Q&A Hero

Q: Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: Direct material .................................................. $45,000 Direct labor.................................................. 30,000 Factory overhead (30% is variable).................................................. 98,000 If Textel can buy 1,000 units from a subcontractor for $100,000, it should: A. Make the product because current factory overhead is less than $100,000. B. Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000. C. Buy the product because the total incremental costs of manufacturing are greater than $100,000. D. Buy the product because total fixed and variable manufacturing costs are greater than $100,000. E. Make the product because factory overhead is a sunk cost.

Q: Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order? A. No, because additional production would exceed capacity. B. No, because incremental costs exceed incremental revenue. C. Yes, because incremental revenue exceeds incremental costs. D. Yes, because incremental costs exceed incremental revenues. E. No, because the incremental revenue is too low.

Q: Marsden manufactures a cat food product called Special Export. Marsden currently has 10,000 bags of Special Export on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,000 cost. The additional processing will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise, which can be sold for $8 and $6 per bag, respectively. If Special Export is processed further into Prime Cat Food and Feline Surprise, the total gross profit would be: A. $ 68,000. B. $ 78,000. C. $ 96,000. D. $ 98,000. E. $100,000.

Q: Marsden manufactures a cat food product called Special Export. Marsden currently has 10,000 bags of Special Export on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,000 cost. The additional processing will yield 10,000 bags of Prime Cat Food and 3,000 bags of Feline Surprise, which can be sold for $8 and $6 per bag, respectively. The net advantage (incremental income) of processing Special Export further into Prime and Feline Surprise would be: A. $98,000. B. $96,000. C. $ 8,000. D. $ 6,000. E. $ 2,000.

Q: Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Sales Sales Value Additional Value after with no further Processing further Product Processing Costs processing Acta $1,350 $900 $2,700 Corda 450 225 630 Fando 900 450 1,800 Limo 90 45 180 Which product(s) should not be processed further? A. Acta. B. Corda. C. Fando. D. Limo. E. None of the products should be processed further.

Q: Alpha Co. can produce a unit of Beta for the following costs: Direct material ..................................................... $ 8 Direct labor..................................................... 24 Overhead..................................................... 40 Total costs per unit..................................................... $72 An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should: A. Buy Beta since the relevant cost to make it is $72. B. Make Beta since the relevant cost to make it is $56. C. Buy Beta since the relevant cost to make it is $48. D. Make Beta since the relevant cost to make it is $48. E. Buy Beta since the relevant cost to make it is $56.

Q: Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should: A. Produce only Product A. B. Produce only Product B. C. Produce equal amounts of A and B. D. Produce A and B in the ratio of 62.5% A to 37.5% B. E. Produce A and B in the ratio of 40% A and 60% B.

Q: A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n): A. Sunk cost. B. Fixed cost. C. Incremental cost. D. Uncontrollable cost. E. Opportunity cost.

Q: An additional cost incurred only if a particular action is taken is a(n): A. Period cost. B. Pocket cost. C. Discount cost. D. Incremental cost. E. Sunk cost.

Q: A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n): A. Incremental cost. B. Opportunity cost. C. Variable cost. D. Sunk cost. E. Out-of-pocket cost.

Q: A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n): A. Uncontrollable cost. B. Incremental cost. C. Opportunity cost. D. Out-of-pocket cost. E. Sunk cost.

Q: A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n): A. Out-of-pocket cost. B. Sunk cost. C. Opportunity cost. D. Operating cost. E. Uncontrollable cost.

Q: The potential benefits of one alternative that are lost by choosing another is known as a(n): A. Alternative cost. B. Sunk cost. C. Out-of-pocket cost. D. Differential cost. E. Opportunity cost.

Q: A limitation of the internal rate of return method is: A. Failure to measure time value of money. B. Failure to measure results as a percent. C. Failure to consider the payback period. D. Failure to reflect changes in risk levels over project life. E. Failure to compare dissimilar projects.

Q: In business decision-making, managers typically examine the two fundamental factors of: A. Risk and capital investment. B. Risk and rate of return. C. Capital investment and rate of return. D. Risk and payback. E. Payback and rate of return.

Q: The process of restating future cash flows in today's dollars is known as: A. Budgeting. B. Annualization. C. Discounting. D. Payback period. E. Capitalizing.

Q: Capital budgeting decisions are risky because: A. The outcome is uncertain. B. Large amounts of money are usually involved. C. The investment involves a long-term commitment. D. The decision could be difficult or impossible to reverse. E. All of the options listed are correct.

Q: The calculation of annual net cash flow from a particular investment project should include all of the following except: A. Income taxes. B. Revenues generated by the investment. C. Cost of products generated by the investment. D. Depreciation expense. E. General and administrative expenses.

