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Chapter 10--Profit and Cost Center Performance Evaluation

Student: ___________________________________________________________________________ 1. Which of the following might cause a materials variance? A. Failing to take purchase discounts. B. Using a better grade of raw material. C. Changes in the market supply for the raw materials. D. All of the above.

2. Which of the following is not a major group responsible for variances in organizations? A. Marketing B. Consulting C. Administration D. Production

3. Why might a material variance arise? A. More efficient use of materials than the standard. B. The purchase of inferior raw materials. C. Both a and b above. D. None of the above.

4. Why do direct labor variances occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Supervisors encounter scheduling problems. D. All of the above.

5. Which is not a reason direct labor variances may occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Prices rise with direct materials. D. All of the above.

6. Fixed production costs variances are calculated as A. the difference between actual and budgeted fixed costs. B. (actual hours standard inputs) budgeted fixed costs. C. (actual hours standard outputs) budgeted fixed costs. D. (actual hours standard outputs) actual fixed costs.

7. Why do fixed manufacturing cost variances occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Supervisors encounter scheduling problems. D. Actual fixed costs differ from budgeted fixed costs.

8. Which of the following terms describes the difference between the budgeted (or standard) price and the actual price paid for each unit of input? A. Price variance. B. Efficiency variance. C. Usage variance. D. Quantity variance.

9. Which variance measures the efficiency with which the firm uses inputs to produce outputs? A. Throughput. B. Efficiency. C. Economy. D. Effectiveness.

10. To analyze variances, the variable cost variance model is applied to the calculation of which of the following? A. Direct materials variances. B. Direct labor variances. C. Variable manufacturing overhead price and efficiency variances. D. All of the above.

11. Which of the following does the cost variance model use to analyze differences between actual and budgeted profits? A. Flexible production budget. B. Fixed production budget. C. Prior periods production budget. D. Generally accepted accounting principles.

12. To help managers in their efforts to control overhead costs, managers and accountants analyze overhead variances using the variable cost variance model by separating variable overhead variances into A. price and quality components. B. economy and efficiency components. C. price and efficiency components. D. economy and effectiveness components.

13. What is the term that describes the rate companies frequently use to apply fixed overhead costs to units produced? A. Actual overhead rate. B. Predetermined overhead rate. C. Post-determined overhead rate. D. Variable overhead rate.

14. The production volume variance is the difference between which of the following two costs? A. Budgeted and applied fixed costs. B. Actual costs and the budgeted costs. C. Budgeted and actual fixed costs. D. Variable costs and the budgeted costs.

15. The production price (spending) variance is the difference between which of the following two costs? A. Budgeted and applied costs. B. Actual and budgeted costs. C. Applied and actual costs. D. Variable and budgeted costs.

16. Which statement is true concerning the fixed overhead production efficiency variance? A. The production efficiency variance exists as fixed costs are assumed to vary inversely with volume. B. The production efficiency variance exists as fixed costs are assumed to vary along with volume. C. The production efficiency variance exists as fixed costs are assumed to vary exponentially with volume. D. The production efficiency variance does not exist as fixed costs are assumed not to vary with volume.

17. Which variance(s) are generally calculated to analyze fixed manufacturing overhead costs? A. Production volume variances only. B. Price variances only. C. Production volume and price variances only. D. Production volume, price, and efficiency variances.

18. Tool(s) that managers can use to decide when to investigate variances include which of the following? A. Use of both tolerance limits and decision models. B. Use of tolerance limits only. C. Decision models only. D. None of the above.

19. Activity-based costing is commonly used with standard costing. Using activity-based costing, a company has A. a single cost driver B. multiple cost drivers. C. no cost drivers. D. the same cost drivers as standard costing.

20. Activity-based costing is commonly used with standard costing. Using more activity drivers increases the potential for managers to A. get much more information from activity-based costing than from the traditional approach. B. get much more information from the traditional approach than from activity-based costing. C. get the same information from activity-based costing as from the traditional approach. D. None of the above.

21. Activity-based costing raises numerous specific questions that managers can address to improve which of the following? A. Productivity and quality. B. Price and efficiency. C. Efficiency only. D. Productivity only.

22. What is the result of substituting computerized equipment for direct labor? A. Less direct material and more manufacturing overhead. B. Less direct labor and more manufacturing overhead. C. Less manufacturing overhead and more direct materials. D. Less direct labor and more direct material.

23. When substituting computerized equipment for direct labor, a firm should treat labor as which of the following? A. Fixed (or capacity) costs. B. Mixed costs. C. Opportunity costs. D. Variable costs.

24. When substituting computerized equipment for direct labor, variable overhead may be associated more with A. labor hours than machine usage. B. machine usage than labor hours. C. machine usage than direct materials. D. machine usage than manufacturing overhead.

25. For managerial accounting purposes, how are fixed manufacturing costs treated? A. As product costs. B. As period costs. C. As opportunity costs. D. As variable costs.

26. For external reporting purposes, how are fixed manufacturing costs treated? A. As period costs. B. Expensed as incurred. C. Period costs included in the value of inventory. D. Product costs included in the value of inventory.

27. For financial reporting purposes, how are fixed manufacturing costs treated? A. As period costs. B. As product costs. C. As direct materials costs. D. None of the above.

28. How are fixed manufacturing costs treated? A. Period costs for managerial accounting and product costs for financial accounting purposes. B. Product costs for managerial accounting and financial accounting purposes. C. Period cost for managerial accounting and financial accounting purposes. D. Product costs for managerial accounting and period costs for financial accounting purposes.

29. For financial reporting purposes, how are fixed manufacturing costs treated? A. Included in the value of inventory. B. Not included in the value of inventory. C. Treated the same as in managerial accounting. D. Not reported.

30. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead variance for fuel costs?

A. $12.00 U B. $12.00 F C. $6.00 U D. $6.00 F 31. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead price variance for fuel costs?

A. $32.00 F B. $ 6.00 U C. $12.00 F D. $20.00 U

32. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $32.00 F B. $ 6.00 U C. $12.00 F D. $20.00 U 33. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the actual fuel cost for March 2010?

A. $374.00 B. $352.00 C. $340.00 D. $320.00

34. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead flexible budget for March 2010?

A. $374.00 B. $352.00 C. $340.00 D. $320.00 35. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead variance for fuel costs?

A. $12.00 U B. $12.00 F C. $6.00 U D. $6.00 F

36. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead price variance for fuel costs?

A. $10.00 U B. $16.00 F C. $26.00 F D. $ 6.00F 37. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $10.00 U B. $16.00 F C. $26.00 F D. $ 6.00F

38. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead variance for fuel costs?

A. $20.00 U B. $20.00 F C. $2.00 U D. $2.00 F 39. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead price variance for fuel costs?

A. $20.00 U B. $20.00 F C. $2.00 U D. $2.00 F

40. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $20.00 U B. $20.00 F C. $18.00 U D. $18.00 F 41. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the actual fuel cost for March 2010?

A. $240.00 B. $220.00 C. $200.00 D. $180.00

42. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead flexible budget for March 2010?

A. $180.00 B. $198.00 C. $220.00 D. $240.00 43. Most companies report which of the following variances? A. Each type of material. B. Each category of labor. C. Major cost components of variable overhead. D. All of the above.

44. Which of the following is an example of a major cost component of variable overhead? A. Direct material. B. Direct labor. C. Indirect material. D. All of the above.

45. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the total direct materials variance.

A. $15,500 U B. $10,500 U C. $15,500 F D. $10,500 F 46. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct materials price variance.

A. $15,500 U B. $10,500 U C. $15,500 F D. $10,500 F 47. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the actual amount paid for coffee.

A. $115,500 B. $105,000 C. $100,000 D. $ 95,500

48. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct materials efficiency variance.

A. $5,000 U B. $10,500 U C. $5,000 F D. $10,500 F 49. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the flexible budget for direct materials.

A. $115,500 B. $105,500 C. $100,000 D. $ 95,500 50. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the total direct labor variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U

51. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct labor price variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U 52. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct labor efficiency variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U 53. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the variable manufacturing overhead variance.

A. $1,000 U B. $2,000 U C. $1,000 F D. $2,000 F

54. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the variable manufacturing overhead variance.

A. $1,000 U B. $2,000 U C. $1,000 F D. $2,000 F

55. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the total direct materials variance.

A. $56,000 U B. $40,500 U C. $56,000 F D. $40,500 U

56. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct materials price variance.

A. $51,000 U B. $56,000 U C. $5,000 U D. $40,500 U

57. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct materials efficiency variance.

A. $51,000 U B. $56,000 U C. $5,000 U D. $40,500 U

58. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the total direct labor variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F

59. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct labor price variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F

60. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct labor efficiency variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F 61. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct materials efficiency variance.

A. $7,150 U B. $7,500 U C. $7,150 F D. $7,500 F

62. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct materials price variance.

A. $350 F B. $-0C. $350 U D. $7,150 U 63. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the total direct materials variance.

A. $7,500 U B. $7,850 U C. $7,150 U D. $7,000 U 64. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the total direct labor variance.

A. $70 F B. $200 U C. $270 U D. $130 U

65. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct labor price variance.

A. $70 F B. $200 U C. $270 U D. $130 U 66. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct labor efficiency variance.

A. $70 F B. $200 U C. $270 U D. $130 U 67. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the total Variable Overhead variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U

68. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the variable overhead price variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U 69. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the variable overhead efficiency variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U 70. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the total fixed overhead efficiency variance.

A. $8,000 F B. $300 F C. $500 U D. $1,000 U 71. When multiple inputs are used to produce the output, the efficiency variance can be broken down into which of the following? A. mix and match variances. B. mix and yield variances. C. profit and yield variances. D. benefit and match variances.

72. The yield variance is the portion of the efficiency variance that is not a A. match variance. B. mix variance. C. quantity variance. D. price variance.

73. Explain how variable production cost variances are calculated and why they occur.

74. How are fixed production cost variances calculated and why do they occur?

75. What is the difference between price and efficiency variances?

76. How do you analyze variances using the variable cost variance model?

77. How do you analyze overhead variances using the variable cost variance model?

78. What is the relationship between actual, budgeted, and applied fixed manufacturing costs?

79. What tools do managers use to decide when to investigate variances?

80. How do you apply activity-based costing to variance analysis?

81. How does technology impact variance analyses?

82. How do you calculate the mix variance portion of the efficiency variance?

83. How are fixed manufacturing costs treated for managerial and external reporting purposes?

84. Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $2.00 per gallon 6,000 parcels picked up or delivered 500 Gallons $2.25 per gallon

REQUIRED: What was the actual fuel cost, flexible budget for fuel cost, and the fuel cost variance?

85. Sallys Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $3.10 per gallon 10,000 parcels picked up or delivered 1,200 Gallons $3.05 per gallon

REQUIRED: Calculate the following: 1) Variable overhead variance for fuel 2) Variable overhead price variance for fuel 3) Variable overhead efficiency variance for fuel 4) Actual fuel costs 5) Flexible budget for fuel cost

86. Houser Parcel Moving Express reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: Standard: Fuel allowed: Cost per gallon: 0.08 gallon per parcel picked up or delivered $2.95 per gallon 8,000 parcels picked up or delivered 1,000 Gallons $3.00 per gallon

REQUIRED: Calculate the following: 1) Variable overhead variance for fuel 2) Variable overhead price variance for fuel 3) Variable overhead efficiency variance for fuel 4) Actual fuel costs 5) Flexible budget for fuel cost

87. JM Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$15,000 of which $5,000 is fixed $4,800 $5.00 1,950 2,200

REQUIRED: Calculate the following variances: 1) Variable overhead price variance 2) Variable overhead efficiency variance 3) Total variable overhead variance 4) Total fixed overhead variance

88. Hightown Company uses a predetermined overhead rate for applying overhead cost to products. Rates for the current year follow: Variable Overhead Rate: $2.50 per unit Fixed Overhead Rate: $5.00 per unit Actual overhead costs:
Variable Overhead: Fixed Overhead: $275,000 $630,000

The company expected to produce 125,000 units during the year, but only produced 120,000. REQUIRED: 1) 2) 3) 4) Calculate the amount of budgeted fixed overhead costs for the year. Calculate the fixed overhead price (spending) variance. Calculate the fixed overhead production volume variance. Calculate the variable overhead price variance.

89. Estimating flexible selling expense budget and computing variances. Georgia Peaches estimates the following selling expenses next period:

Salaries (fixed) Commissions (0.05% of sales revenue) Travel (0.03% of sales revenue) Advertising (fixed) Sales Office Costs ($3,750 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold) Total Selling Expenses

$ 30,000 17,875 10,725 60,000 7,000 6,500 $132,100

Required: a. Derive the cost equation (y = a + bx) for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Georgia actually sells 50,000 units during the period at an average price of $6 per unit. The company had budgeted sales for the period to be: volume, 65,000 units; price, $5.50. Calculate the sales price and volume variance. c. The actual selling expenses incurred during the period were $80,000 fixed and $30,000 variable. Prepare a profit variance analysis for sales revenue and selling expenses.

90. Estimating flexible selling expense budget and computing variances. Golden Nugget estimates the following selling expenses next period:

Salaries (fixed) Commissions (0.04% of sales revenue) Travel (0.02% of sales revenue) Advertising (fixed) Sales Office Costs ($3,950 plus $0.08 per unit sold) Shipping Costs ($0.12 per unit sold) Total Selling Expenses

$ 35,000 17,875 10,725 65,000 7,000 6,500 $132,100

Required: a. Derive the cost equation (y = a + bx) for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Golden actually sells 60,000 units during the period at an average price of $7 per unit. The company had budgeted sales for the period to be: volume, 75,000 units; price, $6.50. Calculate the sales price and volume variance. c. The actual selling expenses incurred during the period were $90,000 fixed and $40,000 variable. Prepare a profit variance analysis for sales revenue and selling expenses.

91. Materials and labor variances. The Sweet Tooth Chocolate Company presents the following data for October:

Materials Labor. Batches Produced

Standards per Batch 1 Pound at $2.50 per Pound 1.5 Hours at $3.00 per Hour

Actual Total 49,000 Pounds 70,000 Hours 48,000 Batches

During the month, the firm purchased 49,000 pounds of materials for $127,500. Wages earned were $214,000. Required: 1. Compute the labor and material variances. 2. Based on the information for the company, write a short report explaining the cause of the variances that you computed.

92. Materials and labor variances. The Chocolate Factory presents the following data for September:

Materials Labor. Batches Produced

Standards per Batch 1 Pound at $3.50 per Pound 1.5 Hours at $4.00 per Hour

Actual Total 59,000 Pounds 82,000 Hours 58,000 Batches

During the month, the firm purchased 59,000 pounds of materials for $216,500. Wages earned were $330,000. Required: 1. Compute the labor and material variances. 2. Based on the information for the company, write a short report explaining the cause of the variances that you computed.

93. Nonmanufacturing variances. Ralphs Sales uses standard costs and variances for controlling costs. As a result of studying past cost data, it has established standards as follows: variable costs, $6 per sales call; nine sales calls per unit sold. Actual data for May, June, and July follow:

May June July

Sales Calls 140,000 160,000 130,000

Units Sold 15,000 20,000 10,000

Actual Costs $ 900,000 1,000,000 800,000

Required: Compute the variable cost price and efficiency variances for each month.

94. Nonmanufacturing variances. Appliance Sales uses standard costs and variances for controlling costs. As a result of studying past cost data, it has established standards as follows: variable costs, $7 per sales call; six sales calls per unit sold. Actual data for May, June, and July follow:

May June July

Sales Calls 150,000 170,000 140,000

Units Sold 16,000 22,000 11,000

Actual Costs $ 1,100,000 1,200,000 1,000,000

Required: Compute the variable cost price and efficiency variances for each month.

95. Solving for materials and labor. Clayton Company makes fireplace screens. Under the flexible budget, when the firm uses 75,000 direct labor hours, budgeted variable overhead is $75,000, whereas budgeted direct labor costs are $450,000. The company applies variable overhead to production units on the basis of direct labor hours. All data apply to the month of February. The following are some of the variances for February (F denotes favorable; U denotes unfavorable):

Variable Overhead Price Variance Variable Overhead Efficiency Variance Materials Price Variance Materials Efficiency Variance

$12,000 U $20,000 U $30,000 F $20,000 U

During February, the firm incurred $400,000 of direct labor costs. According to the standards, each fireplace screen uses one pound of materials at a standard price of $4.00 per pound. The firm produced 100,000 fireplace screens in February. The materials price variance was $0.30 per pound, whereas the average wage rate exceeded the standard average rate by $0.50 per hour. Required: Compute the following for February, assuming there are beginning inventories but no ending inventories of materials: a. pounds of materials purchased b. pounds of material usage over standard c. standard hourly wage rate d. standard direct labor hours for the total February production

96. Solving for materials and labor. Howard Company makes screen doors. Under the flexible budget, when the firm uses 85,000 direct labor hours, budgeted variable overhead is $85,000, whereas budgeted direct labor costs are $573,750. The company applies variable overhead to production units on the basis of direct labor hours. All data apply to the month of February. The following are some of the variances for February (F denotes favorable; U denotes unfavorable):

Variable Overhead Price Variance Variable Overhead Efficiency Variance Materials Price Variance Materials Efficiency Variance

$12,000 U $30,000 U $60,000 F $30,000 U

During February, the firm incurred $600,000 of direct labor costs. According to the standards, each screen door uses one pound of materials at a standard price of $5.00 per pound. The firm produced 100,000 screen doors in February. The materials price variance was $0.40 per pound, whereas the average wage rate exceeded the standard average rate by $0.50 per hour. Required: Compute the following for February, assuming there are beginning inventories but no ending inventories of materials: a. pounds of materials purchased b. pounds of material usage over standard c. standard hourly wage rate d. standard direct labor hours for the total February production

97. Overhead variances. Upton, Inc., uses standard costing. The company reported the following overhead information for the current period:

Actual Overhead Incurred Budgeted Fixed Overhead Variable Overhead Rate per Machine Hour Standard Hours Allowed for Actual Production Actual Machine Hours Used

$13,600, of which $3,500 is fixed $3,300 $3 3,500 3,200

Required: Calculate the variable and fixed overhead variances.

98. Overhead variances. Trevor, Inc., uses standard costing. The company reported the following overhead information for the current period:

Actual Overhead Incurred Budgeted Fixed Overhead Variable Overhead Rate per Machine Hour Standard Hours Allowed for Actual Production Actual Machine Hours Used

$19,600, of which $5,500 is fixed $4,300 $3 5,000 4,100

Required: Calculate the variable and fixed overhead variances.

99. Solving for labor hours. Bills Engineering Consulting reports the following direct labor information for clerical staff:

Month: April Standard Rate Actual Rate Paid Standard Hours Allowed for Actual Production Labor Efficiency Variance

$15 per Hour $17 per Hour 1,600 Hours $860 U

Required: What are the actual hours worked, rounded to the nearest hour?

100. Solving for labor hours. Lances Engineering Consulting reports the following direct labor information for clerical staff:

Month: March Standard Rate Actual Rate Paid Standard Hours Allowed for Actual Production Labor Efficiency Variance

$25 per Hour $27 per Hour 1,500 Hours $2,000 U

Required: What are the actual hours worked, rounded to the nearest hour?

Chapter 10--Profit and Cost Center Performance Evaluation Key

1. Which of the following might cause a materials variance? A. Failing to take purchase discounts. B. Using a better grade of raw material. C. Changes in the market supply for the raw materials. D. All of the above.

2. Which of the following is not a major group responsible for variances in organizations? A. Marketing B. Consulting C. Administration D. Production

3. Why might a material variance arise? A. More efficient use of materials than the standard. B. The purchase of inferior raw materials. C. Both a and b above. D. None of the above.

4. Why do direct labor variances occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Supervisors encounter scheduling problems. D. All of the above.

5. Which is not a reason direct labor variances may occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Prices rise with direct materials. D. All of the above.

6. Fixed production costs variances are calculated as A. the difference between actual and budgeted fixed costs. B. (actual hours standard inputs) budgeted fixed costs. C. (actual hours standard outputs) budgeted fixed costs. D. (actual hours standard outputs) actual fixed costs.

7. Why do fixed manufacturing cost variances occur? A. Managers do not correctly anticipate changes in wage rates. B. Poor materials are used in production. C. Supervisors encounter scheduling problems. D. Actual fixed costs differ from budgeted fixed costs.

8. Which of the following terms describes the difference between the budgeted (or standard) price and the actual price paid for each unit of input? A. Price variance. B. Efficiency variance. C. Usage variance. D. Quantity variance.

9. Which variance measures the efficiency with which the firm uses inputs to produce outputs? A. Throughput. B. Efficiency. C. Economy. D. Effectiveness.

10. To analyze variances, the variable cost variance model is applied to the calculation of which of the following? A. Direct materials variances. B. Direct labor variances. C. Variable manufacturing overhead price and efficiency variances. D. All of the above.

11. Which of the following does the cost variance model use to analyze differences between actual and budgeted profits? A. Flexible production budget. B. Fixed production budget. C. Prior periods production budget. D. Generally accepted accounting principles.

12. To help managers in their efforts to control overhead costs, managers and accountants analyze overhead variances using the variable cost variance model by separating variable overhead variances into A. price and quality components. B. economy and efficiency components. C. price and efficiency components. D. economy and effectiveness components.

13. What is the term that describes the rate companies frequently use to apply fixed overhead costs to units produced? A. Actual overhead rate. B. Predetermined overhead rate. C. Post-determined overhead rate. D. Variable overhead rate.

14. The production volume variance is the difference between which of the following two costs? A. Budgeted and applied fixed costs. B. Actual costs and the budgeted costs. C. Budgeted and actual fixed costs. D. Variable costs and the budgeted costs.

15. The production price (spending) variance is the difference between which of the following two costs? A. Budgeted and applied costs. B. Actual and budgeted costs. C. Applied and actual costs. D. Variable and budgeted costs.

16. Which statement is true concerning the fixed overhead production efficiency variance? A. The production efficiency variance exists as fixed costs are assumed to vary inversely with volume. B. The production efficiency variance exists as fixed costs are assumed to vary along with volume. C. The production efficiency variance exists as fixed costs are assumed to vary exponentially with volume. D. The production efficiency variance does not exist as fixed costs are assumed not to vary with volume.

17. Which variance(s) are generally calculated to analyze fixed manufacturing overhead costs? A. Production volume variances only. B. Price variances only. C. Production volume and price variances only. D. Production volume, price, and efficiency variances.

18. Tool(s) that managers can use to decide when to investigate variances include which of the following? A. Use of both tolerance limits and decision models. B. Use of tolerance limits only. C. Decision models only. D. None of the above.

19. Activity-based costing is commonly used with standard costing. Using activity-based costing, a company has A. a single cost driver B. multiple cost drivers. C. no cost drivers. D. the same cost drivers as standard costing.

20. Activity-based costing is commonly used with standard costing. Using more activity drivers increases the potential for managers to A. get much more information from activity-based costing than from the traditional approach. B. get much more information from the traditional approach than from activity-based costing. C. get the same information from activity-based costing as from the traditional approach. D. None of the above.

21. Activity-based costing raises numerous specific questions that managers can address to improve which of the following? A. Productivity and quality. B. Price and efficiency. C. Efficiency only. D. Productivity only.

22. What is the result of substituting computerized equipment for direct labor? A. Less direct material and more manufacturing overhead. B. Less direct labor and more manufacturing overhead. C. Less manufacturing overhead and more direct materials. D. Less direct labor and more direct material.

23. When substituting computerized equipment for direct labor, a firm should treat labor as which of the following? A. Fixed (or capacity) costs. B. Mixed costs. C. Opportunity costs. D. Variable costs.

24. When substituting computerized equipment for direct labor, variable overhead may be associated more with A. labor hours than machine usage. B. machine usage than labor hours. C. machine usage than direct materials. D. machine usage than manufacturing overhead.

25. For managerial accounting purposes, how are fixed manufacturing costs treated? A. As product costs. B. As period costs. C. As opportunity costs. D. As variable costs.

26. For external reporting purposes, how are fixed manufacturing costs treated? A. As period costs. B. Expensed as incurred. C. Period costs included in the value of inventory. D. Product costs included in the value of inventory.

27. For financial reporting purposes, how are fixed manufacturing costs treated? A. As period costs. B. As product costs. C. As direct materials costs. D. None of the above.

28. How are fixed manufacturing costs treated? A. Period costs for managerial accounting and product costs for financial accounting purposes. B. Product costs for managerial accounting and financial accounting purposes. C. Period cost for managerial accounting and financial accounting purposes. D. Product costs for managerial accounting and period costs for financial accounting purposes.

29. For financial reporting purposes, how are fixed manufacturing costs treated? A. Included in the value of inventory. B. Not included in the value of inventory. C. Treated the same as in managerial accounting. D. Not reported.

30. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead variance for fuel costs?

A. $12.00 U B. $12.00 F C. $6.00 U D. $6.00 F 31. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead price variance for fuel costs?

A. $32.00 F B. $ 6.00 U C. $12.00 F D. $20.00 U

32. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $32.00 F B. $ 6.00 U C. $12.00 F D. $20.00 U 33. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the actual fuel cost for March 2010?

A. $374.00 B. $352.00 C. $340.00 D. $320.00

34. Bens Delivery Company Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 2,200 parcels picked up or delivered 200 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Bens Delivery Company. What is the variable overhead flexible budget for March 2010?

A. $374.00 B. $352.00 C. $340.00 D. $320.00 35. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead variance for fuel costs?

A. $12.00 U B. $12.00 F C. $6.00 U D. $6.00 F

36. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead price variance for fuel costs?

A. $10.00 U B. $16.00 F C. $26.00 F D. $ 6.00F 37. Lydias Delivery Company Lydias Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $1.70 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $1.60 per gallon

Refer to Lydias Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $10.00 U B. $16.00 F C. $26.00 F D. $ 6.00F

38. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead variance for fuel costs?

A. $20.00 U B. $20.00 F C. $2.00 U D. $2.00 F 39. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead price variance for fuel costs?

A. $20.00 U B. $20.00 F C. $2.00 U D. $2.00 F

40. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead efficiency variance for fuel costs?

A. $20.00 U B. $20.00 F C. $18.00 U D. $18.00 F 41. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the actual fuel cost for March 2010?

A. $240.00 B. $220.00 C. $200.00 D. $180.00

42. Dougs Delivery Company Dougs Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 1,100 parcels picked up or delivered 100 Gallons $2.00 per gallon

Standard: Fuel allowed: Cost per gallon:

0.10 gallon per parcel picked up or delivered $1.80 per gallon

Refer to Dougs Delivery Company. What is the variable overhead flexible budget for March 2010?

A. $180.00 B. $198.00 C. $220.00 D. $240.00 43. Most companies report which of the following variances? A. Each type of material. B. Each category of labor. C. Major cost components of variable overhead. D. All of the above.

44. Which of the following is an example of a major cost component of variable overhead? A. Direct material. B. Direct labor. C. Indirect material. D. All of the above.

45. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the total direct materials variance.

A. $15,500 U B. $10,500 U C. $15,500 F D. $10,500 F 46. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct materials price variance.

A. $15,500 U B. $10,500 U C. $15,500 F D. $10,500 F 47. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the actual amount paid for coffee.

A. $115,500 B. $105,000 C. $100,000 D. $ 95,500

48. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct materials efficiency variance.

A. $5,000 U B. $10,500 U C. $5,000 F D. $10,500 F 49. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the flexible budget for direct materials.

A. $115,500 B. $105,500 C. $100,000 D. $ 95,500 50. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the total direct labor variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U

51. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct labor price variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U 52. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the direct labor efficiency variance.

A. $11,000 F B. $9,000 U C. $20,000 U D. $9,500 U 53. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the variable manufacturing overhead variance.

