Prof.

Salem A Helles Advanced Managerial Accounting

Accounting Department Faculty of Commerce
Final Exam Master of Business Administration
Date: Sat., 4 Sept. 2010 Master of Accounting and Finance

: :

ANSWER EIGHT QUESTIONS ONLY: (7.5 Mark for each Question)

Question One: Gaza Company is studying a project that would have an
eight- years life and require a $2,400,000 investment in equipment. At the
end of eight years, the project would terminate and the equipment would
have no salvage value. The project would provide net operating income
each year as follows:
Sales ............................... ......... $3,000,000
Less variable expenses 1,800,000
Contribution margin 1,200,000
Less fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs ............. $700,000
Depreciation ............................... 300,000
Total fixed expenses .................... 1,000,000
Net operating income .................. $200,000
The company's discount rate is 12%
Required:
1- Compute the project's net present value. Is the project acceptable.
2- Find the project's internal rate of return to the nearest whole percent.
3- Compute the project's payback period.
4- Compute the project's accounting rate of return.

Question Two: LG Products markets two computer games: A and B. A

contribution format income statement for a recent month for the two games appears
below:
A B Total
Sales $30,000 $70,000 $100,000
Less variable expenses 20,000 50,000 70,000
Contribution margin $10,000 $20,000 30,000
Less fixed expenses 24,000
Net operating income $6,000
Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company in sales dollars.
3. Compute the break- even point for each computer games in sales dollars.
Question Three: Sea Corporation makes a single product-a fire-resistant
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 commercial filing cabinet-that it sells to office furniture distributors. The
company has a simple ABC system that it uses for internal decision making.
The company has two overhead departments whose costs are listed below:
Manufacturing overhead $500,000
Selling and administrative overhead 300,000
Total overhead costs $800,000

The company's ABC system has the following activity cost pools and activity
measures:
Activity Costs Pool Activity Measure
Assembling units ........... Number of units
Processing orders .......... Number of orders
Supporting customers ....... Number of customers
Other . . . . . . . . . . . . . . . . . . . Not applicable

Costs assigned to the "Other" activity cost pool have no activity measure;
they consist of the costs of unused capacity and organization-sustaining
costs-neither of which are assigned to orders, customers, or the product.
Sea Corporation distributes the costs of manufacturing overhead and of
selling and administrative overhead to the activity cost pools based on
employee interviews, the results of which are reported below:

Distribution of Resource Consumption Across Activity Cost Pools

Assembling Processing Supporting
Other Total
Units Orders Customers
Manufacturing overhead 50% 35% 5% 10% 100%
Selling and administrative
10% 45% 25% 20% 100%
overhead ..................
1,000 250 100
Total activity . . . . . . . . . . . . . . units orders customers

Required:
1. Perform the first-stage allocation of overhead costs to the activity cost
pools.
2. Compute activity rates for the activity cost pools.
3. OM is one of Sea Corporation's customers. Last year, OM ordered filing
cabinets four different times. OM ordered a total of 80 filing cabinets
during the year. Construct a table showing the overhead costs attributable
to OM.

Question Four: The MI Division of Medical Diagnostics, Inc., has reported the
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following results for last year's operations:
Sales.......... .......... .......... .......... $25 million
Net operating income .......... $3 million
Average operating assets .. . . . . . $10 million
Required:
1. Compute the MI Division's margin, turnover, and ROI.
2. Top management of Medical Diagnostics, Inc., has set a minimum required
rate of return on average operating assets of 25%. What is the MI Division's
residual income for the year?

Question Five:
New Look Company sells a single product. The company's sales and expenses
for a recent month follow:
Total Per Unit
Sales $600,000 $40
Less variable expenses 420,000 28
Contribution margin 180,000 $12
Less fixed expenses 150,000
Net operating income $30,000
Required:
1. What is the monthly break-even point in units sold and in sales dollars?
2. How many units would have to be sold each month to earn a minimum
target profit of $18,000?
3. Compute the company's margin of safety in both dollar and per-centage
terms.
4. What is the company's CM ratio? If monthly sales increase by $80,000 and
there is no change in fixed expenses, by how much would you expect
monthly net operating income to increase?

