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ACC 2052 Test #4

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

Division T reported income from operations of $875,000 and total service department charges of $575,000. Therefore:
a.
the gross profit margin was $300,000
b.
consolidated net income was $300,000
c.
income from operations before service department charges was $1,450,000
d.
net income was $300,000
 

2. 

The following financial information was summarized from the accounting records of Block Corporation for the current year ended December 31:

 
Software
Division
Hardware
Division
Corporate
   Total    
Cost of goods sold
$47,200
$30,720
 
Direct operating expenses
27,200
20,040
 
Net sales
95,000
64,000
 
Interest expense
  
$ 2,040
General overhead
  
18,160
Income tax
  
4,700

The gross profit for the Hardware Division is:
a.
$33,280
b.
$47,800
c.
$20,600
d.
$13,240
 

3. 

The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called:
a.
absorption cost analysis
b.
cost-volume-profit analysis
c.
variable cost analysis
d.
capital investment analysis
 

4. 

In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
a.
Total costs plus desired profit
b.
Desired profit
c.
Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
d.
Total selling and administrative expenses plus desired profit
 

5. 

The amount of income that would result from an alternative use of cash is called:
a.
opportunity cost
b.
sunk cost
c.
differential revenue
d.
differential income
 

6. 

Mendoza Corporation uses the product cost concept of product pricing.  Below is cost information for the production and sale of 45,000 units of its sole product.  Mendoza desires a profit equal to a 10.8% rate of return on invested assets of $900,000.

Fixed factory overhead cost
$72,000.00
Fixed selling and administrative costs
45,000.00
Variable direct materials cost per unit
4.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
.90

The dollar amount of desired profit from the production and sale of the company's product is:
a.
$225,000
b.
$97,200
c.
$105,840
d.
$220,500
 

7. 

McClelland Corporation uses the total cost concept of product pricing.  Below is cost information for the production and sale of 60,000 units of its sole product.  McClelland desires a profit equal to a 21% rate of return on invested assets of $600,000.

Fixed factory overhead cost
$37,500
Fixed selling and administrative costs
7,500
Variable direct materials cost per unit
4.50
Variable direct labor cost per unit
1.88
Variable factory overhead cost per unit
1.13
Variable selling and administrative cost per unit
4.50

The markup percentage for the company's product is:
a.
21%
b.
26.25%
c.
16.46%
d.
22.5%
 

8. 

Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed:
a.
direct expenses
b.
miscellaneous administrative expenses
c.
indirect expenses
d.
operating expenses
 

9. 

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $5 a unit. The unit cost for Frank Co. to make the part is $6, which includes $.40 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?
a.
$20,000 cost increase
b.
$2,400 cost increase
c.
$12,000 cost decrease
d.
$20,000 cost decrease
 

10. 

The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is termed:
a.
contribution margin
b.
manufacturing margin
c.
differential cost
d.
differential revenue
 

11. 

The management of Arnold Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:


Year
Income from
Operations
Net Cash
Flow
1
$100,000 
$180,000
2
 40,000
 120,000
3
 20,000
 100,000
4
 10,000
  90,000
5
 10,000
  90,000

The average rate of return for this investment is:
a.
16%
b.
10%
c.
18%
d.
58%
 

12. 

Espinosa Corporation had $220,000 in invested assets, sales of $242,000, income from operations amounting to $48,400, and a desired minimum rate of return of 3%.  The rate of return on investment for Espinosa is:
a.
6.4%
b.
4%
c.
3%
d.
22%
 

13. 

The management of Douglass Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:


Year
Income from
Operations
Net Cash
Flow
1
$18,750 
$93,750 
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750

The average rate of return for this investment is:
a.
5%
b.
10%
c.
25%
d.
15%
 

14. 

In a profit center, the manager has responsibility and authority for making decisions that affect:
a.
costs
b.
equity
c.
liabilities
d.
assets
 

15. 

Mendoza Corporation uses the product cost concept of product pricing.  Below is cost information for the production and sale of 45,000 units of its sole product.  Mendoza desires a profit equal to a 10.8% rate of return on invested assets of $900,000.

Fixed factory overhead cost
$72,000.00
Fixed selling and administrative costs
45,000.00
Variable direct materials cost per unit
4.50
Variable direct labor cost per unit
7.65
Variable factory overhead cost per unit
2.25
Variable selling and administrative cost per unit
.90

The unit selling price for the company's product is:
a.
$15.75
b.
$17.73
c.
$20.06
d.
$22.05
 

16. 