A. $1,000 U B. $2,000 U C. $1,000 F D. $2,000 F

54. Java Gourmet Coffee Java Gourmet Coffee reports the following data for April 2010 where 200,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual:
Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: 210,000 pounds $0.55 per pound

$19.00 per hour 11,000 hours

$21,000

Standard: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 200,000 pounds $0.50 per pound

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Java Gourmet Coffee. Calculate the variable manufacturing overhead variance.

A. $1,000 U B. $2,000 U C. $1,000 F D. $2,000 F

55. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the total direct materials variance.

A. $56,000 U B. $40,500 U C. $56,000 F D. $40,500 U

56. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct materials price variance.

A. $51,000 U B. $56,000 U C. $5,000 U D. $40,500 U

57. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct materials efficiency variance.

A. $51,000 U B. $56,000 U C. $5,000 U D. $40,500 U

58. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the total direct labor variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F

59. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct labor price variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F

60. Freds Fine Roasted Coffee Freds Fine Roasted Coffee reports the following data for April 2010 where 500,000 pounds of roasted gourmet coffee beans were actually produced (note: standard costs do not allow for any wastage),

Actual: Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours used: Variable Overhead: Actual costs: Standard : Direct Materials: Quantity of coffee beans: Cost per pound: Direct Labor: Direct labor rate: Labor hours to be used: Variable overhead: 500,000 pounds $0.50 per pound 510,000 pounds $0.60 per pound

$18.00 per hour 24,000 hours

$49,000

$20.00 per hour 0.05 hours per pound $.10 per pound

Refer to Freds Fine Roasted Coffee. Calculate the direct labor efficiency variance.

A. $48,000 F B. $20,000 F C. $68,000 F D. $28,000 F 61. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct materials efficiency variance.

A. $7,150 U B. $7,500 U C. $7,150 F D. $7,500 F

62. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct materials price variance.

A. $350 F B. $-0C. $350 U D. $7,150 U 63. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the total direct materials variance.

A. $7,500 U B. $7,850 U C. $7,150 U D. $7,000 U 64. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the total direct labor variance.

A. $70 F B. $200 U C. $270 U D. $130 U

65. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct labor price variance.

A. $70 F B. $200 U C. $270 U D. $130 U 66. ABC Company ABC Company reports the following information for the most recent period when 2,750 units were produced.

Cost Materials Labor

Standard 2 lbs. @ $5.00 per pound 0.50 hours @ $8.00 per hour

Actual 7,000 pounds purchased for $34,650 1,400 hours @ $7.95 per hour

Refer to ABC Company. Calculate the direct labor efficiency variance.

A. $70 F B. $200 U C. $270 U D. $130 U 67. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the total Variable Overhead variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U

68. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the variable overhead price variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U 69. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the variable overhead efficiency variance.

A. $1,000 U B. $ 500 F C. $1,000 F D. $ 500 U 70. KF Company KF Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$25,000 of which $8,000 is fixed $8,300 $5.00 3,300 3,200

Refer to KF Company. Calculate the total fixed overhead efficiency variance.

A. $8,000 F B. $300 F C. $500 U D. $1,000 U 71. When multiple inputs are used to produce the output, the efficiency variance can be broken down into which of the following? A. mix and match variances. B. mix and yield variances. C. profit and yield variances. D. benefit and match variances.

72. The yield variance is the portion of the efficiency variance that is not a A. match variance. B. mix variance. C. quantity variance. D. price variance.

73. Explain how variable production cost variances are calculated and why they occur. Material variances may be the result of failing to take purchase discounts, using a better (or worse) grade of raw material, or changes in the market supply or demand for the raw material that affected prices. Materials variances may arise due to more (or less) efficient use of materials than the standard or the purchase of inferior raw materials. Direct labor variances can occur because managers do not correctly anticipate changes in wage rates. These variances may also be caused by the workers themselves, poor materials, faulty equipment, poor supervision, and scheduling problems.

74. How are fixed production cost variances calculated and why do they occur? The only fixed cost variance computed for managerial purposes is the difference between actual and budgeted fixed costs. This variance occurs because actual fixed costs differ from budgeted fixed costs.

75. What is the difference between price and efficiency variances? The price variance is the difference between the budgeted (or standard) price and the actual price paid for each unit of input. The efficiency variance measures the efficiency with which the firm uses inputs to produce outputs.

76. How do you analyze variances using the variable cost variance model? The variable cost variance model is applied to the calculation of direct materials, direct labor, and variable manufacturing overhead price and efficiency variances. The model uses the flexible production budget to analyze differences between actual and budgeted profits.

77. How do you analyze overhead variances using the variable cost variance model? Separating variable overhead variances into price and efficiency components helps managers in their effort to control overhead costs. The manager can use the same method to compute price and efficiency variances for variable overhead as for other variable manufacturing costs using an appropriate input activity measure.

78. What is the relationship between actual, budgeted, and applied fixed manufacturing costs? Companies frequently use a predetermined overhead rate to apply fixed overhead to units produced. The production volume variance is the difference between the budgeted and applied fixed costs. The price variance is the difference between the actual costs and the budgeted costs. There is no efficiency variance calculated because fixed costs are assumed not to vary with volume.

79. What tools do managers use to decide when to investigate variances? Managers can deal with the decision of whether to investigate a variance like other decisions -- on a cost benefit basis. Therefore, managers should investigate variances if they expect the benefits from investigation to exceed the costs of investigation. One method of identification where the benefit might be greater than the cost is the use of tolerance limits; the other is a decision model.

80. How do you apply activity-based costing to variance analysis? Activity-based costing is commonly used with standard costing. Using activity-based costing, a company has multiple cost drivers. The same approach is used for variance analysis as for traditional costing. Using more activity drivers increases the potential for managers to get much more information from activity-based costing than from the traditional approach. Activity-based costing raises numerous specific questions that managers can address to improve quality and productivity.

81. How does technology impact variance analyses? Most changes toward high technology involve substituting computerized equipment for direct labor. The result is less direct labor and more manufacturing overhead. This implies that the firm should treat labor as a fixed, or capacity, cost and that variable overhead may be associated more with machine usage than labor hours.

82. How do you calculate the mix variance portion of the efficiency variance? When multiple inputs are used to produce the output, the efficiency variance can be broken down into mix and yield variances. The mix variance shows the impact on profits of using something other than the budgeted mix of inputs. The yield variance is the portion of the efficiency variance that is not a mix variance.

83. How are fixed manufacturing costs treated for managerial and external reporting purposes? For managerial accounting purposes, fixed manufacturing costs are treated as period costs. However for external reporting purposes, fixed manufacturing costs are treated as product costs and included in the value of inventory.

84. Bens Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $2.00 per gallon 6,000 parcels picked up or delivered 500 Gallons $2.25 per gallon

REQUIRED: What was the actual fuel cost, flexible budget for fuel cost, and the fuel cost variance?

SUPPORTING CALCULATIONS: Actual: $2.25 per gallon 500 gallons = $1,125 Flexible budget: $2.00 per gallon (.10 6,000) = $1,200 Fuel cost variance = Actual cost - Flexible budget = $1,125 - $1,200 = $75.00 F

85. Sallys Delivery Company reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: 10,000 parcels picked up or delivered 1,200 Gallons $3.05 per gallon

Standard: Fuel allowed: Cost per gallon: 0.10 gallon per parcel picked up or delivered $3.10 per gallon

REQUIRED: Calculate the following: 1) Variable overhead variance for fuel 2) Variable overhead price variance for fuel 3) Variable overhead efficiency variance for fuel 4) Actual fuel costs 5) Flexible budget for fuel cost

SUPPORTING CALCULATIONS:

AP AQ $3.05 1,200 = $3,660

SP AQ $3.10 1,200 = $3,720

SP SQ $3.10 (0.10 10,000) = $3,100

|______$60 F _______|________ $620 U_____| 1) 2) 3) 4) 5) Total Variable overhead variance = $ 560 U Variable overhead price variance = $ 60 F Variable overhead efficiency variance = $ 620 U Actual: $3.05 per gallon 1,200 gallons = $3,660 Flexible budget: $3.10 per gallon (.10 10,000) = $3,100

86. Houser Parcel Moving Express reports the following information for 2010: Actual:
Output: Fuel required: Cost per gallon: Standard: Fuel allowed: Cost per gallon: 0.08 gallon per parcel picked up or delivered $2.95 per gallon 8,000 parcels picked up or delivered 1,000 Gallons $3.00 per gallon

REQUIRED: Calculate the following: 1) Variable overhead variance for fuel 2) Variable overhead price variance for fuel 3) Variable overhead efficiency variance for fuel 4) Actual fuel costs 5) Flexible budget for fuel cost

SUPPORTING CALCULATIONS:

AP AQ $3.00 1,000 = $3,000

SP AQ $2.95 1,000 = $2,950

SP SQ $2.95 (0.08 8,000) = $1,888

|______$50 U _______|________ $1,062 U_____| 1) 2) 3) 4) 5) Total Variable overhead variance = $ 1,112 U Variable overhead price variance = $ 50 U Variable overhead efficiency variance = $ 1,062 U Actual: $3.00 per gallon 1,000 gallons = $3,000 Flexible budget: $2.95 per gallon (.08 8,000) = $1,888

87. JM Company uses standard costing. The company reported the following information for the current period:

Actual overhead incurred Budgeted fixed overhead Variable overhead rate per machine hour Standard machine hours allowed for production Actual machine hours used

$15,000 of which $5,000 is fixed $4,800 $5.00 1,950 2,200

REQUIRED: Calculate the following variances: 1) Variable overhead price variance 2) Variable overhead efficiency variance 3) Total variable overhead variance 4) Total fixed overhead variance

SUPPORTING CALCULATIONS:

Variable Overhead Price

AP AQ Given = $10,000

Variable Overhead Efficiency SP AQ $5.00 2,200 = $11,000

SP SQ $5.00 1,950 = $9,750

|______$1,000 F _______|________ $1,250 U_____| 1) 2) 3) 4) Variable overhead price variance = $ 1,000 F Variable overhead efficiency variance = $ 1,250 U Total Variable overhead variance = $ 250 U Actual Fixed overhead $5,000 - budgeted fixed overhead $4,800 = $200 U

88. Hightown Company uses a predetermined overhead rate for applying overhead cost to products. Rates for the current year follow: Variable Overhead Rate: $2.50 per unit Fixed Overhead Rate: $5.00 per unit Actual overhead costs:
Variable Overhead: Fixed Overhead: $275,000 $630,000

The company expected to produce 125,000 units during the year, but only produced 120,000. REQUIRED: 1) 2) 3) 4) Calculate the amount of budgeted fixed overhead costs for the year. Calculate the fixed overhead price (spending) variance. Calculate the fixed overhead production volume variance. Calculate the variable overhead price variance.

SUPPORTING CALCULATIONS:

1) 2) 3) 4)

$5.00 125,000 = $625,000 $630,000 - $625,000 = $5,000 U $625,000 - ($5 120,000) = $25,000 U $275,000 - ($2.50 120,000) = $25,000 F

89. Estimating flexible selling expense budget and computing variances. Georgia Peaches estimates the following selling expenses next period:

Salaries (fixed) Commissions (0.05% of sales revenue) Travel (0.03% of sales revenue) Advertising (fixed) Sales Office Costs ($3,750 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold) Total Selling Expenses

$ 30,000 17,875 10,725 60,000 7,000 6,500 $132,100

Required: a. Derive the cost equation (y = a + bx) for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Georgia actually sells 50,000 units during the period at an average price of $6 per unit. The company had budgeted sales for the period to be: volume, 65,000 units; price, $5.50. Calculate the sales price and volume variance. c. The actual selling expenses incurred during the period were $80,000 fixed and $30,000 variable. Prepare a profit variance analysis for sales revenue and selling expenses.

(Georgia Peaches; estimating flexible selling expense budget and computing variances.) a.

Fixed Costs Variable Costs as a Function of Revenue Variable Costs as a Function of Units Sold Total Selling Expenses

= $30,000 [Salaries] + $60,000 [Advertising] + $3,750 [Sales Office] = $93,750 = (.05 [Commissions] X Revenue) + (.03 [Travel] X Revenue) = ($.05 [Office] X Units Sold) + ($.10 [Shipping] X Units Sold) = $93,750 + (.08 X Revenues) + ($.15 X Units Sold)

b. and c. Profit Variance Analysis Actual (50,000 Units) Selling Expense Variances Sales Price Variance Flexible Budget (50,000 Units) Sales Volume Variance Master Budget (65,000 Units) $ 357,500 38,350 (b) $ 319,150 93,750 $ 73,650 U $ 225,400

Sales Revenue Less Variable Selling Costs Contribution Margin Less Fixed Selling Costs Profits from Selling.

$ 300,000 30,000 $ 270,000 80,000 $ 190,000

$25,000 F $ 500 U $ 500 U 13 ,750 F $ 13,250 F $ 25,000 F $25,000 F

$ 275,000 29,500 (a) $ 245,500 93,750 $ 151,750

$ 82,500 U 8 ,850 F $ 73,650 U

(a) $29,500 = (.08 X $275,000) + ($.15 X 50,000) = $22,000 + $7,500. (b) $38,350 = (.08 X $357,500) + ($.15 X 65,000) = $28,600 + $9,750.

90. Estimating flexible selling expense budget and computing variances. Golden Nugget estimates the following selling expenses next period:

Salaries (fixed) Commissions (0.04% of sales revenue) Travel (0.02% of sales revenue) Advertising (fixed) Sales Office Costs ($3,950 plus $0.08 per unit sold) Shipping Costs ($0.12 per unit sold) Total Selling Expenses

$ 35,000 17,875 10,725 65,000 7,000 6,500 $132,100

Required: a. Derive the cost equation (y = a + bx) for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Golden actually sells 60,000 units during the period at an average price of $7 per unit. The company had budgeted sales for the period to be: volume, 75,000 units; price, $6.50. Calculate the sales price and volume variance. c. The actual selling expenses incurred during the period were $90,000 fixed and $40,000 variable. Prepare a profit variance analysis for sales revenue and selling expenses.

(Golden Nugget; estimating flexible selling expense budget and computing variances.) a.

Fixed Costs Variable Costs as a Function of Revenue Variable Costs as a Function of Units Sold Total Selling Expenses

= $35,000 [Salaries] + $65,000 [Advertising] + $3,950 [Sales Office] = $103,950 = (.04 [Commissions] X Revenue) + (.02 [Travel] X Revenue) = ($.08 [Office] X Units Sold) + ($.12 [Shipping] X Units Sold) = $103,950 + (.06 X Revenues) + ($.20 X Units Sold)

b. and c. Profit Variance Analysis Actual (60,000 Units) Selling Expense Variances Sales Price Variance Flexible Budget (60,000 Units) Sales Volume Variance Master Budget (75,000 Units) $ 487,500 44,250 (b) $ 443,250 103,950 $ 88,650 U $ 339,300

Sales Revenue Less Variable Selling Costs Contribution Margin Less Fixed Selling Costs Profits from Selling.

$ 420,000 40,000 $ 380,000 90,000 $ 290,000

$30,000 F $ 4,600 U $ 4,600 U 13 ,950 F $ 9,350 F $ 30,000 F $30,000 F

$ 390,000 35,400 (a) $ 354,600 103,950 $ 259,650

$ 97,500 U 8 ,850 F $ 88,650 U

(a) $35,400 = (.06 X $390,000) + ($.20 X 60,000) = $23,400 + $12,000. (b) $44,250 = (.06 X $487,500) + ($.20 X 75,000) = $29,250 + $15,000.

91. Materials and labor variances. The Sweet Tooth Chocolate Company presents the following data for October:

Materials Labor. Batches Produced

Standards per Batch 1 Pound at $2.50 per Pound 1.5 Hours at $3.00 per Hour

Actual Total 49,000 Pounds 70,000 Hours 48,000 Batches

During the month, the firm purchased 49,000 pounds of materials for $127,500. Wages earned were $214,000. Required: 1. Compute the labor and material variances. 2. Based on the information for the company, write a short report explaining the cause of the variances that you computed.

(The Sweet Tooth Chocolate Company; materials and labor variances and evaluation of cause.) 1.
Price Variance Materials $127,500 ($2.50 X 49,000 lbs) = $5,000 U Labor $214,000 ($3.00 X 70,000 hrs) = $4,000 U Efficiency Variance $2.50 X [49,000 lbs (48,000 batches X 1 pd)] = $2,500 U $3.00 X [70,000 hrs (48,000 batches X 1.5 hour)] = $6,000 F

2. The $7,500 unfavorable materials variance resulted from paying more than anticipated for the materials ($2.60 actual price versus $2.50 standard price), and from using more pounds of material than anticipated (49,000 actual quantity versus 48,000 standard quantity). The $2,000 favorable labor variance resulted from using less labor hours than anticipated (70,000 actual hours versus 72,000 standard hours). However, the favorable variance resulting from this efficient use of labor hours was somewhat offset by the higher rate of pay than anticipated ($3.06 actual hourly rate versus $3.00 standard rate).

92. Materials and labor variances. The Chocolate Factory presents the following data for September:

Materials Labor. Batches Produced

Standards per Batch 1 Pound at $3.50 per Pound 1.5 Hours at $4.00 per Hour

Actual Total 59,000 Pounds 82,000 Hours 58,000 Batches

During the month, the firm purchased 59,000 pounds of materials for $216,500. Wages earned were $330,000. Required: 1. Compute the labor and material variances. 2. Based on the information for the company, write a short report explaining the cause of the variances that you computed.

(The Chocolate Factory; materials and labor variances and evaluation of cause.) 1.
Price Variance Materials $216,500 ($3.50 X 59,000 lbs) = $10,000 U Labor $330,000 ($4.00 X 82,000 hrs) = $2,000 U Efficiency Variance $3.50 X [59,000 lbs (58,000 batches X 1 lb)] = $3,500 U $4.00 X [82,000 hrs (58,000 batches X 1.5 hrs)] = $20,000 F

2. The $13,500 unfavorable materials variance resulted from paying more than anticipated for the materials ($3.67 actual price versus $3.50 standard price), and from using more pounds of material than anticipated (59,000 actual quantity versus 58,000 standard quantity). The $18,000 favorable labor variance resulted from using less labor hours than anticipated (82,000 actual hours versus 87,000 standard hours). However, the favorable variance resulting from this efficient use of labor hours was offset by the higher rate of pay than anticipated ($4.02 actual hourly rate versus $4.00 standard rate).

93. Nonmanufacturing variances. Ralphs Sales uses standard costs and variances for controlling costs. As a result of studying past cost data, it has established standards as follows: variable costs, $6 per sales call; nine sales calls per unit sold. Actual data for May, June, and July follow:

May June July

Sales Calls 140,000 160,000 130,000

Units Sold 15,000 20,000 10,000

Actual Costs $ 900,000 1,000,000 800,000

Required: Compute the variable cost price and efficiency variances for each month.

(Ralphs Sales; nonmanufacturing variances.)

May June July

Actual Cost (AP X AQ) $ 900,000 1,000,000 800,000

Price Variance $ 60,000 U 40,000 U 20,000 U

(SP X AQ)a $ 840,000 960,000 780,000

Efficiency Variance $ 30,000 U 120,000 F 240,000 U

Standard Cost (SP X SQ)b $ 810,000 1,080,000 540,000

a $840,000 = $6 X 140,000 sales calls; $960,000 = $6 X 160,000 sales calls; $780,000 = $6 X 130,000 sales calls. b $810,000 = $6 X 9 calls per unit sold X 15,000 units sold; $1,080,000 = $6 X 9 calls per unit X 20,000 units sold; $540,000 = $6 X 9 calls per unit X 10,000 units sold.

94. Nonmanufacturing variances. Appliance Sales uses standard costs and variances for controlling costs. As a result of studying past cost data, it has established standards as follows: variable costs, $7 per sales call; six sales calls per unit sold. Actual data for May, June, and July follow:

May June July

Sales Calls 150,000 170,000 140,000

Units Sold 16,000 22,000 11,000

Actual Costs $ 1,100,000 1,200,000 1,000,000

Required: Compute the variable cost price and efficiency variances for each month.

(Appliance Sales; nonmanufacturing variances.)

May June July

Actual Cost (AP X AQ) $1,100,000 1,200,000 1,000,000

Price Variance $ 50,000 U 10,000 U 20,000 U

(SP X AQ)a $ 1,050,000 1,190,000 980,000

Efficiency Variance $ 30,000 U 120,000 F 240,000 U

Standard Cost (SP X SQ)b $ 672,000 924,000 462,000

a $1,050,000 = $7 X 150,000 sales calls; $1,190,000 = $7 X 170,000 sales calls; $980,000 = $7 X 140,000 sales calls. b $672,000 = $7 X 6 calls per unit sold X 16,000 units sold; $924,000 = $7 X 6 calls per unit X 22,000 units sold; $462,000 = $7 X 6 calls per unit X 11,000 units sold.

95. Solving for materials and labor. Clayton Company makes fireplace screens. Under the flexible budget, when the firm uses 75,000 direct labor hours, budgeted variable overhead is $75,000, whereas budgeted direct labor costs are $450,000. The company applies variable overhead to production units on the basis of direct labor hours. All data apply to the month of February. The following are some of the variances for February (F denotes favorable; U denotes unfavorable):

Variable Overhead Price Variance Variable Overhead Efficiency Variance Materials Price Variance Materials Efficiency Variance

$12,000 U $20,000 U $30,000 F $20,000 U

During February, the firm incurred $400,000 of direct labor costs. According to the standards, each fireplace screen uses one pound of materials at a standard price of $4.00 per pound. The firm produced 100,000 fireplace screens in February. The materials price variance was $0.30 per pound, whereas the average wage rate exceeded the standard average rate by $0.50 per hour. Required: Compute the following for February, assuming there are beginning inventories but no ending inventories of materials: a. pounds of materials purchased b. pounds of material usage over standard c. standard hourly wage rate d. standard direct labor hours for the total February production

(Clayton Company; solving for materials and labor.) a. $30,000 / $0.30 = 100,000 pounds [from price variance = (SP AP)AQ]. b. $20,000 / $4.00 = 5,000 pounds [from efficiency variance = SP(AQ SQ)]. c. Standard Hourly Wage Rate = $450,000/75,000 hours = $6.00 per hour. d. Standard Variable Overhead Rate = $75,000/75,000 hours = $1.00 per Direct Labor Hour. $20,000 V.O.H. Efficiency Variance/$1.00 = 20,000 hours worked in excess of standard. $400,000 $6.50 = 61,538 actual direct labor hours. 61,538 hrs. 20,000 hrs. = 41,538 standard direct labor hours allowed.

96. Solving for materials and labor. Howard Company makes screen doors. Under the flexible budget, when the firm uses 85,000 direct labor hours, budgeted variable overhead is $85,000, whereas budgeted direct labor costs are $573,750. The company applies variable overhead to production units on the basis of direct labor hours. All data apply to the month of February. The following are some of the variances for February (F denotes favorable; U denotes unfavorable):

Variable Overhead Price Variance Variable Overhead Efficiency Variance Materials Price Variance Materials Efficiency Variance

$12,000 U $30,000 U $60,000 F $30,000 U

During February, the firm incurred $600,000 of direct labor costs. According to the standards, each screen door uses one pound of materials at a standard price of $5.00 per pound. The firm produced 100,000 screen doors in February. The materials price variance was $0.40 per pound, whereas the average wage rate exceeded the standard average rate by $0.50 per hour. Required: Compute the following for February, assuming there are beginning inventories but no ending inventories of materials: a. pounds of materials purchased b. pounds of material usage over standard c. standard hourly wage rate d. standard direct labor hours for the total February production

(Howard Company; solving for materials and labor.) a. $60,000 / $0.40 = 150,000 pounds [from price variance = (SP AP)AQ]. b. $30,000 / $5.00 = 6,000 pounds [from efficiency variance = SP(AQ SQ)]. c. Standard Hourly Wage Rate = $573,750/85,000 hours = $6.75 per hour. d. Standard Variable Overhead Rate = $85,000/85,000 hours = $1.00 per Direct Labor Hour. $30,000 V.O.H. Efficiency Variance/$1.00 = 30,000 hours worked in excess of standard. $600,000 $7.25 = 82,759 actual direct labor hours. 82,759 hrs. 30,000 hrs. = 52,759 standard direct labor hours allowed.

97. Overhead variances. Upton, Inc., uses standard costing. The company reported the following overhead information for the current period:

Actual Overhead Incurred Budgeted Fixed Overhead Variable Overhead Rate per Machine Hour Standard Hours Allowed for Actual Production Actual Machine Hours Used

$13,600, of which $3,500 is fixed $3,300 $3 3,500 3,200

Required: Calculate the variable and fixed overhead variances.

(Upton Inc.; overhead variances.)

Variable Overhead Fixed Overhead

Actual Costs $13,600 $3,500 = $10,100 $3,500

Flexible Budget $3.00 X 3,500 hours = $10,500 $3,300

Variance $400 F $200 U

98. Overhead variances. Trevor, Inc., uses standard costing. The company reported the following overhead information for the current period:

Actual Overhead Incurred Budgeted Fixed Overhead Variable Overhead Rate per Machine Hour Standard Hours Allowed for Actual Production Actual Machine Hours Used

$19,600, of which $5,500 is fixed $4,300 $3 5,000 4,100

Required: Calculate the variable and fixed overhead variances.

(Trevor Inc.; overhead variances.)

Variable Overhead Fixed Overhead

Actual Costs $19,600 $5,500 = $14,100 $5,500

Flexible Budget $3.00 X 5,000 hours = $15,000 $4,300

Variance $900 F $1,200 U

99. Solving for labor hours. Bills Engineering Consulting reports the following direct labor information for clerical staff:

Month: April Standard Rate Actual Rate Paid Standard Hours Allowed for Actual Production Labor Efficiency Variance

$15 per Hour $17 per Hour 1,600 Hours $860 U

Required: What are the actual hours worked, rounded to the nearest hour?

(Bills Engineering Consulting; solving for labor hours.)

Inputs at Standard Prices (SP X AQ) $15 X AQ

Efficiency Variance > $860 U <

Flexible Production Budget (SP X SQ) $15 X 1,600 hours = $24,000

$15 X AQ = $24,000 + $860 AQ = $24,860/15 AQ = 1,657 hours.

100. Solving for labor hours. Lances Engineering Consulting reports the following direct labor information for clerical staff:

Month: March Standard Rate Actual Rate Paid Standard Hours Allowed for Actual Production Labor Efficiency Variance

$25 per Hour $27 per Hour 1,500 Hours $2,000 U

Required: What are the actual hours worked, rounded to the nearest hour?

(Lances Engineering Consulting; solving for labor hours.)

Inputs at Standard Prices (SP X AQ) $25 X AQ

Efficiency Variance > $2,000 U <

Flexible Production Budget (SP X SQ) $25 X 1,500 hours = $37,500

$25 X AQ = $37,500 + $2,000 AQ = $39,500/25 AQ = 1,580 hours.

Chapter 11--Investment Center Performance Evaluation


Student: ___________________________________________________________________________ 1. Which statement is true concerning decentralization? A. Decentralization impedes local personnel response to a changing environment. B. Decentralization requires significant oversight from top management. C. Decentralization divides large, complex problems into manageable pieces. D. All of the answers are correct.

2. Which of the following statements is true concerning decentralization? A. Decentralization helps train managers. B. Decentralization provides a basis for evaluating manager performance. C. Decentralization motivates managers. D. All of the answers are correct.

3. Which of the following is a disadvantage of decentralization? A. Decentralization helps train managers. B. Decentralization provides a basis for evaluating performance. C. Decentralization motivates managers. D. Decentralization may promote non-goal-congruent behavior.

4. A division manager may decide to purchase materials from an outside supplier even though another division of the firm could produce the materials at a lower incremental cost using currently idle facilities. This is an example of A. profit maximization. B. centralization. C. goal-congruent behavior. D. non-goal-congruent behavior.

