredtosatisfydemandforallfourproducts?
a.21,500
B.27,100
c.13,000
d.24,500
Demandonthegrindingmachine:

Totaltimerequiredforallproducts=10,400+3,600+7,500+5,600=27,100

27.WhichproductmakestheLEASTprofitableuseofthegrindingmachines?
a.ProductA
b.ProductB
C.ProductC
d.ProductD
Optimalproductionplan:

18

28.WhichproductmakestheMOSTprofitableuseofthegrindingmachines?
a.ProductA
b.ProductB
c.ProductC
D.ProductD
Optimalproductionplan:

29.Whenusingthepaybackmethod,anycashflowsforaprojectthatoccurafterthepaybackperiodarenot
consideredincomputingthepaybackperiodforthatproject.
TRUE

19

30.(Ignoreincometaxesinthisproblem.)NevusTattooParlorisconsideringacapitalbudgetingproject.This
projectwillinitiallyrequirea$25,000investmentinequipmentanda$3,000workingcapitalinvestment.The
usefullifeofthisprojectis5yearswithanexpectedsalvagevalueofzeroontheequipment.Theworking
capitalwillbereleasedattheendofthe5years.Thenewsystemisexpectedtogeneratenetcashinflowsof
$9,000peryearineachofthe5years.Nevus'discountrateis14%.Thenetpresentvalueofthisprojectis
closestto:
a.$(3,088)
b.$3,383
C.$4,454
d.$5,897

31.(Ignoreincometaxesinthisproblem.)Dowlen,Inc.,isconsideringthepurchaseofamachinethatwould
cost$150,000andwouldlastfor6years.Attheendof6years,themachinewouldhaveasalvagevalueof
$23,000.Themachinewouldreducelaborandothercostsby$36,000peryear.Additionalworkingcapitalof
$6,000wouldbeneededimmediately.Allofthisworkingcapitalwouldberecoveredattheendofthelifeof
themachine.Thecompanyrequiresaminimumpretaxreturnof12%onallinvestmentprojects.Thenetpresent
valueoftheproposedprojectisclosestto:
a.$9,657
b.$2,004
C.$6,699
d.$13,223

20

32.(Ignoreincometaxesinthisproblem.)RynerCorporationisconsideringthreeinvestmentprojectsS,T,and
U.ProjectSwouldrequireaninvestmentof$20,000,ProjectTof$69,000,andProjectUof$83,000.Noother
cashoutflowswouldbeinvolved.Thepresentvalueofthecashinflowswouldbe$23,200forProjectS,
$77,970forProjectT,and$94,620forProjectU.Ranktheprojectsaccordingtotheprofitabilityindex,from
mostprofitabletoleastprofitable.
a.U,T,S
b.T,S,U
c.U,S,T
D.S,U,T

21

33.(Ignoreincometaxesinthisproblem.)OlinickCorporationisconsideringaprojectthatwouldrequirean
investmentof$343,000andwouldlastfor8years.Theincrementalannualrevenuesandexpensesgeneratedby
theprojectduringthose8yearswouldbeasfollows:

Thescrapvalueoftheproject'sassetsattheendoftheprojectwouldbe$23,000.Thepaybackperiodofthe
projectisclosestto:
a.3.0years
b.5.1years
C.3.2years
d.4.8years
Netannualcashflow=Netoperatingincome+Depreciation
=$67,000+$40,000=$107,000
Paybackperiod=Investmentrequired Netannualcashflow
=$343,000 $107,000=3.2years
Inthiscasethesalvagevalueplaysnopartinthepaybackperiodsincealloftheinvestmentisrecoveredbefore
theendoftheproject.

22

34.(Ignoreincometaxesinthisproblem.)ThemanagementofLanzilottaCorporationisconsideringaproject
thatwouldrequireaninvestmentof$263,000andwouldlastfor8years.Theannualnetoperatingincomefrom
theprojectwouldbe$66,000,whichincludesdepreciationof$31,000.Thescrapvalueoftheproject'sassetsat
theendoftheprojectwouldbe$15,000.Thepaybackperiodoftheprojectisclosestto:
a.3.8years
b.2.6years
C.2.7years
d.4.0years
Netannualcashflow=Netoperatingincome+Depreciation
=$66,000+$31,000=$97,000
Paybackperiod=Investmentrequired Netannualcashflow
=$263,000 $97,000=2.7years
Inthiscasethesalvagevalueplaysnopartinthepaybackperiodsincealloftheinvestmentisrecoveredbefore
theendoftheproject.

