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Questions
Q:
The rate of return calculations ignores the time value of money, but the payback period does include consideration of the time value of money.
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The rate of return is the only capital budgeting method that uses accrual accounting.
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The payback method and the rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.
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Neither the payback period nor the rate of return capital budgeting method recognizes the time value of money.
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The payback method ignores cash flows after the payback period, whereas the rate of return includes them.
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The payback method uses discounted cash flows to make investment decisions.
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The payback method is a very thorough and comprehensive way to choose the best investment among alternatives.
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A criticism of the rate of return method is that it ignores the time value of money.
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The payback method can only be used when the net cash inflows from a capital investment are the same for each period.
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The rate of return method and the payback method are often used as preliminary screening measures, but are insufficient to fully evaluate a capital investment.
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Capital budgeting is:A) planning how to invest in long-term assets.B) budgeting for operating expenses.C) evaluating the ongoing profitability of a business.D) making pricing decisions for products.
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When projecting future cash flows of an investment, which of the following is TRUE?A) Cash flow data must also include non-cash transactions like depreciation.B) Cash inflows and cash outflows are treated separately, rather than being netted together.C) Cash flows are typically projected by accounting personnel without input from other business functions.D) The initial investment is always treated separately from all other cash flows.
Q:
Which two methods are typically used for initial screening of investments, rather than for detailed in-depth analysis?A) Payback and rate of returnB) Net present value and paybackC) Internal rate of return and net present valueD) Rate of return and net present value
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Which of the following is the ONLY capital budgeting method which uses accrual accounting information?A) Payback periodB) Rate of return (ROR)C) Net present value (NPV)D) Internal rate of return (IRR)
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Which of the following is a common capital budgeting method?A) Return on assetsB) Acid test ratioC) Internal rate of returnD) Debt-to-equity ratio
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Capital budgeting applies to which of the following?A) Budgeting for yearly operational expensesB) Making decisions about sales budgets for the coming yearC) Deciding among various long-term investment decisionsD) Making decisions about the financing of operations
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After a company invests in capital assets, which of the following activities will it perform in order to compare the actual to the projected net cash inflows?A) Cash flow analysisB) Post-auditC) Pre and post analysisD) Post-cash flow
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Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.
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When projecting the cash flows of an investment, the inflows are netted against the outflows
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Most capital budgeting methods focus on cash flows rather than book income.
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The payback method and the rate of return method are often used to perform an initial screening of investments, rather than a detailed in-depth analysis.
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The payback period and rate of return (ROR) methods are more suitable to investments with a shorter time span.
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Short-term investment decisions are inherently riskier than long-term decisions because they have a shorter period in which to recoup the investment.
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The further into the future the investment cash flows extend, the more likely it is that actual results will differ from the initial predictions.
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All else being equal, investments with longer payback periods are more desirable.
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Capital rationing is when a company has limited resources, and it must find ways to reduce operating expenses in all of its divisions and units.
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Learning Objective 21-1 A post-audit is an analysis of an investment that is made after the investment is underway or completed.
Q:
Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. What price level would give the desired results?
A) $330 per unit
B) $370 per unit
C) $320 per unit
D) $345 per unit
Q:
Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $340. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $4,500
C) Go up $12,500
D) Remain the same
Q:
Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%. If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $4,500
C) Go up $12,500
D) Go up $7,500
Q:
Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will remain the same. If Victory decides to upgrade, how will it affect operational income?
A) Go down $1,250
B) Go down $5,000
C) Go up $12,500
D) Go up $7,500
Q:
A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The CEO wishes to price the new product at a level which will bring operational income up to $1,000 per month. What price is needed?
A) $5.00
B) $5.06
C) $4.99
D) $4.76
Q:
A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. At what price for the new product will the two alternatives (sell as is or process further) produce the same operational income? (Please round to nearest cent.)
A) $5.00
B) $4.76
C) $3.99
D) $4.40
Q:
A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The company will price the new product at $5.00 per pack. If they do so, how will this affect operational income?