Q: Capital budgeting decisions are generally based on: A. Tentative predictions of future outcomes. B. Perfect predictions of future outcomes. C. Results from past outcomes only. D. Results from current outcomes only. E. Speculation of interest rates and economic performance only.

Q: The process of analyzing alternative investments and deciding which assets to acquire or sell is known as: A. Planning and control. B. Capital budgeting. C. Variance analysis. D. Master budgeting. E. Managerial accounting.

Q: Capital budgeting decisions usually involve analysis of: A. Cash outflows only. B. Short-term investments. C. Long-term investments. D. Investments with certain outcomes only. E. Operating revenues.

Q: Use of the internal rate of return method cannot be used with uneven cash flows.

Q: The internal rate of return equals the rate that yields a net present value of zero for an investment.

Q: The net present value decision rule is: When an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the asset should be acquired.

Q: If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

Q: If two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive.

Q: The payback method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Q: Two investments with exactly the same payback periods are always equally valuable to an investor.

Q: The time value of money is considered when calculating the payback period of an investment.

Q: The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Q: When computing payback period, the year in which a capital investment is made is year 1.

Q: In ranking choices with the break-even time (BET) method, the investment with the highest BET measure gets the highest rank.

Q: An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

Q: The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Q: If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y; assuming fixed costs remain constant, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

Q: Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Q: In a make or buy decision, management should focus on costs that are constant under the two alternatives.

Q: A special order of goods or services should always be accepted when the incremental revenue exceeds the incremental costs.

Q: The concept of incremental cost is the same as the concept of differential cost.

Q: Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Q: An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

Q: Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Q: Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

Q: Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Q: If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Q: The __________________________ is the rate that yields a net present value of zero for an investment.

Q: The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ____________________.

Q: The ___________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.

Q: The ____________________ is computed by dividing a project's after-tax net income by the average amount invested in it.

Q: In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and __________________. There are also two primary methods that consider the time value of money; these are ___________________ and _______________________.

Q: A capital budgeting method that considers how quickly a project recovers costs is known as ______________. An enhancement to this method that considers the time value of money is called ____________.

Q: In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: _________________________; _________________________; _________________________

Q: A _____________________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

Q: An _____________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Q: An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

Q: The minimum acceptable rate of return on an investment is called the _________________.

Q: _____________________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Q: Fields Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

Q: Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

Q: A company inadvertently produced 3,000 defective products. The product cost $15 each to be manufactured and normally sells for $35 each. A salvage company will purchase the defective units as they are for $12 each. The production manager reports that the defects can be corrected for $5 per unit, enabling the company to sell them at a discounted price of $22.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Q: Casco Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a) payback period and (b) accounting rate of return for this equipment.

Q: Interest rate Present value of an annuity of 1 factor 10% 7908 12% 3.6048 14% 3.4331

Q: A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below: Investment Y Investment Z Projected after-tax net income.......................................................... ........................................................ $ 40,000........................... $ 42,000 Investment costs.......................................................... ........................................... $600,000...................................... $675,000 Estimated life .......................................................... ........................................................ 6 years.............................. 6 years The present value of an annuity for 6 years at 10% is 4.3553. This company uses straight-line depreciation. Required: (a) Calculate the net present value for each investment. (b) Which investment should this company select? Explain.

Q: A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows: Product A Product B Unit sales..................................................... 25,000 20,000 Unit sales price..................................................... $ 30 $ 30 Direct materials..................................................... $ 15,000 $ 8,000 Direct labor..................................................... $ 120,000 $ 80,000 Other cash operating expenses..................................................... $ 30,000 $ 25,000 New equipment costs..................................................... $2,500,000 $1,500,000 Estimated useful life (no salvage)..................................................... 5 years 5 years The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?

Q: Baker Corporation has two operating departments, Machining and Assembly, and an office. The three categories of office expenses are allocated to the two departments using different allocation bases. The following information is available for the current period: Office Expenses Total Allocation Basis Salaries.................... $30,000 Number of employees Depreciation............ 20,000 Cost of goods sold Advertising.............. 40,000 Net sales Item Machining Assembly Total Number of employees 1,000 1,500 2,500 Net sales................... $325,000 $475,000 $800,000 Cost of goods sold.... $ 75,000 $125,000 $200,000 The amount of the total office expenses that should be allocated to Assembly for the current period is: A. $ 35,750. B. $ 45,000. C. $ 54,250. D. $ 90,000. E. $600,000.