5. To encourage division managers to act in ways consistent with organizational goals, divisional planning and control systems attempt to create A. profit maximization. B. centralization. C. behavior congruence. D. non-goal-congruent behavior.

6. To encourage division managers to act in ways consistent with organizational goals, divisional planning and control systems attempt to create A. profit maximization. B. centralization. C. goal congruence. D. non-goal-congruent behavior.

7. Which of the following is the correct calculation for Division return on investment? A. Divide division profit margin by division investment. B. Divide profit margin by division investment. C. Divide profit margin by division revenue. D. Divide division revenue by division investment.

8. Before applying ROI as a control measure, the manager must answer the following question(s): A. How does the firm measure revenues? B. What costs does the firm deduct in measuring divisional operating costs? C. How does the firm measure investment? D. All of the answers are correct.

9. The value assigned to a transaction where goods are bought by one unit of an organization from another unit of the same organization known as which of the following? A. sales price. B. intercompany cost basis. C. transfer price. D. generally accepted price.

10. Which statement is true concerning the establishment of transfer prices? A. If the selling division is operating at capacity, the transfer price should be the sum of fixed and variable costs of production. B. If the selling division has idle capacity, and the idle facilities cannot be used for other purposes, the transfer price should be at least the variable costs of production. C. If the selling division is operating below capacity, the transfer price should be discounted. D. None of the answers is correct.

11. Which statement is true concerning the establishment of transfer prices? A. If the selling division is operating at capacity, it should transfer at market price. B. If the selling division is operating below capacity, it should transfer at a discount. C. if the selling division is operating below capacity, it should transfer at market price. D. None of the answers is correct.

12. Which of the following is managements challenge when setting transfer prices? A. Ensuring the buyer has goal congruence with respect to the organizations goals. B. Ensuring the seller has goal congruence with respect to the organizations goals. C. Ensuring either the buyer or the seller, but not both, has goal congruence with respect to the organizations goals. D. Ensuring both the buyer and seller have goal congruence with respect to the organizations goals.

13. Managements challenge is to set transfer prices so that both the buyer and seller have goal congruence with respect to the organizations goals. How is this accomplished? A. With no intervention from top management to set the transfer price for each transaction between divisions. B. With top management establishing transfer price policies that divisions follow. C. With division managers not engaging in negotiation to set transfer prices among themselves. D. All of the answers are correct.

14. To achieve organizational goal congruence, how should management set transfer prices? A. To allow for divisional autonomy and encourage managers to pursue corporate goals consistent with their own personal goals. B. Top management should set the selling divisions revenue and the buying divisions cost. C. Transfer prices should be compatible with the companys performance evaluation system. D. All of the answers are correct.

15. When establishing transfer prices, the objective is to maximize the companys profit by A. transferring at the differential outlay cost to the selling division (typically variable costs). B. transferring at the opportunity cost to the company of making the internal transfers ($0 if the seller has idle capacity or selling price minus variable costs if the seller is operating at capacity). C. transferring at the differential outlay cost to the selling division plus the opportunity cost to the company of making the internal transfers. D. None of the answers is correct.

16. Which of the following transfer pricing procedures maximizes the companys profit by transferring at the differential outlay cost to the selling division plus the opportunity cost to the company of making the internal transfers? A. economic transfer pricing rule. B. effective transfer pricing rule. C. efficient transfer pricing rule. D. None of the answers is correct.

17. What is a disadvantage of top management intervention in setting transfer prices between divisions? A. Top management may become swamped with pricing disputes. B. Division managers will lose the flexibility and other advantages of autonomous decision making. C. The approach reduces the benefits of decentralization. D. All of the answers are correct.

18. What is generally considered the best transfer pricing basis when there is a competitive market for the product and market prices are readily available? A. Market price-based transfer pricing B. Variable cost-based transfer pricing C. Fixed price-based transfer pricing D. Fixed cost-based transfer pricing

19. Which of the following is an advantage(s) of using market prices in a competitive market? A. Both buying and selling divisions can buy and sell as many units as they want at market price. B. Managers of both buying and selling divisions are indifferent between trading with each other or with outsiders. C. From the companys perspective, this arrangement is fine as long as the selling division is operating at capacity. D. All of the answers are correct.

20. What transfer pricing basis is considered a good estimation of differential cost plus opportunity cost? A. Market price-based transfer pricing B. Variable cost-based transfer pricing C. Fixed price-based transfer pricing D. Fixed cost-based transfer pricing

21. What transfer pricing mechanism is used when a company does not have a measure of differential or variable cost? A. Market price-based transfer pricing B. Full-absorption costing C. Activity-based costing D. Actual cost-based transfer pricing

22. Colonial Computing Systems Colonial Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular mouse from Production at $50 per unit. The Production Division is considering raising the price to $60 per unit. The Production Division's costs related to the mouse production is as follows:

Variable costs per unit: Monthly fixed costs:

$50 $10,000

The Marketing Division handles the promotion and distribution of the mouse purchases from the Production Division and sells each mouse for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 1,500 units per month. Marketing Division can buy the same mouse from outside suppliers for $60. If the Marketing Division purchases the mouse from outside suppliers, the facilities the Production Division uses to manufacture the mouse would remain idle. Refer to Colonial Computing Systems. The Production Division is operating below capacity because of weak global demand for the product. What should be the mouse transfer price between the Production Division and Marketing Division in order for Colonial to optimize profits?

A. $ 50 B. $ 55 C. $ 60 D. $100 23. Colonial Computing Systems Colonial Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular mouse from Production at $50 per unit. The Production Division is considering raising the price to $60 per unit. The Production Division's costs related to the mouse production is as follows:

Variable costs per unit: Monthly fixed costs:

$50 $10,000

The Marketing Division handles the promotion and distribution of the mouse purchases from the Production Division and sells each mouse for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 1,500 units per month. Marketing Division can buy the same mouse from outside suppliers for $60. If the Marketing Division purchases the mouse from outside suppliers, the facilities the Production Division uses to manufacture the mouse would remain idle. Refer to Colonial Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product. What should be the mouse transfer price between the Production Division and Marketing Division in order for Colonial to optimize profits?

A. $ 50 B. $ 55 C. $ 60 D. $100

24. Terrapin Computing Systems Terrapin Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular large tower case from Production at $58 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the large tower case production is as follows:

Variable costs per unit: Monthly fixed costs:

$58 $10,000

The Marketing Division handles the promotion and distribution of the large tower case purchases from the Production Division and sells each large tower case for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same large tower case from outside suppliers for $75. Refer to Terrapin Computing Systems. If the Marketing Division purchases the large tower case from outside suppliers, the facilities the Production Division uses to manufacture the large tower case would remain idle. The Production Division is operating below capacity because of weak global demand for the product. What should be the large tower case transfer price between the Production Division and Marketing Division in order for Terrapin to optimize profits?

A. $ 55 B. $ 58 C. $ 75 D. $100 25. Terrapin Computing Systems Terrapin Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular large tower case from Production at $58 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the large tower case production is as follows:

Variable costs per unit: Monthly fixed costs:

$58 $10,000

The Marketing Division handles the promotion and distribution of the large tower case purchases from the Production Division and sells each large tower case for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same large tower case from outside suppliers for $75. Refer to Terrapin Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per large tower case. What should be the large tower case transfer price between the Production Division and Marketing Division in order for Terrapin to optimize profits?

A. $ 55 B. $ 58 C. $ 75 D. $100

26. Dukes Computing Systems Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular motherboard from Production at $65 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the motherboard production is as follows:

Variable costs per unit: Monthly fixed costs:

$65 $10,000

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same motherboard from outside suppliers for $75. Refer to Dukes Computing Systems. If the Marketing Division purchases the motherboard from outside suppliers, the facilities the Production Division uses to manufacture the motherboard would remain idle. The Production Division is operating below capacity because of weak global demand for the product. What should be the motherboard transfer price be between the Production Division and Marketing Division in order for Dukes to optimize profits?

A. $ 55 B. $ 65 C. $ 75 D. $125 27. Dukes Computing Systems Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular motherboard from Production at $65 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the motherboard production is as follows:

Variable costs per unit: Monthly fixed costs:

$65 $10,000

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same motherboard from outside suppliers for $75. Refer to Dukes Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per motherboard. What should be the motherboard transfer price between the Production Division and Marketing Division in order for Dukes to optimize profits?

A. $ 55 B. $ 65 C. $ 75 D. $125

28. Transfer prices are the prices charged A. for distributing goods from one warehouse to another. B. for the goods produced by one division to another division that needs those goods. C. when delivering goods to the customer. D. when transferring goods to international divisions.

29. Which of the following is(are) the transfer price that would leave the selling division no worse off if the good is sold to an internal division? A. The negotiated transfer price. B. The minimum transfer price. C. The maximum transfer price. D. Both a. and c.

30. Which of the following is(are) the transfer price that would leave the buying division no worse off if an input is purchased from an internal division. A. The negotiated transfer price. B. The minimum transfer price. C. The maximum transfer price. D. Both a. and c.

31. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?

A. $90. B. $86. C. $83. D. $73.

32. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 1?

A. $91. B. $90. C. $86. D. $73. 33. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 2?

A. $75. B. $74. C. $68. D. $58.

34. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?

A. $75. B. $74. C. $68. D. $58. 35. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?

A. Case 1 B. Case 2 C. Neither should be transferred internally. D. Both should be transferred internally.

36. When there is an outside market for an intermediate product which is perfectly competitive, the most equitable method of transfer pricing is A. market price. B. production cost pricing. C. variable cost pricing. D. cost plus markup pricing.

37. Colorado Furniture Colorado Furniture had the following historical accounting data, per hundred board feet, concerning one of its products:

Finished shelving: Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$30 16 10 12 8 4

The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. Refer to Colorado Furniture. If the negotiated price is used, Colorado Furniture's transfer price should be a

A. maximum of $100.80. B. minimum of $84.00. C. maximum of $110.00. D. minimum of $80.00. 38. Colorado Furniture Colorado Furniture had the following historical accounting data, per hundred board feet, concerning one of its products:

Finished shelving: Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$30 16 10 12 8 4

The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. Refer to Colorado Furniture. If the variable manufacturing cost transfer price method is used without a fixed fee, Colorado Furniture's transfer price will be

A. $68. B. $84. C. $56. D. $64. 39. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. If the negotiated price is used, Division A's transfer price should be a

A. maximum of $210.00. B. minimum of $153.00 C. maximum of $198.90 D. minimum of $120.00 40. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. What would be the transfer price if Division X uses full cost plus markup?

A. $167.70 B. $198.90 C. $136.50 D. $129.00

41. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be

A. $60. B. $90. C. $105. D. $144. 42. Chemical Company has two divisions, the Mixing Division and Bottling Division. The Mixing Division sells chemicals to the Bottling Division. Standard costs for the Mixing Division are as follows:

Direct materials Direct labor

$3.00 per gallon 2.40 per gallon

The Bottling Division uses the following predetermined overhead rate: Variable overhead Fixed overhead Total $3.60 per gallon 2.40 per gallon $6.00 per gallon

What is the transfer price for the chemicals per gallon based on standard variable cost?

A. $3.00 B. $5.40 C. $9.00 D. $11.40

43. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Division. What is the transfer price based on full cost plus a markup of 30 percent?

A. $2,925. B. $585. C. $2,760. D. $2,730. 44. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Division. What is the transfer price based on variable product costs plus a fixed fee of $210?

A. $210. B. $1,800. C. $2,100 D. $2,310. 45. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Department. The division has excess capacity. What is the best transfer price to avoid transfer price problems?

A. $1,350 B. $300 C. $900 D. $2,100 46. What transfer pricing mechanism generally applies a normal markup to costs as a surrogate for market prices when intermediate market prices are not available? A. Fixed price-based transfer pricing B. Full-absorption costing C. Activity-based costing D. Cost-plus transfer pricing

47. Which of the following is a transfer pricing system that provides the selling division with a profit but charges the buying division with costs only? A. hybrid. B. dual. C. bifurcated. D. split-off.

48. Which statement is true concerning a dual transfer pricing system? A. It provides the selling division with a profit but charges the buying division with costs. B. It provides the buying division with a profit but charges the selling division with costs. C. It is required by generally accepted accounting principles. D. None of the answers is correct.

49. Which of the following describes a transfer pricing system based on either variable costs or full-absorption costs, and applies a normal markup to costs as a surrogate for market prices when intermediate market prices are not available? A. hybrid. B. dual. C. cost-plus. D. mark-to-market.

50. Transfer pricing systems based on costs include which of the following? A. activity-based costing. B. cost-plus. C. standard costs. D. All of the answers are correct.

51. Which statement is true concerning negotiated transfer pricing? A. It preserves the autonomy of the division managers. B. It does not preserve the autonomy of the division managers. C. It violates generally accepted accounting principles. D. It is the same as centrally administered transfer pricing.

52. Which of these is a transfer pricing methodology that preserves the autonomy of the division managers? A. cost-plus. B. actual costs. C. negotiated. D. predetermined.

53. Surveys of global corporate transfer pricing practices indicate that nearly half use A. cost, about one-third use market price, and the rest use negotiations. B. market price, about one-third use cost, and the rest use negotiations. C. negotiations, about one-third use cost, and the rest use market price. D. negotiations, about one-third use market price, and the rest use cost.

54. Is there an optimal transfer pricing policy that dominates all others? A. Yes, managers strive to devise a textbook-perfect system regardless of cost-benefit considerations. B. Yes, managers strive to devise a textbook-perfect system taking into consideration cost and benefits. C. No, managers tend to settle for a system that seems to work reasonably well rather than devise a textbook-perfect system. D. No, managers tend to settle for a textbook-perfect system, rather than devise a system that seems to work reasonably well.

55. Because tax rates are different in different countries, companies have incentives to set transfer prices that will A. increase revenues in low-tax countries. B. decrease costs in high-tax countries. C. decrease revenues in low-tax countries. D. None of the answers is correct.

56. Because tax rates are different in different countries, companies have incentives to set transfer prices that will A. increase revenues in low-tax countries and increase costs in high-tax countries. B. increase costs in low-tax countries and increase revenues in high-tax countries. C. decrease costs in high-tax countries and decrease revenues in low-tax countries. D. None of the answers is correct.

57. Because tax rates are different in various states within the United States, companies have incentives to set transfer prices that will A. increase revenues in low-tax states. B. decrease costs in high-tax states. C. decrease revenues in low-tax states. D. None of the answers is correct.

58. What has spawned a major political issue concerning the estimated cost to the United States Treasury of as much as $9 billion to $13 billion per year in lost taxes that could presumably be collected if transfer prices were calculated according to U.S. tax laws? A. Tax avoidance by foreign companies using inflated transfer prices to reduce the profit of U.S. subsidiaries. B. Tax avoidance by domestic, United States, companies using inflated transfer prices to reduce the foreign profit of U.S. subsidiaries. C. Tax avoidance by foreign companies using deflated transfer prices to reduce the profit of U.S. subsidiaries. D. Tax avoidance by domestic, United States, companies using deflated transfer prices to reduce the profit of foreign subsidiaries.

59. When measuring a divisions operating costs, labor used in the divisions production is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

60. When measuring a divisions operating costs, thesalary of the division manager (controlled by top management) is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

61. When measuring a divisions operating costs, indirect controllable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management) C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

62. When measuring a divisions operating costs, direct controllable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

63. When measuring a divisions operating costs, indirect noncontrollable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

64. When measuring a divisions operating costs, direct noncontrollable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

65. When measuring a divisions operating costs, thecost of the company presidents salary is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

66. When measuring divisional operating costs, direct versus indirect refers to whether A. the costs associate directly with the division. B. the division manager can affect the cost. C. the costs are fixed. D. the costs are variable.

67. In calculating return on investment (ROI), when measuring the investment base most firms use A. acquisition cost. B. net book value. C. replacement cost. D. MCRS depreciated value.

68. In calculating return on investment (ROI), the use of book values of assetsparticularly fixed assetsin the ROI denominator A. is the preferable method. B. may cause a manager of a division with fully depreciated assets to be reluctant to replace the assets with more costly assets. C. is required by generally accepted accounting principles. D. may cause a manager of a division with fully depreciated assets to replace the assets with newer, more efficient, but more costly assets.

69. The rate of return on investment (ROI) has two components: A. Profit margin percentage and investment turnover ratio. B. Sales margin percentage and investment turnover ratio. C. Profit margin percentage and accounts receivable turnover ratio. D. Sales margin percentage and accounts receivable turnover ratio.

70. A shortcoming of return on investment (ROI) is that it may not lead managers to accept good investment opportunities if A. ROI of the investment is higher than the present ROI of the division. B. the ROI of the investment is the same as the present ROI of the division. C. the ROI of the investment is lower than the present ROI of the division. D. None of the answers is correct.

71. Return on Investment (ROI) is equal to the A. Profit Margin Percentage Investment Turnover Ratio. B. Sales Margin Percentage Investment Turnover Ratio. C. Profit Margin Percentage Accounts Receivable Turnover Ratio. D. Sales Margin Percentage Accounts Receivable Turnover Ratio.

72. Return on Investment (ROI) is equal to the A. (Profit Margin/Division Costs) (Division Costs/Division Investment). B. (Profit Margin/Division Revenues) (Division Revenues/Division Investment). C. (Sales Margin/Division Revenues) (Division Revenues/Division Investment). D. (Sales Margin/Division Costs) (Division Costs/Division Investment).

73. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2008?

A. 10%. B. 16%. C. 20%. D. 24%. 74. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2009?

A. 10%. B. 16%. C. 20%. D. 24%. 75. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2010?

A. 10%. B. 16%. C. 20%. D. 24%. 76. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2008?

A. 6%. B. 8%. C. 10%. D. 12%. 77. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2009?

A. 6% B. 8% C. 10% D. 12%

78. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2010?

A. 6% B. 8% C. 10% D. 12% 79. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2008?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 80. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2009?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 81. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2010?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 82. If a division has sales of $2,500,000, operating profit of $250,000, and a division investment of $1,250,000, its return on investment is A. 20% B. 10% C. 500% D. 200%

83. Parker Division had revenue of $250,000, operating profit of $10,000, and a division investment of $100,000. The investment turnover is A. 0.04 B. 2.50 C. 4.00 D. 0.25

84. Patterson Division had sales revenue of $200,000, operating profit of $10,000, and a division investment of $300,000. Its profit margin percentage is A. 66.7% B. 150.0% C. 3.3% D. 5.0%

85. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the return on investment for A?

A. 18% B. 15% C. 20% D. 40% 86. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the total sales revenue for Division B?

A. $666,667. B. $800,000. C. $1,200,000. D. $1,300,000.

87. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the investment turnover for Division A?

A. 4.00 B. 0.10 C. 0.15 D. 2.50 88. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is EVA for Division A?

A. $40,000 B. $25,000 C. $15,000 D. $28,000 89. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is EVA for Division B?

A. $144,000. B. $116,000. C. $216,000 D. $44,000. 90. Management uses the following as a measure for assessing efficiency in producing and selling goods and services because it indicates the portion of each dollar of revenue that is profit. A. Profit margin percentage. B. Return on investment C. Investment turnover ratio. D. Revenue realization ratio.

91. The following is a measure for assessing how effectively management used the funds invested and is the ratio of divisional sales to the investment in divisional assets. A. profit margin percentage. B. return on investment. C. investment turnover ratio. D. investment realization ratio.

92. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the profit margin percentage for Division Z?

A. 1.5% B. 100.0% C. 15.0% D. 6.0%

93. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the division investment for Division Z?

A. $75,000 B. $500,000 C. $1,250,000 D. $187,500 94. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the investment turnover for Division Z?

A. 2.50 B. 0.15 C. 6.67 D. 1.50

95. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the sales revenue for Division Y?

A. $25,000 B. $125,000 C. $500,000 D. $208,333 96. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the investment in Division Y?

A. $25,000 B. $125,000 C. $500,000 D. $208,333 97. Beta Division had the following information:

Investment in Beta Division Operating Profit in Beta Division Weighted average cost of capital Target ROI Profit Margin % for Beta Division

$400,000 $50,000 12% 15% 20%

If the division investment is decreased by $100,000, with no other changes, the return on investment of Beta Division will be

A. 100.0% B. 16.7% C. 600.0% D. 62.5% 98. If the National Division of American Products Company had a investment turnover ratio of 4.2 and a profit margin percentage 10%, the return on investment would be A. 23.8% B. 420.0% C. 42.0% D. 238.0%

99. If the profit margin percentage of 30% stayed the same and the investment turnover ratio of 5.0 increased by 10%, what would happen to ROI? A. increase by 10% B. decrease by 10% C. increase by 15% D. remain the same

100. If the investment turnover ratio increased by 30% and the profit margin percentage increased by 20%, what would happen to the divisional ROI? A. It would increase by 56%. B. It would decrease by 60%. C. It would increase by 20%. D. The answer cannot be determined.

101. The minimum desired ROI rate A. is based on industry averages. B. is based on a divisions operating characteristics. C. is equal to the companys cost of funds. D. is set by generally accepted accounting principles.

102. Why would the calculation of economic value added (EVA) alleviate the shortcoming of the return on investment measurement? A. Because it is required by generally accepted accounting principles. B. Because it is required for Securities and Exchange Commission reporting. C. Because it assures compliance with Internal Revenue Service Code requirements. D. Because managers many not accept good investment opportunities if the ROI of the investment is lower than the present ROI of the division.

103. Which of the following statements is true concerning economic value added (EVA)? A. EVA alleviates the shortcoming of the return on investment measurement. B. EVA calculates a percentage for comparison purposes. C. EVA is required by the New York Stock Exchange. D. EVA is the same as economic payback analysis.

104. Which of the following is the correct calculation of economic value added (EVA)? A. Net Operating Profit Before Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. B. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. C. Weighted-Average Cost of Capital [Net Operating Profit Before Tax - (Total Assets - Non-Interest-Bearing Debt)]. D. Weighted-Average Cost of Capital (Net Operating Profit After Tax - [Total Assets - Non-Interest-Bearing Debt)].

105. Which of the following defines Economic value added (EVA)? A. annual after-tax operating profit minus the total annual cost of capital. B. annual before-tax operating profit minus the total annual cost of capital. C. annual after-tax operating profit plus the total annual cost of capital. D. annual before-tax operating profit plus the total annual cost of capital.

106. Which statement is true concerning economic value added (EVA)? A. EVA indicates how much employee wealth is being created by company managers. B. EVA indicates how much shareholder wealth is being created by company managers. C. EVA indicates how much customer wealth is being created by company managers. D. EVA indicates how much national wealth is being created by company managers.

107. Which of the following best indicates how much shareholder wealth is being created by company managers? A. Return on investment divided by total assets. B. Return on investment divided by total liabilities. C. Return on investment divided by retained earnings. D. Economic value added (EVA).

108. What is economic value added (EVA)? A. The amount of earnings generated above the cost of funds invested to generate those earnings. B. The same as the rate of return on total assets. C. The same as the rate of return on shareholders equity. D. The same as the rate of return on liabilities.

109. How is EVA (economic value added) calculated? A. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. B. the amount of earnings generated above the cost of funds invested to generate those earnings. C. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)], and the amount of earnings generated above the cost of funds invested to generate those earnings. D. None of the answers is correct.

110. EVA encourages the right kind of behavior from divisions because of its emphasis on A. after-tax net income. B. total capital employed. C. true cost of capital. D. before-tax operating income.

111. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Mortgage bonds Unsecured bonds Common stock

Amount $1,000,000 3,000,000 6,000,000

After-tax Cost 0.048 0.050 0.150

What is the weighted cost of capital?

A. 0.1098 B. 0.2480 C. 0.0827 D. 0.0366 112. EVA encourages the right kind of behavior from divisions because of its emphasis on A. after-tax net income. B. total capital employed. C. true cost of capital. D. before-tax operating income.

113. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Mortgage bonds Unsecured bonds Common stock

Amount $1,000,000 3,000,000 6,000,000

After-tax Cost 0.048 0.050 0.150

What is the EVA if the before-tax operating income is $1,500,000?

A. $1,134,000 B. $402,000 C. $534,000 D. $(198,000) 114. Many consultants and analysts modify the numbers presented in external financial statements that comply with GAAP when implementing incentive compensation plans. The main adjustments that companies seem to make, if any, include capitalizing expenditures on A. research and development and then amortizing the capitalized expenditures over their useful life. B. customer development, advertising, and promotion if these expenditures will benefit future years and then amortizing the capitalized expenditures over their useful life. C. employee training that will benefit future years and then amortizing the capitalized expenditures over their useful life. D. All of the answers are correct.

115. Many consultants and analysts modify the numbers presented in external financial statements that comply with GAAP when implementing incentive compensation plans. The main adjustments that companies seem to make, if any, include A. restating inventories to reflect replacement cost. B. making price-level adjustments so that assets, revenues, and expenses are stated in current-year currency values. C. using market values of assets at the beginning and end of fiscal periods to reflect the actual decline in the economic value of assets. D. All of the answers are correct.

116. What issues must be addressed when using return on investment (ROI) as a divisional performance measure?

117. What are the transfer pricing issues and methods?

118. Explain multinational transfer prices.

119. What is the contribution approach alternative to return on investment for division performance measurement?

120. What are the issues in measuring the investment base for calculating return on investment?

121. What is the purpose of the return on investment (ROI) calculation and what are its shortcomings?

122. How do you calculate economic value added (EVA) and how is it used?

123. The Worldwide Computer Retailing Division had the following data:

Year 2008 2009 2010

Sales $1,000,000 2,000,000 4,000,000

Profit $100,000 160,000 400,000

Investment $ 500,000 1,000,000 2,500,000

What is the return on investment (ROI), profit margin percentage, and investment turnover ratio for Years 2008, 2009, and 2010?

124. Identify the benefits and disadvantages of decentralization.

125. Identify types of costs to be considered in measuring divisional operating costs.

126. Compare and discuss the advantages and disadvantages of the following performance measures: ROI and EVA.

127. Provide the missing data in the following situations:

Sales Revenue Division Investment Operating Profit Profit Margin Percentage Investment Turnover Return on investment

Sigma Division $ (a) $ (b) $400,000 8% (c) 16%

Tau Division $250,000 $ (d) $10,000 (e) (f) 10%

Gamma Division $ (g) $800,000 $144,000 12% 1.5 (h)

128. Sprint Company has the following data for 2009:

Sales Revenue Contribution margin Operating profit Division Investment Weighted average cost of capital

Division A $400,000 160,000 80,000 320,000 15%

Division B $300,000 125,000 30,000 200,000 15%

Sprint Company has a target ROI of 20 percent. Required: Calculate the following amounts for each division: a. b. c. Investment Turnover. ROI EVA

129. The Bat Division of Baseball Company has just revised its actual cost data for 2008. Bat Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for $122 each. Bat's new cost data are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling and administrative expenses Total costs Desired return Sales price

$ 40 30 10 16 6 12 $114 20 $134

Current production is 200,000 units, and the Bat Division has a capacity of 300,000 units. Required: a. b. c. What is the lowest price the Bat Division should charge for the internal transfers of its goods? What is the highest price the Sport Division should pay for the units? Give the primary reason why the Bat Division should reduce its price.

130. North Carolina Company produces computers and computer components. The company is organized into several divisions that operate essentially as autonomous companies. The firm permits division managers to make investment and production-level decisions. The division managers can also decide whether to sell to other divisions or to outside customers. Networks Division produces a critical component for computers manufactured by Computers Division. It has been selling this component to Computers for $3,000 per unit. Networks recently purchased new equipment for producing the component. To offset its higher depreciation charges, Networks increased its price to $3,200 per unit. The manager of Networks has asked the president to instruct Computers to purchase the component for the $3,200 price rather than to permit Computers to purchase externally for $3,000 per unit. The following information is obtained from the companys records: Computers annual purchases of the component, 400 units; Networks variable costs per unit, $2,400; Networks fixed costs per unit, $400. Required: a. Assume that the firm has no alternative uses for Networks idle capacity. Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain. b. Assume that the firm can use the idle capacity of Networks for other purposes, resulting in cash operating savings of $150,000. Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain. c. Assume the same facts as in part b. except that the outside market price drops to $2,800 per unit. Will the company as a whole benefit if Computers purchases the component externally for $2,800? Explain. d. As president, how would you respond to the manager of Networks? Discuss each scenario described in parts a., b., and c.