A) Go down $150 per month
B) Remain unchanged
C) Go down $400 per month
D) Go up by $240 per month
Q:
A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, but there will be no change in fixed costs. The company will price the new product at $4.25 to compete with other producers. If they do so, how will this affect operational income?
A) Go down $150 per month
B) Go up $250 per month
C) Go down $400 per month
D) Remain unchanged
Q:
Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The CEO wishes to improve operational income by $1,000 per month by selling the enhanced version of the radio. In order to hit his target, what price would be needed for the enhanced product? (Please round to nearest whole dollar.)
A) $212 per unit
B) $345 per unit
C) $440 per unit
D) $367 per unit
Q:
Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The marketing manager is sure they can charge a higher price for the improved version. At what price level would the newer, improved radio begin to improve operational earnings? (Please round to nearest whole dollar.)
A) At a price of $312 or higher
B) At a price of $309 or higher
C) At a price of $420 or higher
D) At a price of $295 or higher
Q:
Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The marketing manager believes they would be able to boost their price of the radio from $260 to $300. Nordin sells 30 radios per month. If they decide to process further, what would the impact be on monthly operational income?
A) It would increase by $1,050.
B) It would increase by $250.
C) It would decrease by $350.
D) It would decrease by $750.
Q:
Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, but no change to the fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. If they do so, how would the change affect operational income?
A) It would remain the same.
B) It would go up by $25 per unit.
C) It would go up by $20 per unit.
D) It would go down by $5 per unit.
Q:
When a company is considering the option of processing their product further to achieve higher sales revenues, they must consider all of the following factors EXCEPT:
A) how much additional costs are necessary to process further?
B) how much incremental revenue can be earned if processed further?
C) how much cost is required to produce the basic product, before processing further?
D) will the additional processing produce any environmental toxins?
Q:
Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If so, what would be the effect on operational income?
A) It would decline by $120.
B) It would increase by $300.
C) It would increase by $50.
D) It would decline by $800.
Q:
Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a disinfectant, they could charge $25 per unit for the improved product. It would cost them a total of $3,800 per month to make that alteration. If so, what would be the effect on operational income?
A) It would decline by $1,200.
B) It would increase by $3,000.
C) It would increase by $400.
D) It would decline by $800.
Q:
Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. The CEO wishes to boost operational income by $5,000. He has an offer from a foreign producer to provide the media centers at a contract rate of $300 per unit. In order to achieve his objective, how much fixed costs would he have to cut?
A) Cut $4,250 of fixed costs
B) Cut $2,000 of fixed costs
C) Cut $7,500 of fixed costs
D) Cut $19,500 of fixed costs
Q:
Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function. At present, the variable cost per unit is $275, and the fixed costs are $39,000 per month. If they outsource, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $1,000 per month of rental income. At what contract rate would the two alternatives produce the same operational income?
A) $480 per unit
B) $499 per unit
C) $388 per unit
D) $295 per unit
Q:
Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a contract rate of $420 per unit. If they outsource, how would that affect operational income?
A) Operational income would improve by $1,100.
B) Operational income would improve by $4,000.
C) Operational income would decline by $14,500.
D) Operational income would remain the same.
Q:
Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assuming that if they outsource, and the fixed costs could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? (Please round to nearest whole dollar.)
A) At any rate lower than $844 per unit
B) At any rate lower than $796 per unit
C) At any rate lower than $775 per unit
D) At any rate lower than $665 per unit
Q:
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
Assume the fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $500.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
Q:
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
Assume the company could eliminate all fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $2,300.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will go up by $4,800.
Q:
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
Assume the company could cut fixed costs in half by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $2,300.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will stay the same.
Q:
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
Assume the company could not reduce any fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. If the company outsources, how will it affect monthly operating income?
A) Operating income will go up by $4,800.
B) Operating income will go down by $2,800.
C) Operating income will go down by $200.
D) Operating income will stay the same.