35.(Ignoreincometaxesinthisproblem.)SlomkowskiCorporationiscontemplatingpurchasingequipmentthat
wouldincreasesalesrevenuesby$298,000peryearandcashoperatingexpensesby$143,000peryear.The
equipmentwouldcost$712,000andhavean8yearlifewithnosalvagevalue.Theannualdepreciationwould
be$89,000.Thesimplerateofreturnontheinvestmentisclosestto:
A.9.3%
b.21.8%
c.22.1%
d.12.5%
Thesimplerateofreturniscomputedasfollows:

Simplerateofreturn=Annualincrementalnetoperatingincome Initialinvestment=$66,000 $712,000=

9.3%

23

36.(Ignoreincometaxesinthisproblem.)CrowlCorporationisinvestigatingautomatingaprocessby
purchasingamachinefor$792,000thatwouldhavea9yearusefullifeandnosalvagevalue.Byautomatingthe
process,thecompanywouldsave$132,000peryearincashoperatingcosts.Thenewmachinewouldreplace
someoldequipmentthatwouldbesoldforscrapnow,yielding$21,000.Theannualdepreciationonthenew
machinewouldbe$88,000.Thesimplerateofreturnontheinvestmentisclosestto:
a.11.1%
b.16.7%
C.5.7%
d.5.6%
Thesimplerateofreturniscomputedasfollows:

Simplerateofreturn=Annualincrementalnetoperatingincome Initialinvestment=$44,000 $771,000=

5.7%

37.(Ignoreincometaxesinthisproblem.)ThemanagementofRoCorporationisinvestigatingautomatinga
process.Oldequipment,withacurrentsalvagevalueof$11,000,wouldbereplacedbyanewmachine.The
newmachinewouldbepurchasedfor$243,000andwouldhavea9yearusefullifeandnosalvagevalue.By
automatingtheprocess,thecompanywouldsave$69,000peryearincashoperatingcosts.Thesimplerateof
returnontheinvestmentisclosestto:
A.18.1%
b.11.1%
c.28.4%
d.17.3%
Thesimplerateofreturniscomputedasfollows:

Simplerateofreturn=Annualincrementalnetoperatingincome Initialinvestment,lesssalvagevalue=
$42,000 ($243,000$11,000)=18.1%

24

38.(Ignoreincometaxesinthisproblem.)TiffCorporationhasprovidedthefollowingdataconcerninga
proposedinvestmentproject:

Thecompanyusesadiscountrateof16%.Theworkingcapitalwouldbereleasedattheendoftheproject.
Required:
Computethenetpresentvalueoftheproject.

39.(Ignoreincometaxesinthisproblem.)MatticeCorporationisconsideringinvesting$490,000inaproject.
Thelifeoftheprojectwouldbe7years.Theprojectwouldrequireadditionalworkingcapitalof$34,000,which
wouldbereleasedforuseelsewhereattheendoftheproject.Theannualnetcashinflowswouldbe$123,000.
Thesalvagevalueoftheassetsusedintheprojectwouldbe$49,000.Thecompanyusesadiscountrateof11%.
Required:
Computethenetpresentvalueoftheproject.

25

40.(Ignoreincometaxesinthisproblem.)HadyCompanyisconsideringpurchasingamachinethatwouldcost
$688,800andhaveausefullifeof7years.Themachinewouldreducecashoperatingcostsby$118,759per
year.Themachinewouldhavenosalvagevalue.
Required:
a.Computethepaybackperiodforthemachine.
b.Computethesimplerateofreturnforthemachine.
a.Paybackperiod=Investmentrequired Netannualcashflow
=$688,800 $118,759=5.80years
b.Thesimplerateofreturniscomputedasfollows:

Simplerateofreturn=Annualincrementalnetoperatingincome Initialinvestment=$20,359 $688,800

=2.96%

26

41.(Ignoreincometaxesinthisproblem.)OstermeyerCorporationisconsideringaprojectthatwouldrequire
aninitialinvestmentof$247,000andwouldlastfor7years.Theincrementalannualrevenuesandexpensesfor
eachofthe7yearswouldbeasfollows:

Attheendoftheproject,thescrapvalueoftheproject'sassetswouldbe$16,000.
Required:
Determinethepaybackperiodoftheproject.Showyourwork!

Paybackperiod=Investmentrequired Netannualcashinflow
=$247,000 $98,000=2.52years

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