131. Bills Computer Parts has two decentralized divisions, Hardware and Pre-Fab. Pre-Fab has always purchased certain units from Hardware at $230 per unit. Because Hardware plans to raise the price to $260 per unit, Pre-Fab desires to purchase these units from outside suppliers for $230 per unit. Hardwares costs follow: variable costs per unit, $200; annual fixed costs, $30,000. Annual production of these units for Pre-Fab is 1,500 units. If Pre-Fab buys from an outside supplier, the facilities Hardware uses to manufacture these units would remain idle. Required: What would be the result if Bills Computer Parts management enforces a transfer price of $260 per unit between Hardware and Pre-Fab?

132. The Chewy Chocolate Division of the Delight Confection Company had a rate of return on investment (ROI) of 12 percent (= $1,200,000/$10,000,000) during Year 5, based on sales of $20,000,000. In an effort to improve its performance during Year 6, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the companys ROI for Year 6 was 10 percent (= $1,100,000/$11,000,000), based on sales of $20,000,000. Required: a. Break down the ROI for Year 5 and Year 6 into profit margin and investment turnover ratios. b. Explain the reason for the decrease in ROI between the two years using the results from part a.

133. The following information relates to the operating performance of two divisions of Mega Electronics, Inc., for last year.

Operating Profit Total Assets (at gross acquisition cost) Total Assets (net of accumulated depreciation)

U.S. Division $ 3,000,000 20,000,000 15,000,000

Hong Kong Division $ 4,000,000 50,000,000 15,000,000

Required: a. Compute the return on investment (ROI) of each division, using total assets at gross book value as the investment base. b. Compute the ROI of each division, using total assets net of accumulated depreciation (net book value) as the investment base. c. Which of the two measures do you think gives the better indication of operating performance? Explain your reasoning.

134. The following information relates to the operating performance of three divisions of Paul, Inc. for last year.
North Division $ 400,000 5,000,000 Central Division $3,000,000 9,000,000 South Division $ 4,000,000 18,000,000

Operating Profit Investment.

Required: a. Compute the rate of return on investment (ROI) of each division for last year. b. Assume that the firm levies a charge on each division for the use of funds. The charge is 10 percent on investment, and the accounting system deducts it in measuring divisional net income. Recalculate ROI using divisional net income after deduction of the use-of-funds charge in the numerator. c. Which of these two measures do you think gives the better indication of operating performance? Explain your reasoning.

135. Bubbling Springs, Inc., produces bottled drinks. Division #1 acquires the water, adds carbonation, and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers. Division # 2 buys carbonated water in bulk, adds flavoring, bottles it, and sells it. Last year, Division #1 produced 1,500,000 gallons, of which it sold 1,300,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.40 per gallon. Division #2 processed the 1,300,000 gallons, which it sold for $1,500,000. Division #1s variable costs were $440,000 and its fixed costs were $120,000. The Division # 2 incurred an additional variable cost of $320,000 and $200,000 of fixed costs. Both divisions operated below capacity. Required: a. Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon. b. Repeat part a. assuming a negotiated transfer price of $0.30 per gallon is used. c. Respond to the statement: The choice of a particular transfer price is immaterial to the company as a whole.

136. Brooks Beverage Company produces bottled drinks. Division #1 acquires the water, adds carbonation, and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers. Division # 2 buys carbonated water in bulk, adds flavoring, bottles it, and sells it. Last year, Division #1 produced 1,600,000 gallons, of which it sold 1,400,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.35 per gallon. Division #2 processed the 1,400,000 gallons, which it sold for $1,500,000. Division #1s variable costs were $420,000 and its fixed costs were $115,000. The Division # 2 incurred an additional variable cost of $300,000 and $180,000 of fixed costs. Both divisions operated below capacity. Required: a. Prepare division income statements assuming the transfer price is at the external market price of $0.35 per gallon. b. Repeat part a. assuming a negotiated transfer price of $0.25 per gallon is used. c. Respond to the statement: The choice of a particular transfer price is immaterial to the company as a whole.

137. The following information relates to the operating performance of three divisions of Santos, Inc. for last year.
Mexico Division $ 450,000 6,000,000 Canada Division $2,000,000 8,000,000 South America Division $ 5,000,000 25,000,000

Operating Profit Investment.

Required: a. Compute the rate of return on investment (ROI) of each division for last year. b. Assume that the firm levies a charge on each division for the use of funds. The charge is 10 percent on investment, and the accounting system deducts it in measuring divisional net income. Recalculate ROI using divisional net income after deduction of the use-of-funds charge in the numerator. c. Which of these two measures do you think gives the better indication of operating performance? Explain your reasoning.

138. The following information relates to the operating performance of two divisions of Sound Machine, Inc., for last year.

Operating Profit Total Assets (at gross acquisition cost) Total Assets (net of accumulated depreciation)

U.S. Division $ 6,000,000 24,000,000 16,000,000

European Division $ 4,000,000 40,000,000 16,000,000

Required: a. Compute the return on investment (ROI) of each division, using total assets at gross book value as the investment base. b. Compute the ROI of each division, using total assets net of accumulated depreciation (net book value) as the investment base. c. Which of the two measures do you think gives the better indication of operating performance? Explain your reasoning.

139. The Satin Division of the Christmas Candy Company had a rate of return on investment (ROI) of 12 percent (= $1,500,000/$10,000,000) during Year 4, based on sales of $30,000,000. In an effort to improve its performance during Year 5, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the companys ROI for Year 5 was 10 percent (= $1,200,000/$12,000,000), based on sales of $30,000,000. Required: a. Break down the ROI for Year 4 and Year 5 into profit margin and investment turnover ratios. b. Explain the reason for the decrease in ROI between the two years using the results from part a.

Chapter 11--Investment Center Performance Evaluation Key

1. Which statement is true concerning decentralization? A. Decentralization impedes local personnel response to a changing environment. B. Decentralization requires significant oversight from top management. C. Decentralization divides large, complex problems into manageable pieces. D. All of the answers are correct.

2. Which of the following statements is true concerning decentralization? A. Decentralization helps train managers. B. Decentralization provides a basis for evaluating manager performance. C. Decentralization motivates managers. D. All of the answers are correct.

3. Which of the following is a disadvantage of decentralization? A. Decentralization helps train managers. B. Decentralization provides a basis for evaluating performance. C. Decentralization motivates managers. D. Decentralization may promote non-goal-congruent behavior.

4. A division manager may decide to purchase materials from an outside supplier even though another division of the firm could produce the materials at a lower incremental cost using currently idle facilities. This is an example of A. profit maximization. B. centralization. C. goal-congruent behavior. D. non-goal-congruent behavior.

5. To encourage division managers to act in ways consistent with organizational goals, divisional planning and control systems attempt to create A. profit maximization. B. centralization. C. behavior congruence. D. non-goal-congruent behavior.

6. To encourage division managers to act in ways consistent with organizational goals, divisional planning and control systems attempt to create A. profit maximization. B. centralization. C. goal congruence. D. non-goal-congruent behavior.

7. Which of the following is the correct calculation for Division return on investment? A. Divide division profit margin by division investment. B. Divide profit margin by division investment. C. Divide profit margin by division revenue. D. Divide division revenue by division investment.

8. Before applying ROI as a control measure, the manager must answer the following question(s): A. How does the firm measure revenues? B. What costs does the firm deduct in measuring divisional operating costs? C. How does the firm measure investment? D. All of the answers are correct.

9. The value assigned to a transaction where goods are bought by one unit of an organization from another unit of the same organization known as which of the following? A. sales price. B. intercompany cost basis. C. transfer price. D. generally accepted price.

10. Which statement is true concerning the establishment of transfer prices? A. If the selling division is operating at capacity, the transfer price should be the sum of fixed and variable costs of production. B. If the selling division has idle capacity, and the idle facilities cannot be used for other purposes, the transfer price should be at least the variable costs of production. C. If the selling division is operating below capacity, the transfer price should be discounted. D. None of the answers is correct.

11. Which statement is true concerning the establishment of transfer prices? A. If the selling division is operating at capacity, it should transfer at market price. B. If the selling division is operating below capacity, it should transfer at a discount. C. if the selling division is operating below capacity, it should transfer at market price. D. None of the answers is correct.

12. Which of the following is managements challenge when setting transfer prices? A. Ensuring the buyer has goal congruence with respect to the organizations goals. B. Ensuring the seller has goal congruence with respect to the organizations goals. C. Ensuring either the buyer or the seller, but not both, has goal congruence with respect to the organizations goals. D. Ensuring both the buyer and seller have goal congruence with respect to the organizations goals.

13. Managements challenge is to set transfer prices so that both the buyer and seller have goal congruence with respect to the organizations goals. How is this accomplished? A. With no intervention from top management to set the transfer price for each transaction between divisions. B. With top management establishing transfer price policies that divisions follow. C. With division managers not engaging in negotiation to set transfer prices among themselves. D. All of the answers are correct.

14. To achieve organizational goal congruence, how should management set transfer prices? A. To allow for divisional autonomy and encourage managers to pursue corporate goals consistent with their own personal goals. B. Top management should set the selling divisions revenue and the buying divisions cost. C. Transfer prices should be compatible with the companys performance evaluation system. D. All of the answers are correct.

15. When establishing transfer prices, the objective is to maximize the companys profit by A. transferring at the differential outlay cost to the selling division (typically variable costs). B. transferring at the opportunity cost to the company of making the internal transfers ($0 if the seller has idle capacity or selling price minus variable costs if the seller is operating at capacity). C. transferring at the differential outlay cost to the selling division plus the opportunity cost to the company of making the internal transfers. D. None of the answers is correct.

16. Which of the following transfer pricing procedures maximizes the companys profit by transferring at the differential outlay cost to the selling division plus the opportunity cost to the company of making the internal transfers? A. economic transfer pricing rule. B. effective transfer pricing rule. C. efficient transfer pricing rule. D. None of the answers is correct.

17. What is a disadvantage of top management intervention in setting transfer prices between divisions? A. Top management may become swamped with pricing disputes. B. Division managers will lose the flexibility and other advantages of autonomous decision making. C. The approach reduces the benefits of decentralization. D. All of the answers are correct.

18. What is generally considered the best transfer pricing basis when there is a competitive market for the product and market prices are readily available? A. Market price-based transfer pricing B. Variable cost-based transfer pricing C. Fixed price-based transfer pricing D. Fixed cost-based transfer pricing

19. Which of the following is an advantage(s) of using market prices in a competitive market? A. Both buying and selling divisions can buy and sell as many units as they want at market price. B. Managers of both buying and selling divisions are indifferent between trading with each other or with outsiders. C. From the companys perspective, this arrangement is fine as long as the selling division is operating at capacity. D. All of the answers are correct.

20. What transfer pricing basis is considered a good estimation of differential cost plus opportunity cost? A. Market price-based transfer pricing B. Variable cost-based transfer pricing C. Fixed price-based transfer pricing D. Fixed cost-based transfer pricing

21. What transfer pricing mechanism is used when a company does not have a measure of differential or variable cost? A. Market price-based transfer pricing B. Full-absorption costing C. Activity-based costing D. Actual cost-based transfer pricing

22. Colonial Computing Systems Colonial Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular mouse from Production at $50 per unit. The Production Division is considering raising the price to $60 per unit. The Production Division's costs related to the mouse production is as follows:

Variable costs per unit: Monthly fixed costs:

$50 $10,000

The Marketing Division handles the promotion and distribution of the mouse purchases from the Production Division and sells each mouse for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 1,500 units per month. Marketing Division can buy the same mouse from outside suppliers for $60. If the Marketing Division purchases the mouse from outside suppliers, the facilities the Production Division uses to manufacture the mouse would remain idle. Refer to Colonial Computing Systems. The Production Division is operating below capacity because of weak global demand for the product. What should be the mouse transfer price between the Production Division and Marketing Division in order for Colonial to optimize profits?

A. $ 50 B. $ 55 C. $ 60 D. $100 23. Colonial Computing Systems Colonial Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular mouse from Production at $50 per unit. The Production Division is considering raising the price to $60 per unit. The Production Division's costs related to the mouse production is as follows:

Variable costs per unit: Monthly fixed costs:

$50 $10,000

The Marketing Division handles the promotion and distribution of the mouse purchases from the Production Division and sells each mouse for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 1,500 units per month. Marketing Division can buy the same mouse from outside suppliers for $60. If the Marketing Division purchases the mouse from outside suppliers, the facilities the Production Division uses to manufacture the mouse would remain idle. Refer to Colonial Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product. What should be the mouse transfer price between the Production Division and Marketing Division in order for Colonial to optimize profits?

A. $ 50 B. $ 55 C. $ 60 D. $100

24. Terrapin Computing Systems Terrapin Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular large tower case from Production at $58 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the large tower case production is as follows:

Variable costs per unit: Monthly fixed costs:

$58 $10,000

The Marketing Division handles the promotion and distribution of the large tower case purchases from the Production Division and sells each large tower case for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same large tower case from outside suppliers for $75. Refer to Terrapin Computing Systems. If the Marketing Division purchases the large tower case from outside suppliers, the facilities the Production Division uses to manufacture the large tower case would remain idle. The Production Division is operating below capacity because of weak global demand for the product. What should be the large tower case transfer price between the Production Division and Marketing Division in order for Terrapin to optimize profits?

A. $ 55 B. $ 58 C. $ 75 D. $100 25. Terrapin Computing Systems Terrapin Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular large tower case from Production at $58 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the large tower case production is as follows:

Variable costs per unit: Monthly fixed costs:

$58 $10,000

The Marketing Division handles the promotion and distribution of the large tower case purchases from the Production Division and sells each large tower case for $100. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same large tower case from outside suppliers for $75. Refer to Terrapin Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per large tower case. What should be the large tower case transfer price between the Production Division and Marketing Division in order for Terrapin to optimize profits?

A. $ 55 B. $ 58 C. $ 75 D. $100

26. Dukes Computing Systems Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular motherboard from Production at $65 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the motherboard production is as follows:

Variable costs per unit: Monthly fixed costs:

$65 $10,000

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same motherboard from outside suppliers for $75. Refer to Dukes Computing Systems. If the Marketing Division purchases the motherboard from outside suppliers, the facilities the Production Division uses to manufacture the motherboard would remain idle. The Production Division is operating below capacity because of weak global demand for the product. What should be the motherboard transfer price be between the Production Division and Marketing Division in order for Dukes to optimize profits?

A. $ 55 B. $ 65 C. $ 75 D. $125 27. Dukes Computing Systems Dukes Computing Systems manufactures and sells various computer products and has two decentralized divisions: (1) Production and (2) Marketing. The Marketing Division has always purchased a particular motherboard from Production at $65 per unit. The Production Division is considering raising the price to $75 per unit. The Production Division's costs related to the motherboard production is as follows:

Variable costs per unit: Monthly fixed costs:

$65 $10,000

The Marketing Division handles the promotion and distribution of the motherboard purchases from the Production Division and sells each motherboard for $125. Marketing Division incurs monthly fixed costs of $5,000. Marketing Division sells 2,000 units per month. Marketing Division can buy the same motherboard from outside suppliers for $75. Refer to Dukes Computing Systems. The Production Division is operating at maximum capacity because of strong worldwide demand for the product and the Production Division can sell all it produces to outside customers for $75 per motherboard. What should be the motherboard transfer price between the Production Division and Marketing Division in order for Dukes to optimize profits?

A. $ 55 B. $ 65 C. $ 75 D. $125

28. Transfer prices are the prices charged A. for distributing goods from one warehouse to another. B. for the goods produced by one division to another division that needs those goods. C. when delivering goods to the customer. D. when transferring goods to international divisions.

29. Which of the following is(are) the transfer price that would leave the selling division no worse off if the good is sold to an internal division? A. The negotiated transfer price. B. The minimum transfer price. C. The maximum transfer price. D. Both a. and c.

30. Which of the following is(are) the transfer price that would leave the buying division no worse off if an input is purchased from an internal division. A. The negotiated transfer price. B. The minimum transfer price. C. The maximum transfer price. D. Both a. and c.

31. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 1?

A. $90. B. $86. C. $83. D. $73.

32. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 1?

A. $91. B. $90. C. $86. D. $73. 33. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the minimum transfer price in Case 2?

A. $75. B. $74. C. $68. D. $58.

34. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. What is the maximum transfer price in Case 2?

A. $75. B. $74. C. $68. D. $58. 35. Ambros Company In the Ambros Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below:

Case 1 Division A: Capacity in units Number of units sold externally Market selling price Variable costs per unit Fixed costs per unit based on capacity Division B: Number of units needed for production Purchase price per unit from external supplier 100,000 100,000 $90 73 10

Case 2 100,000 60,000 $75 58 10

40,000 $86

40,000 $74

Refer to Ambros Company. The company uses the opportunity cost approach to transfer pricing. Which case should not be transferred internally?

A. Case 1 B. Case 2 C. Neither should be transferred internally. D. Both should be transferred internally.

36. When there is an outside market for an intermediate product which is perfectly competitive, the most equitable method of transfer pricing is A. market price. B. production cost pricing. C. variable cost pricing. D. cost plus markup pricing.

37. Colorado Furniture Colorado Furniture had the following historical accounting data, per hundred board feet, concerning one of its products:

Finished shelving: Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$30 16 10 12 8 4

The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. Refer to Colorado Furniture. If the negotiated price is used, Colorado Furniture's transfer price should be a

A. maximum of $100.80. B. minimum of $84.00. C. maximum of $110.00. D. minimum of $80.00. 38. Colorado Furniture Colorado Furniture had the following historical accounting data, per hundred board feet, concerning one of its products:

Finished shelving: Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$30 16 10 12 8 4

The shelving is normally transferred internally from the Cutting Division to the Finishing Division. It also may be sold externally for $110 per hundred board feet. The minimum profit level accepted by the company is a markup of 20 percent. Refer to Colorado Furniture. If the variable manufacturing cost transfer price method is used without a fixed fee, Colorado Furniture's transfer price will be

A. $68. B. $84. C. $56. D. $64. 39. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. If the negotiated price is used, Division A's transfer price should be a

A. maximum of $210.00. B. minimum of $153.00 C. maximum of $198.90 D. minimum of $120.00 40. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. What would be the transfer price if Division X uses full cost plus markup?

A. $167.70 B. $198.90 C. $136.50 D. $129.00

41. Pauter Company Pauter Company had the following historical accounting data per unit:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

$60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for $210 per unit. The minimum profit level accepted by the company is a markup of 30 percent. There were no beginning or ending inventories. Refer to Pauter Company. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be

A. $60. B. $90. C. $105. D. $144. 42. Chemical Company has two divisions, the Mixing Division and Bottling Division. The Mixing Division sells chemicals to the Bottling Division. Standard costs for the Mixing Division are as follows:

Direct materials Direct labor

$3.00 per gallon 2.40 per gallon

The Bottling Division uses the following predetermined overhead rate: Variable overhead Fixed overhead Total $3.60 per gallon 2.40 per gallon $6.00 per gallon

What is the transfer price for the chemicals per gallon based on standard variable cost?

A. $3.00 B. $5.40 C. $9.00 D. $11.40

43. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Division. What is the transfer price based on full cost plus a markup of 30 percent?

A. $2,925. B. $585. C. $2,760. D. $2,730. 44. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Division. What is the transfer price based on variable product costs plus a fixed fee of $210?

A. $210. B. $1,800. C. $2,100 D. $2,310. 45. Engine Division The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Market price per unit

$ 600 1,200 300 150 2,730

Refer to the Engine Department. The division has excess capacity. What is the best transfer price to avoid transfer price problems?

A. $1,350 B. $300 C. $900 D. $2,100 46. What transfer pricing mechanism generally applies a normal markup to costs as a surrogate for market prices when intermediate market prices are not available? A. Fixed price-based transfer pricing B. Full-absorption costing C. Activity-based costing D. Cost-plus transfer pricing

47. Which of the following is a transfer pricing system that provides the selling division with a profit but charges the buying division with costs only? A. hybrid. B. dual. C. bifurcated. D. split-off.

48. Which statement is true concerning a dual transfer pricing system? A. It provides the selling division with a profit but charges the buying division with costs. B. It provides the buying division with a profit but charges the selling division with costs. C. It is required by generally accepted accounting principles. D. None of the answers is correct.

49. Which of the following describes a transfer pricing system based on either variable costs or full-absorption costs, and applies a normal markup to costs as a surrogate for market prices when intermediate market prices are not available? A. hybrid. B. dual. C. cost-plus. D. mark-to-market.

50. Transfer pricing systems based on costs include which of the following? A. activity-based costing. B. cost-plus. C. standard costs. D. All of the answers are correct.

51. Which statement is true concerning negotiated transfer pricing? A. It preserves the autonomy of the division managers. B. It does not preserve the autonomy of the division managers. C. It violates generally accepted accounting principles. D. It is the same as centrally administered transfer pricing.

52. Which of these is a transfer pricing methodology that preserves the autonomy of the division managers? A. cost-plus. B. actual costs. C. negotiated. D. predetermined.

53. Surveys of global corporate transfer pricing practices indicate that nearly half use A. cost, about one-third use market price, and the rest use negotiations. B. market price, about one-third use cost, and the rest use negotiations. C. negotiations, about one-third use cost, and the rest use market price. D. negotiations, about one-third use market price, and the rest use cost.

54. Is there an optimal transfer pricing policy that dominates all others? A. Yes, managers strive to devise a textbook-perfect system regardless of cost-benefit considerations. B. Yes, managers strive to devise a textbook-perfect system taking into consideration cost and benefits. C. No, managers tend to settle for a system that seems to work reasonably well rather than devise a textbook-perfect system. D. No, managers tend to settle for a textbook-perfect system, rather than devise a system that seems to work reasonably well.

55. Because tax rates are different in different countries, companies have incentives to set transfer prices that will A. increase revenues in low-tax countries. B. decrease costs in high-tax countries. C. decrease revenues in low-tax countries. D. None of the answers is correct.

56. Because tax rates are different in different countries, companies have incentives to set transfer prices that will A. increase revenues in low-tax countries and increase costs in high-tax countries. B. increase costs in low-tax countries and increase revenues in high-tax countries. C. decrease costs in high-tax countries and decrease revenues in low-tax countries. D. None of the answers is correct.

57. Because tax rates are different in various states within the United States, companies have incentives to set transfer prices that will A. increase revenues in low-tax states. B. decrease costs in high-tax states. C. decrease revenues in low-tax states. D. None of the answers is correct.

58. What has spawned a major political issue concerning the estimated cost to the United States Treasury of as much as $9 billion to $13 billion per year in lost taxes that could presumably be collected if transfer prices were calculated according to U.S. tax laws? A. Tax avoidance by foreign companies using inflated transfer prices to reduce the profit of U.S. subsidiaries. B. Tax avoidance by domestic, United States, companies using inflated transfer prices to reduce the foreign profit of U.S. subsidiaries. C. Tax avoidance by foreign companies using deflated transfer prices to reduce the profit of U.S. subsidiaries. D. Tax avoidance by domestic, United States, companies using deflated transfer prices to reduce the profit of foreign subsidiaries.

59. When measuring a divisions operating costs, labor used in the divisions production is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

60. When measuring a divisions operating costs, thesalary of the division manager (controlled by top management) is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

61. When measuring a divisions operating costs, indirect controllable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management) C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

62. When measuring a divisions operating costs, direct controllable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

63. When measuring a divisions operating costs, indirect noncontrollable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

64. When measuring a divisions operating costs, direct noncontrollable operating costs include A. labor used in the divisions production. B. salary of the division manager (controlled by top management). C. costs of providing centralized services, such as data processing and employee training. D. company presidents salary.

65. When measuring a divisions operating costs, thecost of the company presidents salary is A. direct, controllable. B. indirect, controllable. C. direct, noncontrollable. D. indirect, noncontrollable.

66. When measuring divisional operating costs, direct versus indirect refers to whether A. the costs associate directly with the division. B. the division manager can affect the cost. C. the costs are fixed. D. the costs are variable.

67. In calculating return on investment (ROI), when measuring the investment base most firms use A. acquisition cost. B. net book value. C. replacement cost. D. MCRS depreciated value.

68. In calculating return on investment (ROI), the use of book values of assetsparticularly fixed assetsin the ROI denominator A. is the preferable method. B. may cause a manager of a division with fully depreciated assets to be reluctant to replace the assets with more costly assets. C. is required by generally accepted accounting principles. D. may cause a manager of a division with fully depreciated assets to replace the assets with newer, more efficient, but more costly assets.

69. The rate of return on investment (ROI) has two components: A. Profit margin percentage and investment turnover ratio. B. Sales margin percentage and investment turnover ratio. C. Profit margin percentage and accounts receivable turnover ratio. D. Sales margin percentage and accounts receivable turnover ratio.

70. A shortcoming of return on investment (ROI) is that it may not lead managers to accept good investment opportunities if A. ROI of the investment is higher than the present ROI of the division. B. the ROI of the investment is the same as the present ROI of the division. C. the ROI of the investment is lower than the present ROI of the division. D. None of the answers is correct.

71. Return on Investment (ROI) is equal to the A. Profit Margin Percentage Investment Turnover Ratio. B. Sales Margin Percentage Investment Turnover Ratio. C. Profit Margin Percentage Accounts Receivable Turnover Ratio. D. Sales Margin Percentage Accounts Receivable Turnover Ratio.

72. Return on Investment (ROI) is equal to the A. (Profit Margin/Division Costs) (Division Costs/Division Investment). B. (Profit Margin/Division Revenues) (Division Revenues/Division Investment). C. (Sales Margin/Division Revenues) (Division Revenues/Division Investment). D. (Sales Margin/Division Costs) (Division Costs/Division Investment).

73. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2008?

A. 10%. B. 16%. C. 20%. D. 24%. 74. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2009?

A. 10%. B. 16%. C. 20%. D. 24%. 75. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the return on investment for Year 2010?

A. 10%. B. 16%. C. 20%. D. 24%. 76. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2008?

A. 6%. B. 8%. C. 10%. D. 12%. 77. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2009?

A. 6% B. 8% C. 10% D. 12%

78. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the profit margin percentage for Year 2010?

A. 6% B. 8% C. 10% D. 12% 79. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2008?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 80. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2009?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 81. Framing Division The Framing Division had the following data:

Year 2008 2009 2010

Division Revenue $1,000,000 2,000,000 4,000,000

Profit Margin $100,000 160,000 400,000

Division Investment $ 500,000 1,000,000 2,500,000

Refer to the Framing Division. What is the investment turnover ratio for Year 2010?

A. 1.0 B. 1.5 C. 1.6 D. 2.0 82. If a division has sales of $2,500,000, operating profit of $250,000, and a division investment of $1,250,000, its return on investment is A. 20% B. 10% C. 500% D. 200%

83. Parker Division had revenue of $250,000, operating profit of $10,000, and a division investment of $100,000. The investment turnover is A. 0.04 B. 2.50 C. 4.00 D. 0.25

84. Patterson Division had sales revenue of $200,000, operating profit of $10,000, and a division investment of $300,000. Its profit margin percentage is A. 66.7% B. 150.0% C. 3.3% D. 5.0%

85. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the return on investment for A?

A. 18% B. 15% C. 20% D. 40% 86. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the total sales revenue for Division B?

A. $666,667. B. $800,000. C. $1,200,000. D. $1,300,000.

87. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is the investment turnover for Division A?

A. 4.00 B. 0.10 C. 0.15 D. 2.50 88. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is EVA for Division A?

A. $40,000 B. $25,000 C. $15,000 D. $28,000 89. Correll Company Correll Company has two divisions, A and B. Information for each division is as follows:

Division Operating Profit Investment in Division Weighted Average Cost of Capital Profit Margin Percentage

A $40,000 $100,000 12% 10%

B $260,000 $1,200,000 12% 20%

Refer to Correll Company. What is EVA for Division B?