Question Six: Dresser Company uses a standard cost system and sets
predetermined overhead rates on the basis of direct labor-hours. The following
data are taken from the company's budget for the current year:
Denominator activity (direct labor-hours) 9,000
Variable manufacturing overhead cost at 9,000 direct labor hours $34,200
Fixed manufacturing overhead cost . $63,000

The standard cost card for the company's only product is given below:
Direct materials, 4 pounds at $2.60 per pound . $10.40
Direct labor, 2 direct labor-hours at $9 per direct labor- hour $18.00
Overhead, 120% of direct labor cost . $21.60
Standard cost per unit .. $50.00

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During the year, the company produced 4,800 unit of product and incurred the
following costs:
Materials purchased, 30,000 pounds at $2.50 per pound $75,000
Materials used in production (in pounds) .. 20,000
Direct labor cost incurred, 10,000 direct labor-hours at
$8.60 per direct labor- hour . $86,000
Variable manufacturing overhead costs incurred .. $35,900
Fixed manufacturing overhead cost incurred $64,800
Required :
1. Prepare an analysis of the variances for materials and labor for the year.
2. Prepare an analysis of the variances for the variable and fixed overhead for
the year.

Question Seven: " I can't understand what is happening here, " said Ali yousif,
president of Severson Products, Inc " We always seem to bid too high on jobs that
require a lot of labor time in the Finishing Department, and we always seem to get
every job we bid on that requires a lot of machine time in the Milling Department. Yet
we don't seem to be making much money on those Milling Department jobs. I wonder
if the problem is in our overhead rates".

Severson products manufactures high-quality wood products to customers'

specification. Some jobs take a large amount of machine work in the Milling
Department, and other jobs take a large amount of hand finishing work in the Finishing
Department. In addition to the Milling and Finishing departments, the company has
three service departments. The costs of these service departments are allocated to other
departments in the order listed below ( For each service department, use the most
appropriate allocation base.)

TotalSquare Number Machine- Direct

Labor-Feet of of Hours labor
Hours Space Employees
Occupied Hours
Cafeteria ...................... 16,000 12,000 25 - -
Custodial Services......... 9,000 3,000 40 - -
Machinery Maintenance.. 15,000 10,000 60 - -
Milling.............................. 30,000 40,000 100 160,000 20,000
Finishing ...................... 100,000 20,000 300 40,000 70,000
170,000 85,000 525 200,000 90,000
Budgeted overhead costs in each department for the current year
are as follows ( no distinction is made between variable and fixed costs):

Cafeteria ............................................ $320,000*

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Custodial services ............................ 65,400
Machinery maintenance .................... 93,000
Milling .............................................. 416,000
Finishing ............................................ 166,000
Total budgeted costs ......................... $1,060,400
* This represents the amount of cost subsidized by the company.
Required:
1. Allocated service department costs to using departments by the
step method. Then compute predetermined overhead rates in the
producing departments for the current year, using a machine- hours
basis in the Milling Department and a direct labor hours basis in
the finishing Department .
2. Assume that during the current year the company bids on a job that
requires machine and labor time as follows:
Machine Hours Direct labor- Hours
Milling Department ........................... 2,000 1,600
Finishing Department ........................ 800 13,000
2,800 14,600
Determine the amount of overhead that would be assigned to the job if
the company used the overhead rates developed in (1) above.

Question Eight
Comparative data on three companies in the same industry are given below:
Company
A B C

Sales: $ 4,000,000 $1,500,000 $ ?

Net operating income 560,000 210,000 ?
Average operating assets 2,000,000 ? 3,000,000
Margin ? ? 3.5%
Turnover ? ? 2
ROI ? 7% ?
Required:
1. What advantages can you see in breaking down the ROI computation
into two separate elements, margin and turnover?
2. Fill in the missing information above, and comment on the relative
performance of the three companies in as much detail as the data permit.
Make specific recommendations on steps to be taken go improve the
return on investment. Where needed.

Question Nine: Three years ago the CCC bought a frozen yogurt
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machine for $8,000. A salesman has just suggested to the CCC manager
that he replace the machine with a new, $12,500 machine. The manager
has gathered the following data.

Old Machine New Machine

Original cost $8,000 $12,500
Useful life in years 8 5
Current age in years 3 0
Useful life remaining in years 5 5
Accumulated depreciation $3,000 Not acquired yet
Book value $5,000 Not acquired yet
Disposal value (in cash) now $2,000 Not acquired yet
Disposal value in 5 years 0 0
Annual cash operating cost $4,500 $ 2,000

Compute the difference in total costs over the next five years under
both alternatives, that is, keeping the original machine or replacing it
with the new machine. Ignore taxes.
:

12
$10 $20
2000
% 10
3 20$1
:
1
2
3 360

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