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 longterm investment decisions involving
fixed assets is called: a.  absorption cost analysis  b.  costvolumeprofit analysis  c.  variable cost analysis  d.  capital
investment analysis   


4.

In
using the variable cost concept of applying the costplus 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:


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:


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:


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 investmentthe ratio of sales to invested assetsis
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 longrun prices is
the: a.  market price
approach  b.  economic theory approach  c.  costplus
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/manageroperated 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 (straightline 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 AroProducts 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 costplus 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
shortterm  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.  straightline 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 highspeed
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   