Q: Dresden, Inc. has four departments. Information about these departments is listed below. If allocated maintenance cost is based on floor space occupied by each, compute the amount of maintenance cost allocated to the Cutting Department. Maintenance Cutting Assembly Packaging Direct costs......................... $18,000 $30,000 $70,000 $45,000 Sq. ft. of space.................... 500 1,000 2,000 3,000 No. of employees................ 2 3 16 4 A. $ 2,769. B. $ 3,000. C. $ 3,724. D. $ 6,000. E. $18,000.

Q: A retail store has three departments, 1, 2, and 3, and does general advertising that benefits all departments. Advertising expense totaled $50,000 for the year, and departmental sales were as follows. Allocate advertising expense to Department 2 based on departmental sales. Department 1.. $110,000 Department 2.. 213,750 Department 3.. 151,250 A. $11,000. B. $14,000. C. $16,667. D. $22,500. E. $50,000.

Q: Investment center managers are usually evaluated using performance measures A. that combine income and assets. B. that combine income and capital. C. based on assets only. D. based on income only. E. that combine assets and capital.

Q: Calculating return on total assets for an investment center is defined by the following formula for an investment center: A. Contribution margin/Ending assets. B. Gross profit/Ending assets. C. Net income/Ending assets. D. Net income/Average invested assets. E. Contribution margin/Average invested assets.

Q: A sawmill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: Grade Production Market Price Structural 25,000 board feet $1,350/1,000 bd. ft. No. 1 Common. 75,000 board feet $ 750/1,000 bd. ft. No. 2 Common. 100,000 board feet $ 300/1,000 bd. ft. Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common. A. $ 0. B. $17,500. C. $23,333. D. $35,000. E. $70,000.

Q: A sawmill bought a shipment of logs for $40,000. When cut, the logs produced a million board feet of lumber in the following grades. Compute the cost to be allocated to Type 1 and Type 2 lumber, respectively, if the value basis is used. Type 1 - 400,000 bd. ft. priced to sell at $0.12 per bd. ft. Type 2 - 400,000 bd. ft. priced to sell at $0.06 per bd. ft. Type 3 - 200,000 bd. ft. priced to sell at $0.04 per bd. ft. A. $16,000; $16,000. B. $13,333; $4,444. C. $40,000; $24,000. D. $24,000; $12,000. E. $24,000; $8,000.

Q: Data pertaining to a company's joint production for the current period follows: A B Quantities produced. 200 lbs. 100 lbs. Processing cost after products are separated.. $1,100 $400 Market value at point of separation. $8/lb. $16/lb. Compute the cost to be allocated to Product A for this period's $660 of joint costs if the value basis is used. A. $330.00. B. $440.00. C. $220.00. D. $194.12. E. $484.00.

Q: General Chemical produced 10,000 gallons of Breon and 20,000 gallons of Baron. Joint costs incurred in producing the two products totaled $7,500. At the split-off point, Breon has a market value of $6.00 per gallon and Baron $2.00 per gallon. Compute the portion of the joint costs to be allocated to Breon if the value basis is used. A. $2,500. B. $3,000. C. $4,500. D. $5,625. E. $1,500.

Q: Allocating joint costs to products can be based on their relative: A. Sales values. B. Direct costs. C. Gross margins. D. Total costs. E. Variable costs.

Q: Allocations of joint product costs can be based on the relative sales values of the products: A. And never on the relative physical quantities of the products. B. Plus an adjustment for future excess margins. C. And not on any other basis. D. At the split-off point. E. Only if the products contain both direct and indirect costs.

Q: A cost incurred in producing or purchasing two or more products at the same time is a(n): A. Product cost. B. Incremental cost. C. Differential cost. D. Joint cost. E. Fixed cost.

Q: A responsibility accounting system: A. Is designed to measure the performance of managers in terms of controllable costs. B. Assigns responsibility for costs to the appropriate managerial level that controls those costs. C. Should not hold a manager responsible for costs over which the manager has no influence. D. Can be applied at any level of an organization. E. All of the choices are correct.

Q: A responsibility accounting performance report displays: A. Only actual costs. B. Only budgeted costs. C. Both actual costs and budgeted costs. D. Only direct costs. E. Only indirect costs.

Q: Responsibility accounting performance reports: A. Become more detailed at higher levels of management. B. Become less detailed at higher levels of management. C. Are equally detailed at all levels of management. D. Are useful in any format. E. Are irrelevant.

Q: In a responsibility accounting system: A. Controllable costs are assigned to managers who are responsible for them. B. Each accounting report contains all items allocated to a responsibility center. C. Organized and clear lines of authority and responsibility are only incidental. D. All managers at a given level have equal authority and responsibility. E. All of the choices are correct.