An anticipated purchase of equipment for $400,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net incomes and net cash flows:

Year
Net Income
Net Cash Flow
1
$60,000 
$110,000 
2
50,000
100,000
3
50,000
100,000
4
40,000
 90,000
5
40,000
 90,000
6
40,000
 90,000
7
40,000
 90,000
8
40,000
 90,000

What is the cash payback period?
a.
3 years
b.
6 years
c.
4 years
d.
5 years
 

17. 

The present value of $8,000 (rounded to the nearest dollar) to be received two years from today, assuming an earnings rate of 12%, is:
a.
$6,376
b.
$7,144
c.
$5,088
d.
$5,696
 

18. 

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.  Based on the following data, which statement is true?

 
X
Y
Sales Price
$32
$40
Variable Cost
 22
 24
   
Hours needed to process
  5
  8
a.
The contribution margin per hour for X would be $2.
b.
There would be no difference in the contribution margin per hour before and after the processing time reduction.
c.
Soap Y would still be the most profitable.
d.
It would take 270 minutes to process one unit of X.
 

19. 

Materials used by Bristol Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10 per unit.  However, the same materials are available from Division A.  Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 30,000 units of material are transferred, with no reduction in Division A's current sales.  How much would Division A's income from operations increase?
a.
$90,000
b.
$0
c.
$60,000
d.
$30,000
 

20. 

The following financial information was summarized from the accounting records of Block Corporation for the current year ended December 31:

 
Software
Division
Hardware
Division
Corporate
   Total    
Cost of goods sold
$47,200
$30,720
 
Direct operating expenses
27,200
20,040
 
Net sales
95,000
64,000
 
Interest expense
  
$ 2,040
General overhead
  
18,160
Income tax
  
4,700

The net income for Block Corporation is:
a.
$13,640
b.
$ 8,940
c.
$10,980
d.
$15,680
 

21. 

Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return?
a.
Average rate of return
b.
Cash payback period
c.
Accounting rate of return
d.
Internal rate of return
 

22. 

The following financial information was summarized from the accounting records of Block Corporation for the current year ended December 31:

 
Software
Division
Hardware
Division
Corporate
   Total    
Cost of goods sold
$47,200
$30,720
 
Direct operating expenses
27,200
20,040
 
Net sales
95,000
64,000
 
Interest expense
  
$ 2,040
General overhead
  
18,160
Income tax
  
4,700

The income from operations for the Hardware Division is:
a.
$47,800
b.
$33,280
c.
$13,240
d.
$20,600
 

23. 

Assume that divisional income from operations amounts to $187,000 and top management has established 15% as the minimum rate of return on divisional assets totaling $1,000,000.  The residual income for the division is:
a.
$28,050
b.
$37,000
c.
$0
d.
$67,000
 

24. 

Defense contractors would be more likely to use which of the following cost concepts in pricing their product?
a.
Fixed cost
b.
Product cost
c.
Variable cost
d.
Total cost
 

25. 

Which of the following is a present value method of analyzing capital investment proposals?
a.
Cash payback method
b.
Accounting rate of return
c.
Net present value
d.
Average rate of return
 

26. 

A factor in determining the rate of return on investment--the ratio of sales to invested assets--is called:
a.
profit margin
b.
investment turnover
c.
cost ratio
d.
indirect margin
 

27. 

To calculate income from operations, total service department charges are:
a.
subtracted from operating expenses
b.
subtracted from income from operations before service department charges
c.
added to income from operations before service department charges
d.
subtracted from gross profit margin
 

28. 

The management of Douglass Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability in this situation:


Year
Income from
Operations
Net Cash
Flow
1
$18,750 
$93,750 
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750

The net present value for this investment is:
a.
Positive $118,145
b.
Positive $19,875
c.
Negative $118,145
d.
Negative $19,875
 

29. 

A practical approach which is frequently used by managers when setting normal long-run prices is the:
a.
market price approach
b.
economic theory approach
c.
cost-plus approach
d.
price graph approach
 

30. 

Dukes Company is considering the acquisition of a machine that costs $375,000.  The machine is expected to have a useful life of 6 years, a negligible residual value, an annual cash flow of $150,000, and annual operating income of $87,500.  What is the estimated cash payback period for the machine?
a.
5 years
b.
4.3 years
c.
2.5 years
d.
3 years
 

31. 

Which of the following would be most effective in a small owner/manager-operated business?
a.
Investment centers
b.
Cost centers
c.
Centralization
d.
Profit centers
 

32. 

The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $21,600, is:
a.
$10,800
b.
$30,000
c.
$ 5,400
d.
$21,600
 

33. 

Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5 per unit.  However, the same materials are available from Division 6.  Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales.  How much would Division 3's income from operations increase?
a.
$50,000
b.
$150,000
c.
$32,000
d.
$72,000
 

34. 

In using the product cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
a.
Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
b.
Total selling and administrative expenses plus desired profit
c.
Desired profit
d.
Total costs plus desired profit
 

35. 

Neter Co. can further process Product J to produce Product D.  Product J is currently selling for $21 per pound and costs $15.75 per pound to produce.  Product D would sell for $35 per pound and would require an additional cost of $8.75 per pound to produce.  What is the differential revenue of producing Product D?
a.
$8.75 per pound
b.
$14 per pound
c.
$7 per pound
d.
$5.25 per pound
 

36. 

Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the:
a.
Revenue price approach
b.
Negotiated price approach
c.
Market price approach
d.
Cost price approach
 

37. 

A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n):
a.
profit center
b.
investment center
c.
cost center
d.
volume center
 

38. 

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?
a.
Internal rate of return
b.
Average rate of return
c.
Cash payback
d.
Net present value
 

39. 

In contrast to the total product and variable cost concepts used in setting seller's prices, the target cost approach assumes that:
a.
a markup is added to variable cost
b.
a markup is added to product cost
c.
a markup is added to total cost
d.
selling price is set by the marketplace
 

40. 

The primary advantages of the average rate of return method are its ease of computation and the fact that:
a.
there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term
b.
rankings of proposals are necessary
c.
it emphasizes the amount of income earned over the life of the proposal
d.
it is especially useful to managers whose primary concern is liquidity
 

41. 

Soap Company manufactures Soap X and Soap Y and can sell all it can make of either.  Based on the following data, which statement is true?

 
X
Y
Sales Price
$32
$40
Variable Cost
 22
 24
   
Hours needed to process
  5
  8
a.
X is more profitable than Y
b.
X and Y are equally profitable.
c.
Y is more profitable than X
d.
Neither X nor Y have a positive contribution margin.
 

42. 

The methods of evaluating capital investment proposals can be separated into two general groups - present value methods and:
a.
past value methods
b.
methods that ignore present value
c.
straight-line methods
d.
cash payback methods
 

43. 

Which of the following expressions is termed the profit margin factor as used in determining the rate of return on investment?
a.
Sales/Invested Assets
b.
Sales/Income From Operations
c.
Income From Operations/Sales
d.
Invested Assets/Sales
 

44. 

Benson Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The annual net differential increase or decrease in cost for the new equipment is:
a.
decrease of $2,200
b.
decrease of $15,000
c.
increase of $2,200
d.
increase of $11,000
 

45. 

A business received an offer from an exporter for 10,000 units of product at $16 per unit.  The acceptance of the offer will not affect normal production or domestic sales prices.  The following data are available:

Domestic unit sales price
$20
Unit manufacturing costs:
 
  Variable
13
  Fixed
1

What is the differential revenue from the acceptance of the offer?
a.
$160,000
b.
$200,000
c.
$140,000
d.
$130,000
 

46. 

The management of Arnold Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation:


Year
Income from
Operations
Net Cash
Flow
1
$100,000 
$180,000
2
 40,000
 120,000
3
 20,000
 100,000
4
 10,000
  90,000
5
 10,000
  90,000

The net present value for this investment is:
a.
Negative $99,600
b.
Negative $126,800
c.
positive $36,400
d.
positive $55,200
 

47. 

All of the following are factors that may complicate capital investment analysis except:
a.
sunk cost
b.
the federal income tax
c.
the leasing alternative
d.
changes in price levels
 

48. 

Elfrink Corporation uses the variable cost concept of product pricing.  Below is cost information for the production and sale of 35,000 units of its sole product.  Elfrink desires a profit equal to a 11.2% rate of return on invested assets of $350,000.

Fixed factory overhead cost
$105,000
Fixed selling and administrative costs
35,000
Variable direct materials cost per unit
4.34
Variable direct labor cost per unit
5.18
Variable factory overhead cost per unit
.98
Variable selling and administrative cost per unit
.70

The cost per unit for the production and sale of the company's product is:
a.
$ 9.80
b.
$14.00
c.
$12.60
d.
$11.20
 

49. 

A business is considering a cash outlay of $200,000 for the purchase of land, which it intends to lease for $35,000 per year.  If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:
a.
$35,000
b.
$ 1,000
c.
$36,000
d.
$37,000
 

50. 

Which of the following are methods of analyzing capital investment proposals that ignore present value?
a.
Net present value and average rate of return
b.
Internal rate of return and average rate of return
c.
Average rate of return and cash payback method
d.
Internal rate of return and net present value
 



 
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