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Alexandria Semiconductors produces 300,000 hi-tech computer chips per month. Each chip uses a component which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $0.60 each. If Alexandria chooses to outsource, it could reduce the fixed costs by 50%. Alexandria would have no other use for the facilities currently employed in making the component. If Alexandria decides to outsource, how would that affect the operating income?
A) There would be no effect on operating income.
B) Operating income would go up by $538,000.
C) Operating income would go up by $180,000.
D) Operating income would go down by $60,000.
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Alexandria Semiconductors produces 300,000 hi-tech computer chips per month. Each chip uses a component which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $0.60 each. The fixed costs are unavoidable, and Alexandria would have no other use for the facilities currently employed in making the component. If Alexandria decides to outsource, how would that affect the operating income?
A) There would be no effect on operating income.
B) Alexandria could save $120,000 per month in costs.
C) Alexandria could save $60,000 per month in costs.
D) Alexandria's costs would go up by $2,000 per month.
Q:
A chemical company spent $480,000 to produce 144,000 gallons of a chemical, which can be sold for $4.32 per gallon. The chemical can be further processed into a weed killer which can be sold for $6.40 per gallon; it will cost $256,320 to process the chemical into a weed killer. Which of the following is TRUE?
A) To maximize operating income, the company should continue to sell the chemical as is.
B) If the company decides to process further, it will increase operating income by $299,520.
C) If the company decides to process further, it will increase operating income by $43,200.
D) If the company decides to process further, it will decrease operating income by $256,320.
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Action Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Action Products $0.95 to make each component in-house. If Action Products outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs. After analyzing both options, Action Products decided to continue making the component in-house. In the analysis done, which of the following items would be considered an opportunity cost?
A) The difference between $0.95 and $0.80 per component
B) The savings of $10,000 per year in fixed costs
C) The difference between the fixed and variable costs to make the component in-house
D) The contract cost of $0.80 to buy from outside source
Q:
Which of the following phrases MOST accurately describe opportunity cost?
A) The cost incurred to gain the opportunity to make a sale
B) The benefit gained by choosing a certain course of action
C) The benefit given up by not choosing an alternative course of action
D) Costs which have been incurred in the past
Q:
Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is IRRELEVANT with respect to this decision?
A) The quality of the component purchased from the outside supplier
B) The outside supplier's ability to deliver the component on a timely basis
C) The alternative uses of the facilities being used to currently manufacture the component
D) The unavoidable fixed manufacturing costs associated with the manufacture of the component
Q:
Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from an outside supplier. Which of the following is RELEVANT to this decision?
A) The potential uses of the facilities that are currently used to manufacture the component
B) The insurance on the manufacturing facility which will continue regardless of the decision
C) Allocated corporate fixed costs which would have to be allocated to other products if the component is no longer manufactured
D) The cost of the equipment that is currently being used to manufacture the component
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DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can earn profit of $11,600. If DC outsources, what will the effect on operating income be?
A) Up $15,000
B) Down $13,300
C) Down $24,900
D) Up $3,400
Q:
DC Electronics uses a standard part in the manufacture of several of its radios. The total cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs.
If DC Electronics decides to outsource the production of the part, how will it impact operating income?
A) Up $15,000
B) Down $24,900
C) Up $132,000
D) Down $132,000
Q:
Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price to $342. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. If Victory decides to upgrade the product according to the data above, the CEO will reach his goal.
Q:
Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, but no change to the fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. In making this decision, the amount of fixed costs per month is a relevant piece of information.
Q:
When a company is considering the possibility of processing their product further to achieve higher sales revenues, they must carefully study the production costs needed to make the basic productue004before processing furtherue004in order to come to an informed decision.
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When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: as long as the additional processing generates higher sales revenues, it is the preferred alternative.
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When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: if incremental revenues exceed incremental costs, then further processing will enhance operational profits.
Q:
Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If they decide to process further, it will improve their operational income.
Q:
A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
The controller says that they could outsource production of the circuit, and then as long as they could get fixed cost reductions greater than $200 per month, it would improve earnings. Is his statement true or false?
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