A. $144,000. B. $116,000. C. $216,000 D. $44,000. 90. Management uses the following as a measure for assessing efficiency in producing and selling goods and services because it indicates the portion of each dollar of revenue that is profit. A. Profit margin percentage. B. Return on investment C. Investment turnover ratio. D. Revenue realization ratio.

91. The following is a measure for assessing how effectively management used the funds invested and is the ratio of divisional sales to the investment in divisional assets. A. profit margin percentage. B. return on investment. C. investment turnover ratio. D. investment realization ratio.

92. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the profit margin percentage for Division Z?

A. 1.5% B. 100.0% C. 15.0% D. 6.0%

93. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the division investment for Division Z?

A. $75,000 B. $500,000 C. $1,250,000 D. $187,500 94. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the investment turnover for Division Z?

A. 2.50 B. 0.15 C. 6.67 D. 1.50

95. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the sales revenue for Division Y?

A. $25,000 B. $125,000 C. $500,000 D. $208,333 96. Marlow Company The following information pertains to the three divisions of Marlow Company:

Sales Revenue Operating Profit Divisional Investment Return on investment Profit Margin Percentage Investment Turnover Target ROI

Division X ? $36,000 300,000 ? 10% 1.5 15%

Division Y ? $25,000 ? 20% 5% ? 12%

Division Z 1,250,000 $75,000 ? 15% ? ? 10%

Refer to Marlow Company. What is the investment in Division Y?

A. $25,000 B. $125,000 C. $500,000 D. $208,333 97. Beta Division had the following information:

Investment in Beta Division Operating Profit in Beta Division Weighted average cost of capital Target ROI Profit Margin % for Beta Division

$400,000 $50,000 12% 15% 20%

If the division investment is decreased by $100,000, with no other changes, the return on investment of Beta Division will be

A. 100.0% B. 16.7% C. 600.0% D. 62.5% 98. If the National Division of American Products Company had a investment turnover ratio of 4.2 and a profit margin percentage 10%, the return on investment would be A. 23.8% B. 420.0% C. 42.0% D. 238.0%

99. If the profit margin percentage of 30% stayed the same and the investment turnover ratio of 5.0 increased by 10%, what would happen to ROI? A. increase by 10% B. decrease by 10% C. increase by 15% D. remain the same

100. If the investment turnover ratio increased by 30% and the profit margin percentage increased by 20%, what would happen to the divisional ROI? A. It would increase by 56%. B. It would decrease by 60%. C. It would increase by 20%. D. The answer cannot be determined.

101. The minimum desired ROI rate A. is based on industry averages. B. is based on a divisions operating characteristics. C. is equal to the companys cost of funds. D. is set by generally accepted accounting principles.

102. Why would the calculation of economic value added (EVA) alleviate the shortcoming of the return on investment measurement? A. Because it is required by generally accepted accounting principles. B. Because it is required for Securities and Exchange Commission reporting. C. Because it assures compliance with Internal Revenue Service Code requirements. D. Because managers many not accept good investment opportunities if the ROI of the investment is lower than the present ROI of the division.

103. Which of the following statements is true concerning economic value added (EVA)? A. EVA alleviates the shortcoming of the return on investment measurement. B. EVA calculates a percentage for comparison purposes. C. EVA is required by the New York Stock Exchange. D. EVA is the same as economic payback analysis.

104. Which of the following is the correct calculation of economic value added (EVA)? A. Net Operating Profit Before Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. B. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. C. Weighted-Average Cost of Capital [Net Operating Profit Before Tax - (Total Assets - Non-Interest-Bearing Debt)]. D. Weighted-Average Cost of Capital (Net Operating Profit After Tax - [Total Assets - Non-Interest-Bearing Debt)].

105. Which of the following defines Economic value added (EVA)? A. annual after-tax operating profit minus the total annual cost of capital. B. annual before-tax operating profit minus the total annual cost of capital. C. annual after-tax operating profit plus the total annual cost of capital. D. annual before-tax operating profit plus the total annual cost of capital.

106. Which statement is true concerning economic value added (EVA)? A. EVA indicates how much employee wealth is being created by company managers. B. EVA indicates how much shareholder wealth is being created by company managers. C. EVA indicates how much customer wealth is being created by company managers. D. EVA indicates how much national wealth is being created by company managers.

107. Which of the following best indicates how much shareholder wealth is being created by company managers? A. Return on investment divided by total assets. B. Return on investment divided by total liabilities. C. Return on investment divided by retained earnings. D. Economic value added (EVA).

108. What is economic value added (EVA)? A. The amount of earnings generated above the cost of funds invested to generate those earnings. B. The same as the rate of return on total assets. C. The same as the rate of return on shareholders equity. D. The same as the rate of return on liabilities.

109. How is EVA (economic value added) calculated? A. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)]. B. the amount of earnings generated above the cost of funds invested to generate those earnings. C. Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets - Non-Interest-Bearing Debt)], and the amount of earnings generated above the cost of funds invested to generate those earnings. D. None of the answers is correct.

110. EVA encourages the right kind of behavior from divisions because of its emphasis on A. after-tax net income. B. total capital employed. C. true cost of capital. D. before-tax operating income.

111. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Mortgage bonds Unsecured bonds Common stock

Amount $1,000,000 3,000,000 6,000,000

After-tax Cost 0.048 0.050 0.150

What is the weighted cost of capital?

A. 0.1098 B. 0.2480 C. 0.0827 D. 0.0366 112. EVA encourages the right kind of behavior from divisions because of its emphasis on A. after-tax net income. B. total capital employed. C. true cost of capital. D. before-tax operating income.

113. Young Company has a tax rate of 40 percent. Information for the company is as follows:

Mortgage bonds Unsecured bonds Common stock

Amount $1,000,000 3,000,000 6,000,000

After-tax Cost 0.048 0.050 0.150

What is the EVA if the before-tax operating income is $1,500,000?

A. $1,134,000 B. $402,000 C. $534,000 D. $(198,000) 114. Many consultants and analysts modify the numbers presented in external financial statements that comply with GAAP when implementing incentive compensation plans. The main adjustments that companies seem to make, if any, include capitalizing expenditures on A. research and development and then amortizing the capitalized expenditures over their useful life. B. customer development, advertising, and promotion if these expenditures will benefit future years and then amortizing the capitalized expenditures over their useful life. C. employee training that will benefit future years and then amortizing the capitalized expenditures over their useful life. D. All of the answers are correct.

115. Many consultants and analysts modify the numbers presented in external financial statements that comply with GAAP when implementing incentive compensation plans. The main adjustments that companies seem to make, if any, include A. restating inventories to reflect replacement cost. B. making price-level adjustments so that assets, revenues, and expenses are stated in current-year currency values. C. using market values of assets at the beginning and end of fiscal periods to reflect the actual decline in the economic value of assets. D. All of the answers are correct.

116. What issues must be addressed when using return on investment (ROI) as a divisional performance measure? Several questions must be addressed before applying return on investment as a control measure. How does the firm measure revenues? Which costs does the firm deduct in measuring divisional operating costs? How does the firm measure investment?

117. What are the transfer pricing issues and methods? Two general rules exist when establishing a transfer price: (1) If the selling division is operating at capacity, the transfer price should be the market price, (2) if the selling division has idle capacity, and the idle facilities cannot be used for other purposes, the transfer price should be at least the variable costs incurred to produce the goods.

118. Explain multinational transfer prices. Since tax rates are different in different countries, companies have incentives to set transfer prices that will increase revenues (and profits) in low-tax countries and increase costs (thereby reducing profits) in high-tax countries.

119. What is the contribution approach alternative to return on investment for division performance measurement? The contribution approach allows management to evaluate the division and its managers' performance without regard to costs arbitrarily allocated to divisions or to product lines. The report also provides data about the division's performance after the firm allocates all central administrative costs.

120. What are the issues in measuring the investment base for calculating return on investment? Two issues arise when measuring the investment base: (1) how to allocate the cost of shared assets; and (2) what value to use for the assets.

121. What is the purpose of the return on investment (ROI) calculation and what are its shortcomings? The return on investment (ROI) has two components: profit margin and investment turnover. A shortcoming of (ROI) is that it many not lead managers to accept good investment opportunities if the ROI of the investment is lower than the present ROI of the division. Return on Investment (ROI) = Profit Margin Percentage Investment Turnover Ratio (Profit Margin / Divisional Investment) = (Profit Margin/Divisional Revenues) (Divisional Revenues/Divisional Investment)

122. How do you calculate economic value added (EVA) and how is it used? The calculation of economic value added (EVA) alleviates the shortcoming of the return on investment measurement where managers many not accept good investment opportunities if the ROI of the investment is lower than the present ROI of the division. EVA = Net Operating Profit After Tax - [Weighted-Average Cost of Capital (Total Assets Non-Interest-Bearing Debt)]

123. The Worldwide Computer Retailing Division had the following data:

Year 2008 2009 2010

Sales $1,000,000 2,000,000 4,000,000

Profit $100,000 160,000 400,000

Investment $ 500,000 1,000,000 2,500,000

What is the return on investment (ROI), profit margin percentage, and investment turnover ratio for Years 2008, 2009, and 2010?

Year 2008 2009 2010

Return on Investment 20% 16% 16%

Profit Margin Percentage 10% 8% 10%

Investment Turnover Ratio 2.0 2.0 1.6

124. Identify the benefits and disadvantages of decentralization. Decentralization allows local personnel to respond quickly to a changing environment, frees top management from detailed operating decisions, divides complex problems into manageable pieces, helps train managers and provide a basis for evaluating performance, and motivates managers. The disadvantage is that it may promote non-goal-congruent behavior.

125. Identify types of costs to be considered in measuring divisional operating costs. In measuring divisional operating costs, management must decide how to treat the following costs: (1) controllable direct operating costs; (2) noncontrollable direct operating costs; (3) controllable indirect operating costs; and (4) noncontrollable indirect operating costs. Direct versus indirect refers to whether the cost associates directly with the division; controllable versus noncontrollable refers to whether the division manager can affect the cost.

126. Compare and discuss the advantages and disadvantages of the following performance measures: ROI and EVA. The return on investment measure is a ratio of operating income to average operating assets. It encourages efficiency, discourages excessive investment, forces managers to pay attention to relationships among variables, and allows comparison of different size ventures. It discourages investments in ventures that have a lower ROI than the division currently has and encourages short-run focus. The EVA is a measure that looks at the value added by current operations by determining the excess of after-tax operating income over the actual cost of capital employed. It looks at the wealth created from operations. However, it also is subject to manipulation by managers and is an absolute measure, making comparisons of different size divisions difficult.

127. Provide the missing data in the following situations:

Sales Revenue Division Investment Operating Profit Profit Margin Percentage Investment Turnover Return on investment

Sigma Division $ (a) $ (b) $400,000 8% (c) 16%

Tau Division $250,000 $ (d) $10,000 (e) (f) 10%

Gamma Division $ (g) $800,000 $144,000 12% 1.5 (h)

a. b. c. d. e. f. g. h.

$400,000/a = 0.08 $400,000/b = 0.16 c = $5,000,000/$2,500,000 = 2.0 $10,000/d = 0.10 e = $10,000/$250,000 = 4% f = $250,000/$100,000 = 2.5 times $144,000/g = 0.12 0.12 1.5 = 18%

a = $5,000,000 b = $2,500,000

d = $100,000

g = $1,200,000

128. Sprint Company has the following data for 2009:

Sales Revenue Contribution margin Operating profit Division Investment Weighted average cost of capital

Division A $400,000 160,000 80,000 320,000 15%

Division B $300,000 125,000 30,000 200,000 15%

Sprint Company has a target ROI of 20 percent. Required: Calculate the following amounts for each division: a. b. c. Investment Turnover. ROI EVA

Division A:
a. b. c. Investment Turnover ratio = $400,000/$320,000 = 1.25 ROI = 0.20 1.25 = 25% EVA = $80,000 - 0.15($320,000) = $32,000

Division B:

a. b. c.

Investment turnover ratio = $300,000/$200,000 = 1.50 ROI = 0.10 1.50 = 15% EVA = $30,000 - 0.15($200,000) = $0

129. The Bat Division of Baseball Company has just revised its actual cost data for 2008. Bat Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for $122 each. Bat's new cost data are as follows:

Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling and administrative expenses Total costs Desired return Sales price

$ 40 30 10 16 6 12 $114 20 $134

Current production is 200,000 units, and the Bat Division has a capacity of 300,000 units. Required: a. b. c. What is the lowest price the Bat Division should charge for the internal transfers of its goods? What is the highest price the Sport Division should pay for the units? Give the primary reason why the Bat Division should reduce its price.

a. b. c.

Lowest price would be total variable costs per unit; ($40 + $30 + $10 + $6) = $86. Highest price would be the open market price: $122. It should reduce its price because it is not operating at capacity and the fixed costs could be reduced per unit if more units were produced and sold. Also, there would probably be few, if any, variable selling expenses. The current contribution margin is $36 per unit ($122 $86), which amounts to a 29.5 percent contribution margin ratio on the $122 open market price.

130. North Carolina Company produces computers and computer components. The company is organized into several divisions that operate essentially as autonomous companies. The firm permits division managers to make investment and production-level decisions. The division managers can also decide whether to sell to other divisions or to outside customers. Networks Division produces a critical component for computers manufactured by Computers Division. It has been selling this component to Computers for $3,000 per unit. Networks recently purchased new equipment for producing the component. To offset its higher depreciation charges, Networks increased its price to $3,200 per unit. The manager of Networks has asked the president to instruct Computers to purchase the component for the $3,200 price rather than to permit Computers to purchase externally for $3,000 per unit. The following information is obtained from the companys records: Computers annual purchases of the component, 400 units; Networks variable costs per unit, $2,400; Networks fixed costs per unit, $400. Required: a. Assume that the firm has no alternative uses for Networks idle capacity. Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain. b. Assume that the firm can use the idle capacity of Networks for other purposes, resulting in cash operating savings of $150,000. Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain. c. Assume the same facts as in part b. except that the outside market price drops to $2,800 per unit. Will the company as a whole benefit if Computers purchases the component externally for $2,800? Explain. d. As president, how would you respond to the manager of Networks? Discuss each scenario described in parts a., b., and c. a.

Incremental Cash Outflow of the Computers Division ($3,000 X 400 $1,200,000 Units) Incremental Cash Savings of the Networks Division ($2,400 X 400 Units) (960,000) Net Incremental Cash Outflow $ 240,000 The company will be worse off by $240,000 if the Computers Division purchases the component externally.

b. Net Incremental Cash Outflow from Part a Incremental Cash Savings of the Networks Division Net Incremental Cash Outflow The company will be worse off by $90,000 if the Computers Division purchases the component externally.

$240,000 (150,000) $ 90,000

c. Incremental Cash Outflow of the Computers Division ($2,800 X 400 Units) Incremental Cash Savings of the Networks Division: Variable Costs ($2,400 X 400) Operating Savings Net Incremental Cash Outflow The company will be worse off by $10,000 if the Computers Division purchases the component externally.

$1,120,000 (960,000) (150,000) $ 10,000

d. Before responding, the president should raise three questions. First, which of the three conditions in Parts a. to c. is most likely to occur? The president should only consider interceding if the Computers Division's action will be detrimental to the company. Second, will the conditions expected to occur be short-lived or continually recurring? The president may permit the Computers Division to purchase the component externally if it is anticipated that the outside market price will soon increase to $3,200 or higher. In this way, divisional decision making autonomy is maintained. If the president intercedes, division managers may react negatively and harm the decentralized organization structure. The third, and perhaps most critical, question then is the effect of intercession on divisional performance.

131. Bills Computer Parts has two decentralized divisions, Hardware and Pre-Fab. Pre-Fab has always purchased certain units from Hardware at $230 per unit. Because Hardware plans to raise the price to $260 per unit, Pre-Fab desires to purchase these units from outside suppliers for $230 per unit. Hardwares costs follow: variable costs per unit, $200; annual fixed costs, $30,000. Annual production of these units for Pre-Fab is 1,500 units. If Pre-Fab buys from an outside supplier, the facilities Hardware uses to manufacture these units would remain idle. Required: What would be the result if Bills Computer Parts management enforces a transfer price of $260 per unit between Hardware and Pre-Fab? It would cost the company $45,000 if Pre-Fab purchased units from the outside supplier for $230 each. This $45,000 is the difference between the price paid for the units from an outside supplier ($230) and the differential cost of producing in the Hardware Division ($200) times the 1,500 units in the order. The fixed costs are sunk and, therefore, do not enter into the decision. Both the company and Hardware would be $45,000 worse off if Pre-Fab purchased from an outsider. Pre-Fab would not be affected whether paying $230 per unit to hardware or to an outsider. If management enforced the $260 transfer price and insisted that Pre-Fab purchase the units from Hardware, then the overall company profits would not be affected by the transfer price increase. However, Hardware would gain $45,000 while Pre-Fab would lose $45,000 compared to the current situation.

132. The Chewy Chocolate Division of the Delight Confection Company had a rate of return on investment (ROI) of 12 percent (= $1,200,000/$10,000,000) during Year 5, based on sales of $20,000,000. In an effort to improve its performance during Year 6, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the companys ROI for Year 6 was 10 percent (= $1,100,000/$11,000,000), based on sales of $20,000,000. Required: a. Break down the ROI for Year 5 and Year 6 into profit margin and investment turnover ratios. b. Explain the reason for the decrease in ROI between the two years using the results from part a. a. ROI = Profit Margin Percentage X Asset Turnover Ratio (Amounts in thousands of dollars--000 omitted.)

Profit / Investment = Year 5: 12% = Year 6: 10% = $1,200/$10,000 = $1,100/$11,000 =

Profit / Sales X $1,200/$20,000 X 6% X $1,100/$20,000 X 5.5% X

Sales / Investment $20,000/$10,000 2.0 $20,000/$11,000 1.82

b. The cost savings programs resulted in a reduction in expenses and a decrease in net income based on the same level of sales. Thus, the profit margin percentage decreased from 6 percent to 5.5 percent. The cost savings programs resulted in an increase in investment, probably from larger amounts of inventory and fixed assets. Since sales remained the same, the asset turnover ratio decreased.

133. The following information relates to the operating performance of two divisions of Mega Electronics, Inc., for last year.

Operating Profit Total Assets (at gross acquisition cost) Total Assets (net of accumulated depreciation)

U.S. Division $ 3,000,000 20,000,000 15,000,000

Hong Kong Division $ 4,000,000 50,000,000 15,000,000

Required: a. Compute the return on investment (ROI) of each division, using total assets at gross book value as the investment base. b. Compute the ROI of each division, using total assets net of accumulated depreciation (net book value) as the investment base. c. Which of the two measures do you think gives the better indication of operating performance? Explain your reasoning.

a. U.S. Division: $3,000,000/$20,000,000 = 15% Hong Kong Division: $4,000,000/$50,000,000 = 8% b. U.S. Division: $3,000,000/$15,000,000 = 20% Hong Kong Division: $4,000,000/$15,000,000 = 26.67% c. There is no universal "best" response to this question. It can be argued that the ROI on assets net of accumulated depreciation (Part b.) is biased in favor of divisions with older depreciable assets. By calculating ROI based on gross assets, the bias caused by differences in the age of depreciable assets is removed. However, another bias is introduced if gross assets are used. The acquisition costs of the assets of Hong Kong Division are more out of date than those of U.S. Division, which were acquired more recently. Each division might have assets of equal operating efficiency, but the amount at which they are stated in the denominator of ROI will be different. During periods of inflation, use of ROI based on assets gross of accumulated depreciation also tends to be biased in favor of divisions with older depreciable assets.

134. The following information relates to the operating performance of three divisions of Paul, Inc. for last year.
North Division $ 400,000 5,000,000 Central Division $3,000,000 9,000,000 South Division $ 4,000,000 18,000,000

Operating Profit Investment.

Required: a. Compute the rate of return on investment (ROI) of each division for last year. b. Assume that the firm levies a charge on each division for the use of funds. The charge is 10 percent on investment, and the accounting system deducts it in measuring divisional net income. Recalculate ROI using divisional net income after deduction of the use-of-funds charge in the numerator. c. Which of these two measures do you think gives the better indication of operating performance? Explain your reasoning.

a.
North Division: Central Division: South Division: $400,000/$5,000,000 = $3,000,000/$9,000,000 = $4,000,000/$18,000,000 = 8.0% 33.33% 22.22%

b. North Division: Central Division: South Division: $400,000 .10 X $5,000,000/$5,000,000 = $3,000,000 .10 X $9,000,000/$9,000,000 = $4,000,000 .10 X $18,000,000/$18,000,000 = 2% 23.33% 12.22%

c. As the above calculations demonstrate, the ranking of the divisions does not change. The ROI before deducting the use of capital charge is simply reduced by the 10 percent charge. It can be argued, therefore, that from the standpoint of top management, it does not matter which approach is followed as long as it is used consistently. Use of the measure in Part a., however, may lead divisions to improper decisions. A division may be inclined to accept projects which will increase its ROI even though the project will not return an amount to cover the charge for the use of capital. Therefore, it is preferable from the viewpoint of the company as a whole to allocate the investment funds to a division that can earn at least 10 percent.

135. Bubbling Springs, Inc., produces bottled drinks. Division #1 acquires the water, adds carbonation, and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers. Division # 2 buys carbonated water in bulk, adds flavoring, bottles it, and sells it. Last year, Division #1 produced 1,500,000 gallons, of which it sold 1,300,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.40 per gallon. Division #2 processed the 1,300,000 gallons, which it sold for $1,500,000. Division #1s variable costs were $440,000 and its fixed costs were $120,000. The Division # 2 incurred an additional variable cost of $320,000 and $200,000 of fixed costs. Both divisions operated below capacity. Required: a. Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon. b. Repeat part a. assuming a negotiated transfer price of $0.30 per gallon is used. c. Respond to the statement: The choice of a particular transfer price is immaterial to the company as a whole. a. & b.

Sales Costs of Goods Sold Selling and Administrative Expenses Operating Profit Total Company

Market-Based Transfer Price Division # 1 $ 600,000(a) (440,000) (120,000) $ 40,000 $500,000

Negotiated Transfer Price Division # 2 $ 1,500,000 (840,000)(b) (200,000) $ 460,000 $500,000 Division # 1 $ 470,000(c) (440,000) (120,000) $ (90,000) Division # 2 $ 1,500,000 (710,000)(d) (200,000) $ 590,000

(a) $600,000 = $.40 X 1,500,000 gallons. (b) $840,000 = ($.40 X 1,300,000 gallons) + $320,000. (c) $470,000 = ($.40 X 200,000 gallons) + ($.30 X 1,300,000 gallons). (d) $710,000 = ($.30 X 1,300,000 gallons) + $320,000. c. Although the company has the same total profit, the statement is incorrect if the type of transfer price used has an effect on the decisions of people in either division. For example, the use of a cost-based transfer price may provide no incentive for divisions to control costs because they will always have zero net income. Managers may choose not to sell to other divisions at a loss to their divisions, forcing the buying divisions to go outside the company.

136. Brooks Beverage Company produces bottled drinks. Division #1 acquires the water, adds carbonation, and sells it in bulk quantities to Division # 2 of Spring Waters and to outside buyers. Division # 2 buys carbonated water in bulk, adds flavoring, bottles it, and sells it. Last year, Division #1 produced 1,600,000 gallons, of which it sold 1,400,000 gallons to the Division # 2 and the remaining 200,000 gallons to outsiders for $0.35 per gallon. Division #2 processed the 1,400,000 gallons, which it sold for $1,500,000. Division #1s variable costs were $420,000 and its fixed costs were $115,000. The Division # 2 incurred an additional variable cost of $300,000 and $180,000 of fixed costs. Both divisions operated below capacity. Required: a. Prepare division income statements assuming the transfer price is at the external market price of $0.35 per gallon. b. Repeat part a. assuming a negotiated transfer price of $0.25 per gallon is used. c. Respond to the statement: The choice of a particular transfer price is immaterial to the company as a whole. a. & b.

Sales Costs of Goods Sold Selling and Administrative Expenses Operating Profit Total Company

Market-Based Transfer Price Division # 1 $ 560,000(a) (420,000) (115,000) $ 25,000 $555,000

Negotiated Transfer Price Division # 2 $ 1,500,000 (790,000)(b) (180,000) $ 530,000 $555,000 Division # 1 $ 420,000(c) (420,000) (115,000) $ (115,000) Division # 2 $ 1,500,000 (650,000)(d) (180,000) $ 670,000

(a) $560,000 = $.35 X 1,600,000 gallons. (b) $790,000 = ($.35 X 1,400,000 gallons) + $300,000. (c) $420,000 = ($.35 X 200,000 gallons) + ($.25 X 1,400,000 gallons). (d) $650,000 = ($.25 X 1,400,000 gallons) + $300,000. c. Although the company has the same total profit, the statement is incorrect if the type of transfer price used has an effect on the decisions of people in either division. For example, the use of a cost-based transfer price may provide no incentive for divisions to control costs because they will always have zero net income. Managers may choose not to sell to other divisions at a loss to their divisions, forcing the buying divisions to go outside the company.

137. The following information relates to the operating performance of three divisions of Santos, Inc. for last year.
Mexico Division $ 450,000 6,000,000 Canada Division $2,000,000 8,000,000 South America Division $ 5,000,000 25,000,000

Operating Profit Investment.

Required: a. Compute the rate of return on investment (ROI) of each division for last year. b. Assume that the firm levies a charge on each division for the use of funds. The charge is 10 percent on investment, and the accounting system deducts it in measuring divisional net income. Recalculate ROI using divisional net income after deduction of the use-of-funds charge in the numerator. c. Which of these two measures do you think gives the better indication of operating performance? Explain your reasoning.

a.
Mexico Division: Canada Division: South America Division: $450,000/$6,000,000 = $2,000,000/$8,000,000 = $5,000,000/$25,000,000 = 7.5% 25% 20%

b. Mexico Division: Canada Division: South America Division: $450,000 .10 X $6,000,000/$6,000,000 = $2,000,000 .10 X $8,000,000/$8,000,000 = $5,000,000 .10 X $25,000,000/$25,000,000 = 2.5% 15% 10%

c. As the above calculations demonstrate, the ranking of the divisions does not change. The ROI before deducting the use of capital charge is simply reduced by the 10 percent charge. It can be argued, therefore, that from the standpoint of top management, it does not matter which approach is followed as long as it is used consistently. Use of the measure in Part a., however, may lead divisions to improper decisions. A division may be inclined to accept projects which will increase its ROI even though the project will not return an amount to cover the charge for the use of capital. Therefore, it is preferable from the viewpoint of the company as a whole to allocate the investment funds to a division that can earn at least 10 percent.

138. The following information relates to the operating performance of two divisions of Sound Machine, Inc., for last year.

Operating Profit Total Assets (at gross acquisition cost) Total Assets (net of accumulated depreciation)

U.S. Division $ 6,000,000 24,000,000 16,000,000

European Division $ 4,000,000 40,000,000 16,000,000

Required: a. Compute the return on investment (ROI) of each division, using total assets at gross book value as the investment base. b. Compute the ROI of each division, using total assets net of accumulated depreciation (net book value) as the investment base. c. Which of the two measures do you think gives the better indication of operating performance? Explain your reasoning.

a. U.S. Division: $6,000,000/$24,000,000 = 25% European Division: $4,000,000/$40,000,000 = 10% b. U.S. Division: $6,000,000/$16,000,000 = 37.5% European Division: $4,000,000/$16,000,000 = 25% c. There is no universal "best" response to this question. It can be argued that the ROI on assets net of accumulated depreciation (Part b.) is biased in favor of divisions with older depreciable assets. By calculating ROI based on gross assets, the bias caused by differences in the age of depreciable assets is removed. However, another bias is introduced if gross assets are used. The acquisition costs of the assets of the European Division are more out of date than those of U.S. Division, which were acquired more recently. Each division might have assets of equal operating efficiency, but the amount at which they are stated in the denominator of ROI will be different. During periods of inflation, use of ROI based on assets gross of accumulated depreciation also tends to be biased in favor of divisions with older depreciable assets.

139. The Satin Division of the Christmas Candy Company had a rate of return on investment (ROI) of 12 percent (= $1,500,000/$10,000,000) during Year 4, based on sales of $30,000,000. In an effort to improve its performance during Year 5, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the companys ROI for Year 5 was 10 percent (= $1,200,000/$12,000,000), based on sales of $30,000,000. Required: a. Break down the ROI for Year 4 and Year 5 into profit margin and investment turnover ratios. b. Explain the reason for the decrease in ROI between the two years using the results from part a. a. ROI = Profit Margin Percentage X Asset Turnover Ratio (Amounts in thousands of dollars--000 omitted.)

Profit / Investment = Year 4: 15% = Year 5: 10% = $1,500/$10,000 = $1,200/$12,000 =

Profit / Sales X $1,500/$30,000 X 5% X $1,200/$30,000 X 4% X

Sales / Investment $30,000/$10,000 3.0 $30,000/$12,000 2.5

b. The cost savings programs resulted in a reduction in expenses and a decrease in net income based on the same level of sales. Thus, the profit margin percentage decreased from 5 percent to 4 percent. The cost savings programs resulted in an increase in investment, probably from larger amounts of inventory and fixed assets. Since sales remained the same, the asset turnover ratio decreased.

Chapter 12--Incentive Issues


Student: ___________________________________________________________________________ 1. Which of the following are key characteristic(s) of divisional incentive compensation plans? A. cash bonuses and profit sharing for short-term performance. B. deferred compensation for long-term incentive. C. special awards for particular actions or extraordinary performance. D. All of the answers are correct.

2. Because effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth, for long-term incentives firms give A. cash bonuses and profit sharing. B. deferred compensation. C. special awards. D. reorganizations.

3. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth, so for particular actions or extraordinary performance firms give A. cash bonuses and profit sharing. B. deferred compensation. C. special awards. D. reorganizations.

4. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth. Deferred compensation is given for A. short-term performance. B. long-term incentive. C. particular actions or extraordinary performance. D. None of the answers is correct.

5. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth. Why are special awards given? A. to improve short-term performance. B. as a long-term incentive. C. for particular actions or extraordinary performance. D. None of the answers is correct.

6. Which of the following are components of deferred compensation? A. cash bonuses. B. profit sharing plans. C. special awards. D. stock options.

7. Deferred compensation that gives an individual the right to purchase a specified number of shares of the companys stock at a specified price within a specified time period is/are called A. stock puts. B. stock options. C. stock calls. D. stock puts and stock calls.

8. What are the four stages of a products life cycle? A. design and development, growth, maturity, and decline. B. development, controlling, feedback, and decline. C. design, planning, redesign, and maturity. D. planning, controlling, monitoring, and feedback.

9. Which stage of a products life cycle establishes 80 to 90 percent of what the products costs will be? A. Product design and development B. Product manufacturing C. Product controlling D. Product planning

10. Effective divisional incentive compensation plans must induce individual behavior compatible with increasing which of the following? A. firm's wealth. B. suppliers' wealth. C. customers' wealth. D. employees' agency wealth.

11. Which of the following is a key characteristic of divisional incentive compensation plans for rewarding short-term performance? A. Cash bonuses and profit sharing B. Deferred compensation C. Employee stock options D. Retirement plans

12. The expectancy view of motivation recommends A. improving performance evaluation processes. B. providing a high probability that behaving as the organization wishes will lead to rewards. C. creating incentive plans that include stock options. D. both a and b above.

13. The theory which maintains that people act in ways to obtain the rewards that they desire and prevent the penalties that they wish to avoid is called the A. agency theory. B. expectancy theory. C. reward-penalty theory. D. mini-max theory.

14. Which statement is true concerning the expectancy view of motivation? A. The expectancy view of motivation focuses on the relationships between principals and agents. B. The expectancy view of motivation recommends providing a high probability that behaving as the organization wishes will lead to desirable rewards. C. The expectancy view of motivation looks for way to encourage agents to act in the interests of principals. D. None of the answers is correct.

15. The expectancy view of motivation recommends providing which of the following? A. cash rewards for all employees. B. extended vacation time during periods of high growth. C. encouragement for agents to act in the interests of principals. D. A high probability that behaving as the organization wishes will lead to the rewards.

16. Which statement is true concerning the agency view of motivation? A. The agency view of motivation focuses on the relationships between principals and agents. B. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. C. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. D. The agency view of motivation focuses on the relationships between shareholders and management.

17. Which of the following statements is true concerning the agency view of motivation? A. The agency view of motivation provides desirable rewards. B. The agency view of motivation provides a high probability that behaving as the organization wishes will lead to the rewards. C. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. D. None of the answers is correct.

18. The theory of motivation which deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors is called A. agency theory. B. principal theory. C. expectancy theory. D. traditional theory.

19. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Supervisors and workers, respectively, are called A. principals and agents. B. agents and employees. C. masters and slaves. D. lords and serfs.

20. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Examples of principals and agents includes A. shareholders and the board of directors. B. board of directors and top management. C. top management and division managers. D. All of the answers are correct.

21. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Examples of principals and agents includes A. board of directors and top management. B. top management and division managers. C. division managers and department managers. D. All of the answers are correct.

22. According to the agency theory of motivation, which of the following are agency costs? A. the costs incurred by agents to control principals actions. B. the costs to the agents if principals pursue interests that are not in the interests of the agents. C. rewards, penalties, monitoring devices, and audits. D. All of the answers are correct.

23. According to the agency view, the objective of a good incentive compensation system is to do which of the following? A. maximize principal wealth. B. maximize agent wealth. C. strike a fair balance between principal and agency wealth. D. minimize agency costs.

24. According to the agency view, the objective of a good incentive compensation system is to minimize agency costs by balancing the costs of controls and A. disincentives against the risks of divergent behavior. B. incentives against the risks of divergent behavior. C. incentives against the cost of divergent behavior. D. disincentives against the cost of divergent behavior.

25. Rewards that come from outside the individual, such as rewards from a teacher, a parent, an organization, or a spouse that include grades, money, praise, and prizes are called A. traditional rewards. B. intrinsic rewards. C. extrinsic rewards. D. outside rewards.

26. Rewards that include grades, money, praise, and prizes are called A. traditional rewards. B. intrinsic rewards. C. extrinsic rewards. D. outside rewards.

27. Extrinsic rewards include rewards from a(n) A. teacher. B. parent or a spouse. C. organization. D. All of the answers are correct.

28. Which of the following are rewards that come from the individual, such as the satisfaction from studying hard, providing help to someone in need, or doing a good job? A. extrinsic rewards. B. intrinsic rewards. C. self rewards. D. performance-based rewards.

29. Which of the following would be considered an intrinsic reward? A. the satisfaction from studying hard. B. providing help to someone in need. C. doing a good job. D. All of the answers are correct.

30. Getting a bonus is a(n) ____________ reward and getting satisfaction from ones own performance is a(n) ____________ reward. A. intrinsic, extrinsic B. extrinsic, intrinsic C. material, immaterial D. monetary, intangible

31. What is the focus of the agency view of motivation? A. relationships between customers and agents. B. Ways to discourage agents to act in the interests of principals. C. Ways to encourage principals to act in the interests of agents. D. Ways to encourage agents to act in the interests of principals.

32. What is true concerning the agency view of motivation? A. The theory recommends providing desirable rewards and a high probability of behaving as the organization wishes will lead to the rewards. B. The theory looks for ways to encourage agents to act in the interests of principals. C. The theory looks for ways to discourage agents from acting in the interests of principals. D. The theory looks for ways to encourage principals to act in the interests of agents.

33. A causal model of lead and lag indicators of performance based on financial and non-financial perspectives is known as which of the following? A. balanced scorecard. B. managerial report card. C. hierarchical scorecard. D. management by objectives.

34. The balanced scorecard is a causal model of lead and lag indicators of performance and is based on the financial perspective and the non-financial perspective(s) of A. learning and growth. B. internal business and production process. C. customer. D. All of the answers are correct.

35. Which of the following is not usually one of the perspectives used in the balanced scorecard? A. Learning and growth B. Congeniality C. Customer D. Financial

36. Which statement best describes the balanced scorecard? A. A causal model for lead and lag indicators of performance. B. A replacement for zero-based budgeting. C. A product of zero-sum game theory. D. A tool to evaluate customer profitability.

37. Which of the following is a model based on four perspectives: (1) learning and growth, (2) internal business and production process efficiency, (3) customer, and (4) financial? A. Zero-based budgeting B. Planning programming and budgeting C. Management by objectives D. Balanced scorecard

38. The balanced scorecard is used to tie performance measures to which of the following? A. organizational goals. B. short-term objectives only. C. long-term objectives only. D. regulatory requirements.

39. Which of these is the perspective of the balanced scorecard that is measured by employee satisfaction, employee retention, and employee productivity? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

40. Which of these is the perspective of the balanced scorecard that includes supplier relationships and outsourcing? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

41. Which of these is the perspective of the balanced scorecard that uses such measures as customer satisfaction, customer retention, market share, and customer profitability? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

42. Which of these is the perspective of the balanced scorecard that is at the top of a nonprofit organizations mission statement? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

43. Which of these is the perspective of the balanced scorecard that indicates whether the companys strategy and operations add value to shareholders? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

44. Which of these is the perspective of the balanced scorecard that is at the top of the list for a companys lenders and shareholders? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

45. Which of the following is an advantage for compensating on future performance? A. a short-term orientation. B. a disincentive to invest in new technology. C. golden handcuffs for managers because they have incentives to stay with the company. D. rewards that come too far in the future to be motivational.

46. Which of these is a disadvantage for compensating on future performance? A. a short-term orientation. B. a disincentive to invest in new technology. C. a focus of attention on the long-run. D. rewards that come too far in the future to be motivational.

47. When making deferred awards to divisional managers and below, recent research has found that companies usually defer the award for only A. one year or less. B. one to two years. C. three to five years. D. five to ten years.

48. How do decentralized companies that have many divisions doing diverse activities tend to weight the performance evaluation? A. more on each divisions performance and less on company-wide performance. B. less on each divisions performance and more on company-wide performance. C. on the stock market performance of the companys shares, only. D. equally between each divisions performance and company-wide performance.

49. How do companies that are large, highly integrated and very centralized, weight the performance evaluation? A. more on each divisions performance and less on company-wide performance. B. less on each divisions performance and more on company-wide performance. C. on the stock market performance of the companys shares, only. D. equally between each divisions performance and company-wide performance.

50. Which of the following is an advantage for companies to award managerial performance based on a formula-based approach? A. Managers know precisely what is expected of them. B. Managers know what reward they will get if they achieve expectations. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

51. Which of these is an advantage for companies to award managerial performance based on a subjective approach? A. The subjective approach considers factors not explicitly captured in the formula approach. B. Managers know what reward they will get if they achieve expectations. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

52. What is a disadvantage for companies to award managerial performance based on a subjective approach? A. The subjective approach considers factors not explicitly captured in the formula approach. B. The subjective approach is subject to favoritism, political maneuvering, and a good old boy network. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

53. Companies generally base most of the divisional managers compensation on which of the following? A. management-based performance. B. performance based on financial measures. C. the companys stock performance. D. accounting-based performance.

54. Tying a managers compensation to the companys stock performance aligns managers incentives with those of the which of the following groups? A. shareholders. B. creditors. C. employees. D. vendors.

55. What happens when a company ties manager compensation to the companys stock performance? A. It creates a significant amount of risk because of a lack of diversity since the performance indicator is based on just one stock - that of the company. B. It has the risk that a companys stock can fluctuate widely based on factors over which the manager has no control. C. It is accomplished through issuing stock options which shields some of risk. D. All of the answers are correct.

56. What is true of companies that use relative performance evaluation? A. Divisional performance is compared with that of other divisions in the same industry. B. Managers are not shielded from the risk of managing a division in a poorly performing industry. C. Incentives are not provided for managers to move out of low-performing to high-performing industries. D. All of the answers are correct.

57. What is true concerning companies that use absolute performance evaluations? A. Divisional performance is compared with that of other divisions in the same industry. B. Managers are shielded from the risk of managing a division in a poorly performing industry. C. Incentives are provided for managers to move out of low-performing to high-performing industries. D. Managers are forced to seek, new, more profitable opportunities.

58. What provides rewards to managers for upside company stock performance but no out-of-pocket penalty for downside company stock performance, yet gives the manager an orientation to how well the companys stock is doing? A. Stock rights B. Stock options C. Stock warrants D. Stock dividends

59. Which is a disadvantagefor a company to use relative performance evaluations? A. Forces managers to seek, new, more profitable opportunities. B. Shields managers from the risk of managing a division in a poorly performing industry. C. Does not provide incentives for managers to move out of low-performing to high-performing industries. D. None of the answers are disadvantages.

60. What occurs when applying expectancy theory to employees in nonprofit organizations? A. Cash awards are more attractive, and therefore more motivating than prizes. B. Prizes are more attractive, and therefore more motivating than cash awards. C. Stock options are more attractive, and therefore more motivating than cash awards. D. Stock options are more attractive, and therefore more motivating than prizes.

61. What is true concerning applications of incentive compensation plans to nonprofit organizations? A. These plans are usually based on performance on nonfinancial dimensions. B. These plans lack relevant, market-based comparisons. C. These plans are usually based on adherence to rules set down by top authorities. D. All of the answers are correct.

62. What is true concerning applications of incentive compensation plans to nonprofit organizations? A. These plans rely heavily on intrinsic rewards. B. These plans lack high financial payoffs for excellent performance. C. These plans involve adherence to rules set down by top authorities. D. All of the answers are correct.

63. Which of the management methods developed in the private sector are being used by nonprofit organizations? A. Balanced scorecard. B. Deferred stock options. C. Bonuses based on achieving profit targets. D. Extended vacation time.

64. Which of these is a common fraud in financial reporting? A. improper revenue recognition. B. understating inventory. C. overstating liabilities. D. understating assets.

65. Which of these is a common fraud in financial reporting? A. understating revenues. B. overstating inventory. C. overstating liabilities. D. understating assets.

66. Which of these are two common frauds in financial reporting? A. understating revenues and overstating inventory. B. overstating revenues and overstating inventory. C. understating revenues and understating inventory. D. overstating revenues and understating inventory.

67. Misstatements that are material to the financial statements caused by intentional or reckless conduct is(are) called A. collusion. B. fraudulent financial reporting. C. gross errors. D. internal controls.

68. Which of the following is considered to be fraudulent financial reporting? A. intentional conduct resulting in materially misleading financial statements. B. embezzlement or theft of assets. C. unintentional errors in preparing financial statements. D. None of the answers is correct.

69. Which of these falls under the responsibility of top management? A. assuring the integrity of financial information presented to outsiders. B. maintaining adequate internal control. C. unintentional errors in preparing financial statements. D. assuring the integrity of financial information presented to outsiders and maintaining adequate internal control.

70. Fraudulent financial reporting that results in higher reported earnings sometimes A. also overstates taxable income. B. shifts income from a future period to the present period, and then overstates taxable income in the present period that might be offset by lower taxable income in a future period C. sometimes overstates taxable income in early periods that likely increases the present value of a companys tax payments. D. All of the answers are correct.

71. What are common causes of financial fraud? A. short-term profit orientation. B. pressure to achieve unreasonable targets. C. sudden decreases in revenue or market share. D. All of the answers are correct.

72. Which of these is considered to be a key concept in fraudulent financial reporting? A. the conduct must be unintentional or not reckless. B. the misstatement must be immaterial to the financial statements. C. employees at all levels in the organization could be involved in fraudulent financial reporting. D. All of the answers are correct.

73. Which of these is a common type of fraud on financial statements? A. improper revenue recognition. B. improper expense recognition. C. understating inventory. D. miscounting cash

74. When does improper revenue recognition usually occur? A. When reporting profit-decreasing effects of revenue in the wrong accounting period. B. When reporting profit-increasing effects of revenue in the wrong accounting period. C. When reporting profit-decreasing effects of cash flows in the wrong accounting period. D. When reporting profit-increasing effects of cash flows in the wrong accounting period.

75. Why do managers often have incentives for committing financial fraud? A. Bonuses, merit pay increases, and promotions often depend on reported accounting numbers. B. Managers given a long-term perspective by their employment and pay arrangements will have an incentive to "manager earnings." C. Bonuses, merit pay increases, and promotions often depend on reported accounting numbers, and managers given a long-term perspective by their employment and pay arrangements will have an incentive to "manager earnings." D. None of the answers is correct.

76. Which of these is a common type of fraud on financial statements? A. overstating inventory. B. overstating cash. C. understating inventory. D. overstating cost of goods sold.

77. How does overstated ending inventory leads to overstated earnings? A. By understating cost of good sold. B. By overstating cost of good sold. C. By understating contribution margin. D. By understating gross margin.

78. High-pressure performance evaluation systems not only put pressure on people to perform well but also create incentives to A. be motivated. B. "manage earnings." C. leave the company. D. None of the answers is correct.

79. High-pressure performance evaluation systems designed to meet the demands of stockholders, the expectation of financial analysts, or managements egos A. will not motivate employees. B. may not create incentives to commit fraudulent financial reporting. C. may increase the present value of a companys tax payments. D. All of the answers are correct.

80. Controls that can be instituted to prevent financial fraud includes A. separation of duties where a single person carrying out a series of tasks could commit fraud and take steps to hide it. B. the presence of the independent auditors and their review of a company's internal controls. C. the presence of the internal auditors and their review of a company's internal controls. D. All of the answers are correct.

81. Which of these is a fundamental principle of internal control to prevent fraud? A. Separate duties so that a single person carrying out a series of tasks could not commit fraud and take steps to hide it. B. Only permit top management to authorize transactions. C. Allow cashiers to collect cash from customers and enter the receipts into the account records. D. Allow cashiers to collect cash from customers and deposit the cash on a daily basis into the bank.

82. Which of the following are not controls that can be instituted to prevent financial fraud? A. Separate duties where a single person carrying out a series of tasks could not commit fraud and hide it. B. Hire internal auditors. C. Have independent auditors review a company's internal controls. D. Have the bank independently reconcile cash balances with company records.

83. When can internal controls to prevent fraud can be ineffective? A. When banking institutions go out of business or merge with other banking institutions. B. When standard operating procedures are followed. C. When collusion exists between two or more employees. D. When customers invoke the Foreign Corrupt Practices Act.

84. Which of the following is a control that can be instituted to prevent financial fraud? A. separation of duties. B. internal auditors. C. independent auditors. D. All of the answers are correct.

85. What is a fundamental principle of internal control to prevent fraud? A. Separate duties and responsibilities. B. Require employee collusion. C. Eliminate internal audits. D. Eliminate independent audits.

86. Which of the following is not a control that can be instituted to prevent financial fraud? A. Separate duties B. Encourage collusion C. Internal audits D. Independent audits

87. What is true concerning internal auditors? A. Internal auditors can not deter nor detect fraud. B. Internal auditors can deter but not detect fraud. C. Internal auditors can not deter but can detect fraud. D. Internal auditors can both deter and detect fraud.

88. The presence of the independent auditors and their review of a company's internal controls A. encourages collusion. B. encourages consolidation of duties and responsibilities. C. helps to prevent fraud. D. totally prevent fraud.

89. Economists argue that corruption requires the following element(s): A. An individual, such as a government official, must have discretionary power to award a contract or rights. B. There must be economic benefits associated with the discretionary power to award a contract or rights. C. The legal system must be unlikely to detect wrongdoing. D. All of the answers are correct.

90. In 1977, Congress addressed foreign bribes paid by U.S. Companies by passing which of the following acts? A. Foreign Anti-bribery Practices Act. B. Foreign Corruption Act. C. Foreign Corrupt Practices Act. D. Foreign Bribery and Corruption Act.

91. What is the law which makes it illegal for any U.S. citizen or company to bribe foreign government officials in the course of business? A. Foreign Anti-bribery Practices Act. B. Foreign Corruption Act. C. Foreign Corrupt Practices Act. D. Foreign Bribery and Corruption Act.

92. What is true of the Foreign Corrupt Practices Act? A. It is illegal for any U.S. citizen or company to bribe foreign government officials in the course of business. B. Questionable payments to foreign officials, record keeping, and internal accounting control are addressed. C. Grease payments paid to low-level foreign government employees to expedite routine matters are permitted. D. All of the answers are correct.

93. In 1977, the United States Government passed the Foreign Corrupt Practices Act which A. requires all companies registered with the SEC to make and keep accurate books and records. B. requires all companies registered with the SEC to devise and maintain a system of internal accounting controls sufficiently adequate that managers of a company will know if a bribe is paid. C. allows for grease payments paid to low-level foreign government employees to expedite routine matters. D. All of the answers are correct.

94. What are the incentives for committing financial fraud?

95. How do environmental conditions influence fraudulent conduct?

96. Treadway Commission The 1987 recommendations of the Treadway Commission focused on publicly held companies. For each area listed below, explain how a company can improve its overall financial reporting process, increase the likelihood of preventing fraudulent financial reporting, and detect it earlier when it occurs. Refer to the Treadway Commission. Explain what the Treadway Commission means by the "tone at the top."

97. Treadway Commission The 1987 recommendations of the Treadway Commission focused on publicly held companies. For each area listed below, explain how a company can improve its overall financial reporting process, increase the likelihood of preventing fraudulent financial reporting, and detect it earlier when it occurs. Refer to the Treadway Commission. Explain why the Treadway Commission believes the internal audit function plays an important role in deterring financial fraud.

98. Explain the role of the audit committee in deterring financial fraud.

99. Explain management's role in assuring the integrity of financial information.

100. Describe three types of divisional incentive compensation plans.

101. How does fraudulent financial reporting differ from simply making an error in financial reporting?

102. Describe two types of common financial fraud.

103. Explain common causes of financial fraud.

104. Summarize the recommendations of the Treadway Commission. Explain the steps managers should take to reduce the possibility of fraudulent financial reporting.

105. Explain the internal auditors general role in detecting errors and irregularities.

106. Discuss the steps that an internal auditor should take when fraud is suspected.

107. The impact of employee and management fraud is staggering both in terms of dollar costs and effect on the victims. Presented below are three independent cases of employee wrong doing.

a.

b.

c.

A retail store that was part of a national chain experienced an abnormal inventory shrinkage in its electronics department. The internal auditors, noting this shrinkage, included an in-depth evaluation of the department in the scope of their audit of the store. During the review, the auditors were "tipped" by an employee that a particular customer bought a large number of small electronic components, and that the customer always went to a certain cashier's checkout line. The auditor's work revealed that the cashier and the customer had colluded to steal a number of components. The cashier did not record the sale of several items the customer took from the store. Internal auditors discovered a payroll fraud in a large hospital when they observed, on a surprise basis, the distribution of paychecks. The supervisors of each department distribute paychecks to employees and are supposed to return unclaimed checks to the payroll department. When the auditors took control of and followed up on an unclaimed paycheck for an employee in the food service department, they discovered that the employee had quit four months previously. The employee and the supervisor had an argument, and the employee had simply left and never returned. The supervisor had continued to turn in a time card for the employee and, when the paychecks came for distribution, had taken the unclaimed checks and cashed them. While performing an audit of cash disbursements in a manufacturing firm, internal auditors discovered a fraud perpetrated by an accounts payable clerk. The clerk had made copies of supporting documents and used the copies to support duplicate payments to a vendor of materials used in the manufacturing process. The clerk, who had opened a bank account in a name similar to that of the vendor, took the duplicate checks and deposited them in the bank account.

For each of the three situations presented above, describe the recommendations that the internal auditors should make to prevent similar problems in the future.

108. Explain incentive compensation plans and what they should accomplish.

109. Discuss fraud in financial reporting from a managerial accounting perspective.

110. Identify (a) the purpose of internal accounting controls and (b) the importance of record keeping.

111. Define the two most common types of fraud and discuss their impact on financial statements. Also discuss incentives for managers to commit financial fraud.

112. Identify controls that can be instituted to prevent financial fraud.

113. Describe the characteristics found to exist in most divisional incentive compensations plans.

114. Compare and contrast expectancy and agency approaches to motivation.

115. How does the balanced scorecard tie performance measures to organizational goals?

116. Explain the linkages among the four balanced scorecard perspectives.

117. How do incentive plans affect the development phase of the product life cycle?

118. How could activity-based costing shift the emphasis from managing overhead to managing supplier relations?

119. When implementing the balanced scorecard, why do some managers use a different term to describe it?

120. Bowers Company is considering a new accounting policy to write-off of design and development costs as current period expenses. Explain how this could affect managers incentives to incur these costs.

121. Carson Company uses a cost of capital rate of 10 percent in making investment decisions. It currently is considering two mutually exclusive projects, each requiring an initial investment of $12 million. The first project has a net present value of $23 million and an internal rate of return of 18 percent. The firm will complete this project within one year. It will raise accounting income and earnings per share almost immediately thereafter. The second project has a net present value of $45 million and an internal rate of return of 28 percent. The second project requires incurring large, noncapitalizable expenses over the next few years before net cash inflows from sales revenue result. Thus accounting income and earnings per share for the next few years will not only be lower than if the first project is accepted but will also be lower than earnings currently reported. Required: a. Should the short-run effects on accounting income and earnings per share influence the decision about the choice of projects? Explain. b. Should either of the projects be accepted? If so, which one? Why?

122. Josephson and Associates is a consulting firm that spends $60,000 per year advertising the companys brand names and trademarks. Gross margin on sales after taxes is up $66,000 each year because of these advertising expenditures. For the purposes of this problem, assume that the firm makes all advertising expenditures on the first day of each year and that the $66,000 extra after-tax gross margin on sales occurs on the first day of the next year. Excluding any advertising assets or profits, Josephson has $200,000 of other assets that have produced an after-tax income of $20,000 per year. Josephson follows a policy of declaring dividends each year equal to net income, and it has a cost of capital of 10 percent per year. Required: a. Is the advertising policy a sensible one? Explain. b. How should accounting report the expenditures for advertising in Josephsons financial statements to reflect accurately the managerial decision of advertising at the rate of $60,000 per year? In other words, how can the firm account for the advertising expenditures in such a way that the accounting rate of return for the advertising project and the rate of return on assets for the firm reflect the 10-percent return from advertising?

123. The CFO, Brad Taylor, of Florida Electronics Merchandising Company has asked you to advise it on how to detect fraudulent financial reporting. Brad suspects that the management of one of its outlet stores may have been committing fraud by overstating ending inventory by $100,000 per quarter and wants your help in detecting this. In particular, Brad wants to know how to find evidence of inventory overstatement, whether intentional or unintentional. Required: a. Brad as CFO has provided the following data (in thousands) for quarter 1 and projected figures for quarter 2 for the year. If fraud is occurring, he believes it is at its early stages and that the beginning inventory for Quarter 1 was more than likely correct. Brad would like you to put together an illustration that he can take to the audit committee that shows the potential effect of the inventory overstatement fraud, how it compares to a situation with no fraud, and how the fraudulent scheme may carry through to the reported amounts for beginning inventory and operating profits in Quarter 2.

Sales Beginning Inventory Purchases Administrative and Marketing Expenses

Quarter 1 $2,000 200 900 800

Quarter 2 (projected) $1,500 ? 900 500

b. Prepare a brief report for Brad, that suggests ways he and his team could detect the inventory overstatement.

Chapter 12--Incentive Issues Key

1. Which of the following are key characteristic(s) of divisional incentive compensation plans? A. cash bonuses and profit sharing for short-term performance. B. deferred compensation for long-term incentive. C. special awards for particular actions or extraordinary performance. D. All of the answers are correct.

2. Because effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth, for long-term incentives firms give A. cash bonuses and profit sharing. B. deferred compensation. C. special awards. D. reorganizations.

3. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth, so for particular actions or extraordinary performance firms give A. cash bonuses and profit sharing. B. deferred compensation. C. special awards. D. reorganizations.

4. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth. Deferred compensation is given for A. short-term performance. B. long-term incentive. C. particular actions or extraordinary performance. D. None of the answers is correct.

5. Effective incentive compensation plans must induce individual behavior compatible with increasing the firm's wealth. Why are special awards given? A. to improve short-term performance. B. as a long-term incentive. C. for particular actions or extraordinary performance. D. None of the answers is correct.

6. Which of the following are components of deferred compensation? A. cash bonuses. B. profit sharing plans. C. special awards. D. stock options.

7. Deferred compensation that gives an individual the right to purchase a specified number of shares of the companys stock at a specified price within a specified time period is/are called A. stock puts. B. stock options. C. stock calls. D. stock puts and stock calls.

8. What are the four stages of a products life cycle? A. design and development, growth, maturity, and decline. B. development, controlling, feedback, and decline. C. design, planning, redesign, and maturity. D. planning, controlling, monitoring, and feedback.

9. Which stage of a products life cycle establishes 80 to 90 percent of what the products costs will be? A. Product design and development B. Product manufacturing C. Product controlling D. Product planning

10. Effective divisional incentive compensation plans must induce individual behavior compatible with increasing which of the following? A. firm's wealth. B. suppliers' wealth. C. customers' wealth. D. employees' agency wealth.

11. Which of the following is a key characteristic of divisional incentive compensation plans for rewarding short-term performance? A. Cash bonuses and profit sharing B. Deferred compensation C. Employee stock options D. Retirement plans

12. The expectancy view of motivation recommends A. improving performance evaluation processes. B. providing a high probability that behaving as the organization wishes will lead to rewards. C. creating incentive plans that include stock options. D. both a and b above.

13. The theory which maintains that people act in ways to obtain the rewards that they desire and prevent the penalties that they wish to avoid is called the A. agency theory. B. expectancy theory. C. reward-penalty theory. D. mini-max theory.

14. Which statement is true concerning the expectancy view of motivation? A. The expectancy view of motivation focuses on the relationships between principals and agents. B. The expectancy view of motivation recommends providing a high probability that behaving as the organization wishes will lead to desirable rewards. C. The expectancy view of motivation looks for way to encourage agents to act in the interests of principals. D. None of the answers is correct.

15. The expectancy view of motivation recommends providing which of the following? A. cash rewards for all employees. B. extended vacation time during periods of high growth. C. encouragement for agents to act in the interests of principals. D. A high probability that behaving as the organization wishes will lead to the rewards.

16. Which statement is true concerning the agency view of motivation? A. The agency view of motivation focuses on the relationships between principals and agents. B. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. C. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. D. The agency view of motivation focuses on the relationships between shareholders and management.

17. Which of the following statements is true concerning the agency view of motivation? A. The agency view of motivation provides desirable rewards. B. The agency view of motivation provides a high probability that behaving as the organization wishes will lead to the rewards. C. The agency view of motivation looks for ways to encourage agents to act in the interests of principals. D. None of the answers is correct.

18. The theory of motivation which deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors is called A. agency theory. B. principal theory. C. expectancy theory. D. traditional theory.

19. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Supervisors and workers, respectively, are called A. principals and agents. B. agents and employees. C. masters and slaves. D. lords and serfs.

20. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Examples of principals and agents includes A. shareholders and the board of directors. B. board of directors and top management. C. top management and division managers. D. All of the answers are correct.

21. The agency theory of motivation deals with relationships between supervisors and workers where the principals assign responsibility to the workers and the workers work on behalf of the supervisors. Examples of principals and agents includes A. board of directors and top management. B. top management and division managers. C. division managers and department managers. D. All of the answers are correct.

22. According to the agency theory of motivation, which of the following are agency costs? A. the costs incurred by agents to control principals actions. B. the costs to the agents if principals pursue interests that are not in the interests of the agents. C. rewards, penalties, monitoring devices, and audits. D. All of the answers are correct.

23. According to the agency view, the objective of a good incentive compensation system is to do which of the following? A. maximize principal wealth. B. maximize agent wealth. C. strike a fair balance between principal and agency wealth. D. minimize agency costs.

24. According to the agency view, the objective of a good incentive compensation system is to minimize agency costs by balancing the costs of controls and A. disincentives against the risks of divergent behavior. B. incentives against the risks of divergent behavior. C. incentives against the cost of divergent behavior. D. disincentives against the cost of divergent behavior.

25. Rewards that come from outside the individual, such as rewards from a teacher, a parent, an organization, or a spouse that include grades, money, praise, and prizes are called A. traditional rewards. B. intrinsic rewards. C. extrinsic rewards. D. outside rewards.

26. Rewards that include grades, money, praise, and prizes are called A. traditional rewards. B. intrinsic rewards. C. extrinsic rewards. D. outside rewards.

27. Extrinsic rewards include rewards from a(n) A. teacher. B. parent or a spouse. C. organization. D. All of the answers are correct.

28. Which of the following are rewards that come from the individual, such as the satisfaction from studying hard, providing help to someone in need, or doing a good job? A. extrinsic rewards. B. intrinsic rewards. C. self rewards. D. performance-based rewards.

29. Which of the following would be considered an intrinsic reward? A. the satisfaction from studying hard. B. providing help to someone in need. C. doing a good job. D. All of the answers are correct.

30. Getting a bonus is a(n) ____________ reward and getting satisfaction from ones own performance is a(n) ____________ reward. A. intrinsic, extrinsic B. extrinsic, intrinsic C. material, immaterial D. monetary, intangible

31. What is the focus of the agency view of motivation? A. relationships between customers and agents. B. Ways to discourage agents to act in the interests of principals. C. Ways to encourage principals to act in the interests of agents. D. Ways to encourage agents to act in the interests of principals.

32. What is true concerning the agency view of motivation? A. The theory recommends providing desirable rewards and a high probability of behaving as the organization wishes will lead to the rewards. B. The theory looks for ways to encourage agents to act in the interests of principals. C. The theory looks for ways to discourage agents from acting in the interests of principals. D. The theory looks for ways to encourage principals to act in the interests of agents.

33. A causal model of lead and lag indicators of performance based on financial and non-financial perspectives is known as which of the following? A. balanced scorecard. B. managerial report card. C. hierarchical scorecard. D. management by objectives.

34. The balanced scorecard is a causal model of lead and lag indicators of performance and is based on the financial perspective and the non-financial perspective(s) of A. learning and growth. B. internal business and production process. C. customer. D. All of the answers are correct.

35. Which of the following is not usually one of the perspectives used in the balanced scorecard? A. Learning and growth B. Congeniality C. Customer D. Financial

36. Which statement best describes the balanced scorecard? A. A causal model for lead and lag indicators of performance. B. A replacement for zero-based budgeting. C. A product of zero-sum game theory. D. A tool to evaluate customer profitability.

37. Which of the following is a model based on four perspectives: (1) learning and growth, (2) internal business and production process efficiency, (3) customer, and (4) financial? A. Zero-based budgeting B. Planning programming and budgeting C. Management by objectives D. Balanced scorecard

38. The balanced scorecard is used to tie performance measures to which of the following? A. organizational goals. B. short-term objectives only. C. long-term objectives only. D. regulatory requirements.

39. Which of these is the perspective of the balanced scorecard that is measured by employee satisfaction, employee retention, and employee productivity? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

40. Which of these is the perspective of the balanced scorecard that includes supplier relationships and outsourcing? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

41. Which of these is the perspective of the balanced scorecard that uses such measures as customer satisfaction, customer retention, market share, and customer profitability? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

42. Which of these is the perspective of the balanced scorecard that is at the top of a nonprofit organizations mission statement? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

43. Which of these is the perspective of the balanced scorecard that indicates whether the companys strategy and operations add value to shareholders? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

44. Which of these is the perspective of the balanced scorecard that is at the top of the list for a companys lenders and shareholders? A. financial perspective. B. internal business and production process perspective. C. learning and growth perspective. D. customer perspective.

45. Which of the following is an advantage for compensating on future performance? A. a short-term orientation. B. a disincentive to invest in new technology. C. golden handcuffs for managers because they have incentives to stay with the company. D. rewards that come too far in the future to be motivational.

46. Which of these is a disadvantage for compensating on future performance? A. a short-term orientation. B. a disincentive to invest in new technology. C. a focus of attention on the long-run. D. rewards that come too far in the future to be motivational.

47. When making deferred awards to divisional managers and below, recent research has found that companies usually defer the award for only A. one year or less. B. one to two years. C. three to five years. D. five to ten years.

48. How do decentralized companies that have many divisions doing diverse activities tend to weight the performance evaluation? A. more on each divisions performance and less on company-wide performance. B. less on each divisions performance and more on company-wide performance. C. on the stock market performance of the companys shares, only. D. equally between each divisions performance and company-wide performance.

49. How do companies that are large, highly integrated and very centralized, weight the performance evaluation? A. more on each divisions performance and less on company-wide performance. B. less on each divisions performance and more on company-wide performance. C. on the stock market performance of the companys shares, only. D. equally between each divisions performance and company-wide performance.

50. Which of the following is an advantage for companies to award managerial performance based on a formula-based approach? A. Managers know precisely what is expected of them. B. Managers know what reward they will get if they achieve expectations. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

51. Which of these is an advantage for companies to award managerial performance based on a subjective approach? A. The subjective approach considers factors not explicitly captured in the formula approach. B. Managers know what reward they will get if they achieve expectations. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

52. What is a disadvantage for companies to award managerial performance based on a subjective approach? A. The subjective approach considers factors not explicitly captured in the formula approach. B. The subjective approach is subject to favoritism, political maneuvering, and a good old boy network. C. Managers who do not fully trust their superiors tend to prefer this approach. D. All of the answers are correct.

53. Companies generally base most of the divisional managers compensation on which of the following? A. management-based performance. B. performance based on financial measures. C. the companys stock performance. D. accounting-based performance.

54. Tying a managers compensation to the companys stock performance aligns managers incentives with those of the which of the following groups? A. shareholders. B. creditors. C. employees. D. vendors.

55. What happens when a company ties manager compensation to the companys stock performance? A. It creates a significant amount of risk because of a lack of diversity since the performance indicator is based on just one stock - that of the company. B. It has the risk that a companys stock can fluctuate widely based on factors over which the manager has no control. C. It is accomplished through issuing stock options which shields some of risk. D. All of the answers are correct.

56. What is true of companies that use relative performance evaluation? A. Divisional performance is compared with that of other divisions in the same industry. B. Managers are not shielded from the risk of managing a division in a poorly performing industry. C. Incentives are not provided for managers to move out of low-performing to high-performing industries. D. All of the answers are correct.

57. What is true concerning companies that use absolute performance evaluations? A. Divisional performance is compared with that of other divisions in the same industry. B. Managers are shielded from the risk of managing a division in a poorly performing industry. C. Incentives are provided for managers to move out of low-performing to high-performing industries. D. Managers are forced to seek, new, more profitable opportunities.

58. What provides rewards to managers for upside company stock performance but no out-of-pocket penalty for downside company stock performance, yet gives the manager an orientation to how well the companys stock is doing? A. Stock rights B. Stock options C. Stock warrants D. Stock dividends

59. Which is a disadvantagefor a company to use relative performance evaluations? A. Forces managers to seek, new, more profitable opportunities. B. Shields managers from the risk of managing a division in a poorly performing industry. C. Does not provide incentives for managers to move out of low-performing to high-performing industries. D. None of the answers are disadvantages.

60. What occurs when applying expectancy theory to employees in nonprofit organizations? A. Cash awards are more attractive, and therefore more motivating than prizes. B. Prizes are more attractive, and therefore more motivating than cash awards. C. Stock options are more attractive, and therefore more motivating than cash awards. D. Stock options are more attractive, and therefore more motivating than prizes.

61. What is true concerning applications of incentive compensation plans to nonprofit organizations? A. These plans are usually based on performance on nonfinancial dimensions. B. These plans lack relevant, market-based comparisons. C. These plans are usually based on adherence to rules set down by top authorities. D. All of the answers are correct.

62. What is true concerning applications of incentive compensation plans to nonprofit organizations? A. These plans rely heavily on intrinsic rewards. B. These plans lack high financial payoffs for excellent performance. C. These plans involve adherence to rules set down by top authorities. D. All of the answers are correct.

63. Which of the management methods developed in the private sector are being used by nonprofit organizations? A. Balanced scorecard. B. Deferred stock options. C. Bonuses based on achieving profit targets. D. Extended vacation time.

64. Which of these is a common fraud in financial reporting? A. improper revenue recognition. B. understating inventory. C. overstating liabilities. D. understating assets.

65. Which of these is a common fraud in financial reporting? A. understating revenues. B. overstating inventory. C. overstating liabilities. D. understating assets.

66. Which of these are two common frauds in financial reporting? A. understating revenues and overstating inventory. B. overstating revenues and overstating inventory. C. understating revenues and understating inventory. D. overstating revenues and understating inventory.

67. Misstatements that are material to the financial statements caused by intentional or reckless conduct is(are) called A. collusion. B. fraudulent financial reporting. C. gross errors. D. internal controls.

68. Which of the following is considered to be fraudulent financial reporting? A. intentional conduct resulting in materially misleading financial statements. B. embezzlement or theft of assets. C. unintentional errors in preparing financial statements. D. None of the answers is correct.

69. Which of these falls under the responsibility of top management? A. assuring the integrity of financial information presented to outsiders. B. maintaining adequate internal control. C. unintentional errors in preparing financial statements. D. assuring the integrity of financial information presented to outsiders and maintaining adequate internal control.

70. Fraudulent financial reporting that results in higher reported earnings sometimes A. also overstates taxable income. B. shifts income from a future period to the present period, and then overstates taxable income in the present period that might be offset by lower taxable income in a future period C. sometimes overstates taxable income in early periods that likely increases the present value of a companys tax payments. D. All of the answers are correct.

71. What are common causes of financial fraud? A. short-term profit orientation. B. pressure to achieve unreasonable targets. C. sudden decreases in revenue or market share. D. All of the answers are correct.

72. Which of these is considered to be a key concept in fraudulent financial reporting? A. the conduct must be unintentional or not reckless. B. the misstatement must be immaterial to the financial statements. C. employees at all levels in the organization could be involved in fraudulent financial reporting. D. All of the answers are correct.

73. Which of these is a common type of fraud on financial statements? A. improper revenue recognition. B. improper expense recognition. C. understating inventory. D. miscounting cash

74. When does improper revenue recognition usually occur? A. When reporting profit-decreasing effects of revenue in the wrong accounting period. B. When reporting profit-increasing effects of revenue in the wrong accounting period. C. When reporting profit-decreasing effects of cash flows in the wrong accounting period. D. When reporting profit-increasing effects of cash flows in the wrong accounting period.

75. Why do managers often have incentives for committing financial fraud? A. Bonuses, merit pay increases, and promotions often depend on reported accounting numbers. B. Managers given a long-term perspective by their employment and pay arrangements will have an incentive to "manager earnings." C. Bonuses, merit pay increases, and promotions often depend on reported accounting numbers, and managers given a long-term perspective by their employment and pay arrangements will have an incentive to "manager earnings." D. None of the answers is correct.

76. Which of these is a common type of fraud on financial statements? A. overstating inventory. B. overstating cash. C. understating inventory. D. overstating cost of goods sold.

77. How does overstated ending inventory leads to overstated earnings? A. By understating cost of good sold. B. By overstating cost of good sold. C. By understating contribution margin. D. By understating gross margin.

78. High-pressure performance evaluation systems not only put pressure on people to perform well but also create incentives to A. be motivated. B. "manage earnings." C. leave the company. D. None of the answers is correct.

79. High-pressure performance evaluation systems designed to meet the demands of stockholders, the expectation of financial analysts, or managements egos A. will not motivate employees. B. may not create incentives to commit fraudulent financial reporting. C. may increase the present value of a companys tax payments. D. All of the answers are correct.

80. Controls that can be instituted to prevent financial fraud includes A. separation of duties where a single person carrying out a series of tasks could commit fraud and take steps to hide it. B. the presence of the independent auditors and their review of a company's internal controls. C. the presence of the internal auditors and their review of a company's internal controls. D. All of the answers are correct.

81. Which of these is a fundamental principle of internal control to prevent fraud? A. Separate duties so that a single person carrying out a series of tasks could not commit fraud and take steps to hide it. B. Only permit top management to authorize transactions. C. Allow cashiers to collect cash from customers and enter the receipts into the account records. D. Allow cashiers to collect cash from customers and deposit the cash on a daily basis into the bank.

82. Which of the following are not controls that can be instituted to prevent financial fraud? A. Separate duties where a single person carrying out a series of tasks could not commit fraud and hide it. B. Hire internal auditors. C. Have independent auditors review a company's internal controls. D. Have the bank independently reconcile cash balances with company records.

83. When can internal controls to prevent fraud can be ineffective? A. When banking institutions go out of business or merge with other banking institutions. B. When standard operating procedures are followed. C. When collusion exists between two or more employees. D. When customers invoke the Foreign Corrupt Practices Act.

84. Which of the following is a control that can be instituted to prevent financial fraud? A. separation of duties. B. internal auditors. C. independent auditors. D. All of the answers are correct.

85. What is a fundamental principle of internal control to prevent fraud? A. Separate duties and responsibilities. B. Require employee collusion. C. Eliminate internal audits. D. Eliminate independent audits.

86. Which of the following is not a control that can be instituted to prevent financial fraud? A. Separate duties B. Encourage collusion C. Internal audits D. Independent audits

87. What is true concerning internal auditors? A. Internal auditors can not deter nor detect fraud. B. Internal auditors can deter but not detect fraud. C. Internal auditors can not deter but can detect fraud. D. Internal auditors can both deter and detect fraud.

88. The presence of the independent auditors and their review of a company's internal controls A. encourages collusion. B. encourages consolidation of duties and responsibilities. C. helps to prevent fraud. D. totally prevent fraud.

89. Economists argue that corruption requires the following element(s): A. An individual, such as a government official, must have discretionary power to award a contract or rights. B. There must be economic benefits associated with the discretionary power to award a contract or rights. C. The legal system must be unlikely to detect wrongdoing. D. All of the answers are correct.

90. In 1977, Congress addressed foreign bribes paid by U.S. Companies by passing which of the following acts? A. Foreign Anti-bribery Practices Act. B. Foreign Corruption Act. C. Foreign Corrupt Practices Act. D. Foreign Bribery and Corruption Act.

91. What is the law which makes it illegal for any U.S. citizen or company to bribe foreign government officials in the course of business? A. Foreign Anti-bribery Practices Act. B. Foreign Corruption Act. C. Foreign Corrupt Practices Act. D. Foreign Bribery and Corruption Act.

92. What is true of the Foreign Corrupt Practices Act? A. It is illegal for any U.S. citizen or company to bribe foreign government officials in the course of business. B. Questionable payments to foreign officials, record keeping, and internal accounting control are addressed. C. Grease payments paid to low-level foreign government employees to expedite routine matters are permitted. D. All of the answers are correct.

93. In 1977, the United States Government passed the Foreign Corrupt Practices Act which A. requires all companies registered with the SEC to make and keep accurate books and records. B. requires all companies registered with the SEC to devise and maintain a system of internal accounting controls sufficiently adequate that managers of a company will know if a bribe is paid. C. allows for grease payments paid to low-level foreign government employees to expedite routine matters. D. All of the answers are correct.

94. What are the incentives for committing financial fraud? Managers often have incentives for committing financial fraud because bonuses, merit pay increases, and promotions often depend on reported accounting numbers. Managers given a short-term perspective by their employment and pay arrangements will have an incentive to "manager earnings." High-pressure performance evaluation systems not only put pressure on people to perform well but also create incentives to commit fraud.

95. How do environmental conditions influence fraudulent conduct? The tone at the topthe environment top management sets for dealing with ethical issuesmost strongly influences fraudulent financial reporting. Regardless of policies and rules, looking the other way when subordinates act unethically sets a tone that encourages fraudulent reporting.

96. Treadway Commission The 1987 recommendations of the Treadway Commission focused on publicly held companies. For each area listed below, explain how a company can improve its overall financial reporting process, increase the likelihood of preventing fraudulent financial reporting, and detect it earlier when it occurs. Refer to the Treadway Commission. Explain what the Treadway Commission means by the "tone at the top." The tone set by top management influences the corporate environment within which financial reporting occurs. To set the right tone, top management must identify and assess the factors that could lead to fraudulent financial reporting. In addition, top management must be good role models.

97. Treadway Commission The 1987 recommendations of the Treadway Commission focused on publicly held companies. For each area listed below, explain how a company can improve its overall financial reporting process, increase the likelihood of preventing fraudulent financial reporting, and detect it earlier when it occurs. Refer to the Treadway Commission. Explain why the Treadway Commission believes the internal audit function plays an important role in deterring financial fraud. The internal audit function must be designed to fulfill the financial reporting responsibilities the corporation has undertaken as a public company. All public companies must have an effective and objective internal audit function. The internal auditor's qualifications, staff, status within the company, reporting lines, and relationships with the audit committee of the board of directors must be adequate to ensure the internal audit function's effectiveness and objectivity.

98. Explain the role of the audit committee in deterring financial fraud. The audit committee of the board of directors plays a role critical to the integrity of the company's financial reporting. All public companies should have audit committees composed entirely of independent directors. To be effective, audit committees should exercise vigilant and informed oversight of the financial reporting process including the company's internal controls.

99. Explain management's role in assuring the integrity of financial information. Management reports should acknowledge that the financial statements are the company's, and that top management takes responsibility for the company's financial reporting process.

100. Describe three types of divisional incentive compensation plans. Divisional incentive compensation plans include:
a. b. c. Cash bonuses and profit sharing plans. Deferred compensation, such as stock and stock options. Special awards for extraordinary performance.

101. How does fraudulent financial reporting differ from simply making an error in financial reporting? Fraudulent financial reporting is intentional conduct resulting in materially misleading financial statements.

102. Describe two types of common financial fraud. Two types of common fraud are: (a) improper revenue recognition, and (b) overstating inventory.

103. Explain common causes of financial fraud. Common causes of financial fraud include: (a) short-term profit orientation, (b) pressure to achieve unreasonable targets, and (c) sudden decreases in revenue or market share.

104. Summarize the recommendations of the Treadway Commission. Explain the steps managers should take to reduce the possibility of fraudulent financial reporting. The Treadway Commission's recommendation included the importance of the right tone at the top, the use of corporate codes of conduct, an improved role of internal auditor, and reliance on internal control to reduce fraudulent financial reporting. To reduce the possibility of fraudulent financial reporting, managers should: (1) set the proper corporate tone at the top, (2) identify and understand factors that can lead to fraudulent financial reporting, (3) assess the risk of fraudulent financial reporting that these factors can cause within the company, and (4) design and implement effective internal controls.

105. Explain the internal auditors general role in detecting errors and irregularities. The internal auditor's general role in detecting errors and irregularities, as set forth in the Standards for the Professional Practice of Internal Auditing, should include the following responsibilities:
Internal auditors should have sufficient knowledge of fraud to enable them to identify indications of fraud. In exercising due professional care, internal auditors should be alert to the possibility of intentional wrongdoing, errors, omissions, inefficiency, waste, ineffectiveness, and conflicts of interest. They should also be alert to conditions and activities where irregularities are most likely to occur. All audits should be performed in accordance with generally accepted auditing standards. For example, proper sampling techniques should be used to confirm client representations.

106. Discuss the steps that an internal auditor should take when fraud is suspected. When fraud is suspected, the internal auditor should:
1. 2. 3. Inform the appropriate authorities within the organization. Recommend whatever investigation is considered necessary in the circumstances. Have the authority to inform higher levels of management, e.g., the audit committee or outside directors if no action is taken in resolving suspected wrongdoing.

107. The impact of employee and management fraud is staggering both in terms of dollar costs and effect on the victims. Presented below are three independent cases of employee wrong doing.

a.

b.

c.

A retail store that was part of a national chain experienced an abnormal inventory shrinkage in its electronics department. The internal auditors, noting this shrinkage, included an in-depth evaluation of the department in the scope of their audit of the store. During the review, the auditors were "tipped" by an employee that a particular customer bought a large number of small electronic components, and that the customer always went to a certain cashier's checkout line. The auditor's work revealed that the cashier and the customer had colluded to steal a number of components. The cashier did not record the sale of several items the customer took from the store. Internal auditors discovered a payroll fraud in a large hospital when they observed, on a surprise basis, the distribution of paychecks. The supervisors of each department distribute paychecks to employees and are supposed to return unclaimed checks to the payroll department. When the auditors took control of and followed up on an unclaimed paycheck for an employee in the food service department, they discovered that the employee had quit four months previously. The employee and the supervisor had an argument, and the employee had simply left and never returned. The supervisor had continued to turn in a time card for the employee and, when the paychecks came for distribution, had taken the unclaimed checks and cashed them. While performing an audit of cash disbursements in a manufacturing firm, internal auditors discovered a fraud perpetrated by an accounts payable clerk. The clerk had made copies of supporting documents and used the copies to support duplicate payments to a vendor of materials used in the manufacturing process. The clerk, who had opened a bank account in a name similar to that of the vendor, took the duplicate checks and deposited them in the bank account.

For each of the three situations presented above, describe the recommendations that the internal auditors should make to prevent similar problems in the future.

A: Inventory Shrinkage The inventory shrinkage problem is an example of collusion. While collusion is often difficult to prevent, the store could improve its control system by:
Implementing job rotation so that the same employees are not always performing the same duties. Separating the payment for expensive items from the pickup of these items at a separate location.

B: Payroll The payroll fraud described could be prevented through the introduction of better internal controls including: Separation of duties. A supervisor with the authority to sign time cards should not be allowed to distribute paychecks. An individual with no other payroll-related duties should be given the responsibility for distributing checks. Periodic floor checks for employees on the payroll. C: Accounts Payable In order to prevent further occurrences of accounts payable fraud, the company should implement and enforce a policy that prohibits the payment of invoices based on copies of supporting documents. Should a situation arise where payment on the basis of copies of supporting documents is necessary, specific authorization to do so should be required for each individual case.

108. Explain incentive compensation plans and what they should accomplish. The method of rewarding managers for their performance is referred to as incentive compensation plans. Effective incentive compensation plans should induce individual behavior compatible with increasing the firm's wealth. Examples of divisional incentive compensation plans include cash bonuses, profit sharing, deferred compensation, and special awards for extraordinary behavior.

109. Discuss fraud in financial reporting from a managerial accounting perspective. Fraudulent financial reporting is intentional conduct resulting in materially misleading financial statements. Fraudulent financial reporting is not embezzlement or theft of assets. Unintentional errors in preparing financial statements are not fraudulent financial reporting. The two key concepts in fraudulent financial reporting are: (1) the conduct must be intentional or reckless, and (2) the misstatement must be material to the financial statements. Employees at all levels in the organization could be involved in fraudulent financial reporting. Management accountants may commit fraud in financial reports to their superiors. The two most common types of this fraud involve improper revenue recognition and overstating inventory. Top management is responsible for assuring the integrity of financial information presented to outsiders. As a result, they are responsible for maintaining adequate internal controls.

110. Identify (a) the purpose of internal accounting controls and (b) the importance of record keeping.

a. b.

Internal accounting control requirements are to provide reasonable assurance that transactions are recorded in accordance with management's intentions. The objective of the record keeping requirements is to enable staff to prepare accurate and fairly stated external financial reports while preventing unrecorded transactions such as bribes.

111. Define the two most common types of fraud and discuss their impact on financial statements. Also discuss incentives for managers to commit financial fraud. The two most common types of fraud involve improper revenue recognition and overstating inventory. Improper revenue recognition occurs when the firm reports the profit-increasing effects of revenue in the wrong accounting period, usually early. Overstated ending inventory leads to overstated earnings, by understating Cost of Goods Sold. Bonuses, merit pay increases, and promotions often depend on reported accounting numbers. Managers given a short-term perspective by their employment and pay arrangements will have an incentive to "manage earnings." High-pressure performance evaluation systems not only put pressure on people to perform well but also create incentives to commit fraud.

112. Identify controls that can be instituted to prevent financial fraud. A fundamental principle of internal control to prevent fraud separates duties where a single person carrying out a series of tasks could commit fraud and take steps to hide it. Separation of duties makes fraud more difficult because fraud then requires collusion. Internal auditors can both deter and detect fraud. The presence of the independent auditors and their review of a company's internal controls help to prevent fraud.

113. Describe the characteristics found to exist in most divisional incentive compensations plans. The characteristics found to exist in most divisional incentive compensation plans are:
1) 2) 3) Cash bonuses and profit sharing plans reward managers for short-term performance. Deferred compensation, such as stock and stock options, is available to managers several years after they earn the compensation. Firms give special awards for particular actions or extraordinary performance.

114. Compare and contrast expectancy and agency approaches to motivation. The expectancy view of motivation recommends two things: providing desirable rewards and providing a high probability that behaving as the organization wishes will lead to the rewards. The agency view focuses on the relationships between principles and agents, and looks for ways to encourage agents (e.g. employees) to act in the interests of principals (e.g. managers).

115. How does the balanced scorecard tie performance measures to organizational goals? The balanced scorecard is a causal model for lead and lag indicators of performance. The model is based on four perspectives: (1) learning and growth, (2) internal business and production process efficiency, (3) customer, and (4) financial.

116. Explain the linkages among the four balanced scorecard perspectives. One can think of performing well on learning and growth as leading to improved business process and improved customer satisfaction, which leads to improved financial performance. There are various linkages among the four perspectives, but the point is that performing well on the three non-financial perspectives should lead to financial performance, or that financial performance lags non-financial performance.

117. How do incentive plans affect the development phase of the product life cycle? Incentive plans based on short-term accounting performance may deter managers from investing in product development at a point in the product life cycle when the investment can do the most to ensure the most cost-effective method of production through the product's life.

118. How could activity-based costing shift the emphasis from managing overhead to managing supplier relations? Activity-based costing identifies activities that drive overhead costs. Some of these activities could be less expensive if outsourced. Consequently, some managerial activity could shift from managing overhead costs to managing supplier relations.

119. When implementing the balanced scorecard, why do some managers use a different term to describe it? The reason some managers use a different term to describe the balanced scorecard concept is because they are often concerned that some employees will think the approach is just another management fad without giving the substance of the approach a try.

120. Bowers Company is considering a new accounting policy to write-off of design and development costs as current period expenses. Explain how this could affect managers incentives to incur these costs. Writing off design and development costs as current period expenses may be a disincentive to managers incurring these costs, if managers are evaluated by financial performance measures. For instance, if bonuses are given on the basis of net income, managers will want to keep expenses as low as possible.

121. Carson Company uses a cost of capital rate of 10 percent in making investment decisions. It currently is considering two mutually exclusive projects, each requiring an initial investment of $12 million. The first project has a net present value of $23 million and an internal rate of return of 18 percent. The firm will complete this project within one year. It will raise accounting income and earnings per share almost immediately thereafter. The second project has a net present value of $45 million and an internal rate of return of 28 percent. The second project requires incurring large, noncapitalizable expenses over the next few years before net cash inflows from sales revenue result. Thus accounting income and earnings per share for the next few years will not only be lower than if the first project is accepted but will also be lower than earnings currently reported. Required: a. Should the short-run effects on accounting income and earnings per share influence the decision about the choice of projects? Explain. b. Should either of the projects be accepted? If so, which one? Why? a. Management should not make decisions on the basis of reported accounting income. Rather, managerial decisions should be based upon accurate, or as accurate as possible, estimates of future cash flows and the correct use of the net present value rule. The conflict between sound managerial decisions and financial reporting, however, is further aggravated by the fact that conventionally prepared financial statements are prepared for the benefit of individual shareholders and creditors who may or may not understand the results of the accounting conventions of conservatism and objectivity. Investors in Carson Company, like the managers, should be interested in maximizing the future cash flows. If investors are fooled, however, by financial statements which report decreased earnings after the acceptance of a desirable project, the firm may have difficulty raising capital to finance future long-term projects. Under such circumstances, it is conceivable that management could make suboptimal decisions in order to raise reported earnings and improve their ability to raise capital. Fortunately, there is considerable empirical evidence indicating investors are not fooled by accounting conventions. This result implies that management decisions based on the correct use of the present value rule will lead to an optimal investment strategy from the point of view of the firm, its shareholders, and its creditors. b. In light of the foregoing discussion and the discussion in the text, Carson should accept that project which has a net present value of $45 million in spite of the fact that it results in lower reported earnings in the short run. The $45 million project with a 28 percent internal rate of return is the most desirable because it leads to the highest present value of expected future cash flows.

122. Josephson and Associates is a consulting firm that spends $60,000 per year advertising the companys brand names and trademarks. Gross margin on sales after taxes is up $66,000 each year because of these advertising expenditures. For the purposes of this problem, assume that the firm makes all advertising expenditures on the first day of each year and that the $66,000 extra after-tax gross margin on sales occurs on the first day of the next year. Excluding any advertising assets or profits, Josephson has $200,000 of other assets that have produced an after-tax income of $20,000 per year. Josephson follows a policy of declaring dividends each year equal to net income, and it has a cost of capital of 10 percent per year. Required: a. Is the advertising policy a sensible one? Explain. b. How should accounting report the expenditures for advertising in Josephsons financial statements to reflect accurately the managerial decision of advertising at the rate of $60,000 per year? In other words, how can the firm account for the advertising expenditures in such a way that the accounting rate of return for the advertising project and the rate of return on assets for the firm reflect the 10-percent return from advertising? a. The decision to advertise, like the decision to invest in any asset, should be based on the correct use of the net present value rule. The cost of capital of Josephson is 10 percent; hence, management should be willing to invest in any project that has a positive net present value when discounted at 10 percent. Since the advertising expenditures have a 10 percent return [= ($66,000 $60,000)/60,000] and a zero net present value, management should be indifferent between advertising or not advertising. b. In the absence of the advertising expenditures, Josephson would report a 10 percent return on capital [= $20,000/$200,000]. If the decision was made to advertise, generally accepted accounting principles would require that the expenditures be expensed immediately. Under these circumstances, Josephson would report earnings of $26,000 and assets of $200,000, or an all-capital earnings rate of 13 percent. Such a result may unnecessarily bias management in favor of advertising. The preferable alternative would be that Josephson capitalize its advertising expenditures and amortize them to expense as their benefits accrue. Under these circumstances, the first year's advertising would be capitalized and amortized to expense in Year 2 when the benefits accrue. Similarly, advertising expenditures in Year 2 would be capitalized and expensed in the third year. The result would be that total assets would become $260,000 each year and income would be $26,000. The accounting rate of return would be 10 percent [=$26,000/$260,000], accurately reflecting the return on the advertising expenditures.

123. The CFO, Brad Taylor, of Florida Electronics Merchandising Company has asked you to advise it on how to detect fraudulent financial reporting. Brad suspects that the management of one of its outlet stores may have been committing fraud by overstating ending inventory by $100,000 per quarter and wants your help in detecting this. In particular, Brad wants to know how to find evidence of inventory overstatement, whether intentional or unintentional. Required: a. Brad as CFO has provided the following data (in thousands) for quarter 1 and projected figures for quarter 2 for the year. If fraud is occurring, he believes it is at its early stages and that the beginning inventory for Quarter 1 was more than likely correct. Brad would like you to put together an illustration that he can take to the audit committee that shows the potential effect of the inventory overstatement fraud, how it compares to a situation with no fraud, and how the fraudulent scheme may carry through to the reported amounts for beginning inventory and operating profits in Quarter 2.

Sales Beginning Inventory Purchases Administrative and Marketing Expenses

Quarter 1 $2,000 200 900 800

Quarter 2 (projected) $1,500 ? 900 500

b. Prepare a brief report for Brad, that suggests ways he and his team could detect the inventory overstatement.

a. Illustration of the Effects of Overstating Ending Inventory

Period 1: Sales Beginning Inventory Add Purchases Subtract Ending Inventory Equals Cost of Goods Sold Administrative and Marketing Expenses Operating Profits Period 2: Sales Beginning Inventory Add Purchases Subtract Ending Inventory Equals Cost of Goods Sold Administrative and Marketing Expenses Operating Profits

(1) Correct $ 2,000 $ 200 900 100 $ 1,000 $ 800 $ 200

(2)Fraudulent $ 2,000a $ 200a 900a 200 $ 900 $ 800a $ 300

$ 1,500 $ 100b 900 100 $ 900 $ 500 $ 100

$ 1,500a $ 200b 900a 100a $ 1,000 $ 500a $0

a Correct amount; not a fraudulent number. b From Period 1 Ending Inventory.

b. Inventory is often overstated by not writing off obsolete inventory, thus leaving on the books an asset that should be expensed. Inventory may also be overstated by reporting inflated ending inventory values. Inventory overstatements can be found as follows: Count the inventory accurately, and make sure the inventory that is reported is actually on hand. Use people who have expertise in the field to check both the physical inventory and the records to look for obsolete inventory (particularly important in high-tech fields). Analyze the inventory levels and the relation of inventory to cost of goods sold. If the inventory turnover ratio (inventory turnover = cost of goods sold/average inventory) goes down over time, or is low compared to other similar divisions, inventory may be overstated.

Chapter 13--Allocating Costs to Responsibility Centers


Student: ___________________________________________________________________________ 1. Which of the following terms describes a cost that firms can identify specifically with, or trace directly to, a particular product, department, or process? A. direct cost. B. process cost. C. marginal cost. D. variable cost.

2. How can a department managers salary be characterized? A. direct cost of the department, but indirect to the units the department produces. B. process cost of the department, but indirect to the units the department produces. C. indirect cost of the department, but direct to the units the department produces. D. variable cost of the department, but direct to the units the department produces.

3. Which of these is a cost that results from the joint use of a facility or a service by several products, departments, or processes? A. direct cost. B. indirect cost. C. marginal cost. D. variable cost.

4. How do common costs arise? A. From the joint use of a facility or a service by several products, departments, or processes. B. From the direct use of a facility or a service by several products, departments, or processes. C. From the variable use of a facility or a service by several products, departments, or processes. D. From the marginal use of a facility or a service by several products, departments, or processes.

5. Why do companies allocate common costs to departments and products? A. pricing and bidding. B. contract cost reimbursement. C. motivation. D. All of the answers are correct.

6. Costs of operating the human resources, accounting, computer support, and maintenance departments are allocated to other departments. All are examples of which of the following? A. direct departments. B. producing departments. C. service departments. D. common departments.

7. Which of the following is the process by which the costs of operating the human resources, accounting, computer support, and maintenance departments are allocated to other departments? A. direct department cost allocation. B. producing department cost allocation. C. service department cost allocation. D. common department cost allocation.

8. Why are the costs of operating service departments allocated to other departments? A. Many departments consume the services provided by service departments and should be assigned a share of the costs associated with the services consumed. B. Allocating service costs to other departments for services provided gives department managers incentives to control the use of support services. C. External reporting regulations (for tax and financial reporting) require allocating manufacturing overhead to the units produced. D. All of the answers are correct.

9. What costs result from the joint use of a facility or a service by several products, departments, or process? A. Opportunity B. Direct C. Common (or indirect) costs D. All of the answers are correct.

10. The step method allocates costs of service departments to A. other service departments. B. producing departments. C. joint products. D. other service departments and producing departments.

11. Pricing and bidding, contract cost reimbursement, and motivation are reasons for A. allocating common costs to departments and products. B. allocating common costs to service departments, only. C. not allocating common costs to departments and products. D. not allocating common costs to production departments.

12. Companies do not allocate common costs to departments and products for which of the following reasons: A. to develop product cost information for purposes of pricing and bidding. B. contract cost reimbursement. C. motivation. D. dumping excess inventories on the market.

13. Why do companies allocate common costs to departments and products? A. to develop product cost information for purposes of pricing and bidding. B. contract cost reimbursement. C. motivation. D. All of the answers are correct.

14. Charley's Products allocates telephone expenses based on a variable rate of $1 per phone call. It allocates the fixed monthly charge equally over its budgeted usage. Able Division expected to make 300 telephone calls, but actually made 350. Baker Division expected to make 300 telephone calls, but actually made 250. Actual fixed costs for the month totaled $3,000. What are the amounts allocated to the two divisions using a dual rate of allocation? A. Able Division = $2,259, Baker Division = $1,291 B. Able Division = $2,209, Baker Division = $1,391 C. Able Division = $1,850, Baker Division = $1,750 D. Able Division = $1,800, Baker Division = $1,800

15. When are cost allocation concepts appropriate? A. only as management deems appropriate. B. in manufacturing, nonmanufacturing, and service organizations. C. in allocating costs to production departments, but not from one service department to another. D. None of the answers is correct.

16. Which of the following is a cost that is not usually allocated to a department? A. Direct labor used. B. Manager's salary for the department. C. Property taxes for the factory building. D. All of the answers are correct.

17. Which of the following is not a reason that costs of operating service departments are allocated to other departments? A. Many departments consume the services provided by service departments and should be assigned a share of the costs associated with the services consumed. B. Allocating service costs to other departments for services provided gives department managers incentives to control the use of support services. C. External reporting regulations (for tax and financial reporting) require allocating manufacturing overhead to the units produced. D. Many departments consume the services provided by service departments and should be charged an arbitrary share of the costs because the costs must be allocated to someone.

18. What is the proper sequence of steps in allocating costs to production departments? A. Assign direct costs to departments, allocate indirect costs to departments, and allocate service department costs to production departments. B. Assign indirect costs to departments, allocate direct costs to departments, and allocate service department costs to production departments. C. Assign service department costs to production departments, allocate direct costs to departments, and allocate indirect costs to production departments. D. Assign indirect costs to departments, allocate service department costs to departments, and allocate direct costs to production departments.

19. What is the first step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

20. What is the second step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

21. What is the third, or final, step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

22. Pine Tar Forest Products has two production departments (Planting and Harvesting) and two service departments (Cafeteria and Repairs). The service department costs must be allocated to production departments. Management has decided to allocate the cost of the cafeteria to other departments based upon the average number of employees and the cost of the Repairs Department based upon the number of machine hours used.

Departments Cafeteria Repairs Planting Harvesting

Pre-Allocation Costs $43,200 60,000 350,000 700,000

Number of Employees 5 12 20 40

Machine Hours 100 12,000 40,000 20,000

Regardless of the allocation method used, Pine Tar Forest Products always starts the allocation process with the Cafeteria Department. If Pine Tar Forest Products distributes costs directly (direct method) from service departments to productions departments, what additional overhead costs should be allocated from the service departments to the Planting Department?

A. $56,800 B. $54,400 C. $35,940 D. $67,200 23. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department A? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

24. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department B? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

25. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department C? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

26. Columbia Hospital for Women charges for labor and delivery room overhead based on hours of use. The following data represents the annual budget for the labor and delivery room:

Nurses compensation Supplies Allocated rent Allocated utilities Total budgeted cost

$2,000,000 600,000 300,000 100,000 $3,000,000

The total hours of labor and delivery room care expected for the year is 300,000 hours. If a patient spends 4 hours in the labor and delivery room, what is the total overhead costs that would be charged?

A. $80.00 B. $40.00 C. $20.00 D. $ 4.00 27. Which of the following statements best describes cost allocation? A. A company can maximize or minimize total company income by selecting different bases on which to allocate indirect costs. B. A company should select an allocation base to raise or lower reported income on given products. C. A company's total income will remain unchanged no matter how indirect costs are allocated. D. A company, as a general rule, should allocate indirect costs randomly or based on an "ability-to-bear" criterion.

28. To identify costs that relate to a specific product, what allocation base should be chosen? A. One that does not have a cause and effect relationship. B. One that has a causal relationship. C. One that considers variable costs but not fixed costs. D. One that considers direct materials and direct labor but not factory overhead.

29. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of personnel costs is allocated to Department J (rounded to the nearest $)?

A. $120,000 B. $240,000 C. $300,000 D. $360,000 30. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of personnel costs is allocated to Department D (rounded to the nearest $)?

A. $ 73,171 B. $240,000 C. $300,000 D. $333,333

31. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Shipping costs is allocated to Department D (rounded to the nearest $)?

A. $ 63,636 B. $318,182 C. $381,818 D. $450,000 32. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Shipping costs is allocated to Department J (rounded to the nearest $)?

A. $ 63,636 B. $318,182 C. $381,818 D. $450,000

33. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Administration costs is allocated to Department D (rounded to the nearest $)?

A. $ 97,561 B. $320,000 C. $400,000 D. $444,444 34. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Administration costs is allocated to Department J (rounded to the nearest $)?

A. $ 97,561 B. $320,000 C. $400,000 D. $480,000

35. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Administration costs is allocated to Department D (rounded to the nearest $)?

A. $ 97,561 B. $216,216 C. $273,115 D. $409,673 36. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Administration costs is allocated to Department J (rounded to the nearest $)?

A. $ 97,561 B. $216,216 C. $273,115 D. $409,673

37. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Personnel costs is allocated to Department D (rounded to the nearest $)?

A. $ 73,171 B. $100,000 C. $105,263 D. $240,000 38. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Personnel costs is allocated to Department J (rounded to the nearest $)?

A. $ 73,171 B. $105,263 C. $157,895 D. $240,000

39. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Shipping costs is allocated to Department D (rounded to the nearest $)?

A. $304,348 B. $500,000 C. $524,570 D. $629,484 40. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Shipping costs is allocated to Department J (rounded to the nearest $)?

A. $304,348 B. $500,000 C. $524,570 D. $629,484

41. What is the final step for allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs (that are not directly attributable to a service or production department) based on some cost driver. C. Allocate service department costs to production departments D. Service department costs cannot be allocated to production departments.

42. The service department cost allocation methodology that begins with the service department that receives the smallest dollar amount of service from the other service departments has its costs allocated to the other service and production departments, then distributes the total costs of the service department receiving the next smallest amount of service from other service departments, and so on is called the A. wave method. B. activity-based method. C. step method. D. pass along method.

43. Which overhead allocation method allocates service department costs with consideration of services rendered to other service departments? A. step method. B. direct method. C. net realizable value method. D. physical measures method.

44. The costing process that (1) measures each service departments resource spending by unit, batch, product, customer, or facility, then (2) identifies and measures the activities demanded by other departments that require support-service spending, then (3) identifies appropriate cost-driver bases and calculates cost-driver rates, and finally allocates service department costs based on other departments usage of cost-driver bases, is called the A. usage method. B. activity-based method. C. step method. D. cost driver method.

45. Applying the techniques of activity-based costing typically results in identifying which of the following? A. less accurate cost-allocation bases (cost drivers). B. as accurate cost-allocation bases (cost drivers). C. more accurate cost-allocation bases (cost drivers). D. None of the answers is correct.

46. Why is activity-based costing used to allocate service department costs? A. To improve allocations of production department costs to production departments. B. To improve allocations of production department costs to service departments. C. To improve allocations of service department costs to production departments. D. None of the answers is correct.

47. Why is activity-based costing used to allocate service department costs? A. There are fewer cost-allocation bases. B. It can lead to improved allocation of production department costs to service departments. C. It results in identifying more accurate cost-allocation bases. D. None of the answers is correct.

48. Which of the following is a reason for using activity-based costing to allocate service department costs? A. It results in identifying more accurate cost drivers. B. It is required by generally accepted accounting principles. C. It is required by the tax authorities. D. All of the answers are correct.

49. Which of the following is a reason for using activity-based costing to allocate service department costs? A. It can lead to improved allocation of service department costs to production departments. B. It is required by generally accepted accounting principles. C. It is required by the tax authorities. D. All of the answers are correct.

50. Which of the following statements is true concerning finding a cost-allocation base for activity-based costing? A. Finding the cost-allocation base is justified if the benefits from improved decisions exceed the costs of finding and using the base. B. Finding the cost-allocation base is usually difficult and costly. C. Finding the cost-allocation base may require the accumulation of extensive data in addition to the regular accounting information. D. All of the answers are correct.

51. Marketing and administrative costs are allocated to departments for purposes of performance evaluation using techniques A. similar to those employed in allocating service department costs. B. different than those employed in allocating service department costs. C. similar to those employed in allocating production department costs. D. different than those employed in allocating common department costs.

52. Joint-process cost allocations arise from the need to assign joint-process costs to A. a single product manufactured from a common input. B. a single product manufactured from two or more common inputs. C. two or more products manufactured from a common input. D. two or more products manufactured from two or more common inputs.

53. The methodology(ies) of allocating joint-process costs is(are) based on A. net realizable value, only. B. physical measures, only. C. both net realizable value and physical measures. D. None of the answers is correct.

54. Net realizable value and physical measures are two methods for allocating which of the following costs? A. direct costs. B. opportunity costs. C. joint-process costs. D. sunk costs.

55. Why do companies allocate joint-process costs? A. Performance evaluation B. Reporting purposes C. Establishing regulated rates D. All of the answers are correct.

56. Why are joint-process costs are allocated? A. Due to the need to assign joint-process costs to two or more products manufactured from a common input. B. Due to the need to assign joint-process costs to two or more products manufactured from different inputs. C. Due to the need to assign joint-process costs to two or more products manufactured from a common output. D. Due to the need to assign joint-process costs to two or more products manufactured from different outputs.

57. A method for allocating joint-process costs is based on A. opportunity costs. B. outlay costs. C. indirect costs. D. net realizable value.

58. Why are joint-process costs allocated? A. Used for performance evaluations. B. Used for reporting purposes. C. Used for establishing regulated rates. D. All of the answers are correct.

59. The products that result from processing a common input in the forest products, oil and gas, chemicals and mining industries are called A. natural products. B. common products. C. joint products. D. environmentally-sound products.

60. The stage of processing when two or more products are separated from the processing of a common input in the forest products, oil and gas, chemicals and mining industries is called a A. point of no return. B. separation point. C. splitoff point. D. breakout point.

61. Which of the following statements is true concerning the net realizable value method of joint-process costing? A. The method implies a matching of output costs with revenues generated by each input. B. The method implies a matching of input costs with revenues generated by each output. C. The method implies a matching of input revenues with costs generated by each output. D. The method implies a matching of output costs with revenues generated by each input.

62. While the results of allocating joint-process costs in different ways can be very important to managers for planning, performance evaluation, and decision making, A. there is no precise way of tracing joint-process costs to joint products. B. activity-based costing provides a precise way of tracing joint-process costs to joint products. C. traditional costing provides a precise way of tracing joint-process costs to joint products. D. standard costing provides a precise way of tracing joint-process costs to joint products.

63. Why bother allocating joint-process costs? A. It is a performance measurement. B. It is used for determining and responding to regulatory rate changes. C. It is used in estimating casualty losses. D. All of the answers are correct.

64. Why bother allocating joint-process costs? A. It is a performance measurement. B. It is used in resolving contractual disputes. C. It is used for estimating casualty losses D. All of the answers are correct.

65. Manufacturing companies are required to allocate joint-process costs in the valuation of inventories and cost of goods sold for A. financial reporting, only. B. tax reporting, only. C. managerial reporting, only. D. both financial and tax reporting.

66. A method for allocating joint-process costs is based on A. opportunity costs. B. outlay costs. C. indirect costs. D. physical measures.

67. Which of the following is the method of allocating joint costs based on a physical measure of volume, weight, or any other common measure of physical characteristics? A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. absolute qualities method.

68. The method of allocating joint costs used when output product prices are highly volatile or when significant processing occurs between the splitoff point and the first point of marketability is called the A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. absolute qualities method.

69. The method of allocating joint costs used when product prices are not set by the market (for example with heavily regulated companies) is called the A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. regulation method.

70. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using the step method, what is the total amount of costs allocated to (a) the Fabrication Department and (b) the Assembly Department?

71. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using the direct method, what is the total amount of costs allocated to (a) the Fabrication Department and (b) the Assembly Department?

72. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using machine hours as the base and the step method of allocation, what is the overhead rate for the Fabrication Department?

73. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using direct labor hours as the base and the direct method of allocation, what is the overhead rate for the Assembly Department?

74. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. Use the direct method to allocate service department costs to the operating departments.

75. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. Use the step method to allocate service department costs to the operating departments, starting with general factory administration.

76. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. What are the total service department costs allocated using each method?

77. Big Farms LLC has two production departments (Planting and Harvesting) and two service departments (Cafeteria and Repairs.) The service department's costs must be allocated to production departments. Management has decided to allocate the cost of the cafeteria to other departments based upon the average number of employees and the cost of the Repairs Department based upon the number of machine hours used.

Departments Cafeteria Repairs Planting Harvesting

Pre-Allocation Costs $ 43,200 60,000 350,000 700,000

Avg. No. Employees 5 12 20 40

Machine Hours 100 12,000 40,000 20,000

Regardless of the allocation method used, Big Farm always starts the allocation process with the Cafeteria Department. If Big Farm uses the step method, what additional overhead costs should be allocated from the service departments to the Planting Department?

78. Why are service department costs allocated to producing departments?

79. Describe the factors that should be considered in allocating service department costs.

80. Why are joint-process costs allocated?

81. How are joint-process costs allocated?

82. How are marketing and administrative costs allocated to departments for purposes of performance evaluation?

83. How is activity-based costing used to allocate service department costs?

84. How are service department costs allocated to production departments?

85. What is the nature of common (or indirect) costs?

86. Why do companies allocate common costs to departments and products?

87. Lamar Company has two production departments and a maintenance department. In addition, the company keeps other costs for the general plant in a separate account. The estimated cost data for Year 1 follow:

Cost Direct Labor Indirect Labor Indirect Materials Miscellaneous Maintenance

Production Dept. 1 $100,000 56,000 18,000 6,000 $180,000 16,000 Hours

Production Dept. 2 $ 60,000 28,000 14,000 10,000 $112,000 24,000 Hours

Maintenance $45,000 1,800 3,200 $50,000

General Plant $40,000 16,000 10,000 $66,000

The general plant services the three departments in the following proportions: 50 percent (Department 1); 30 percent (Department 2); 20 percent (Maintenance). Required: Allocate maintenance costs based on maintenance hours. Allocate maintenance department and general plant costs to the production departments. Use the step method, starting with general plant costs.

88. Garfield Company has two production departments and a maintenance department. In addition, the company keeps other costs for the general plant in a separate account. The estimated cost data for Year 1 follow:

Cost Direct Labor Indirect Labor Indirect Materials Miscellaneous Maintenance

Production Dept. 1 $100,000 66,000 19,000 5,000 $190,000 12,000 Hours

Production Dept. 2 $ 60,000 29,000 15,000 10,000 $114,000 18,000 Hours

Maintenance $45,000 1,800 3,200 $50,000

General Plant $40,000 16,000 10,000 $66,000

The general plant services the three departments in the following proportions: 50 percent (Department 1); 30 percent (Department 2); 20 percent (Maintenance). Required: Allocate maintenance costs based on maintenance hours. Allocate maintenance department and general plant costs to the production departments. Use the step method, starting with general plant costs.

89. Evans Company processes a chemical, Exacto 7, through a pressure treatment operation. The complete process has two outputs, X and Y. The January costs to process Exacto 7 are $50,000 for materials and $100,000 for conversion costs. This processing results in two outputs, X and Y, that sell for a total of $250,000. The sales revenue from X amounts to $200,000 of the total. Required: Using the net realizable method, assign costs to X and Y for January.

90. Grimes Company processes a chemical, Techno 9, through a pressure treatment operation. The complete process has two outputs, Y and Z. The January costs to process Techno 9 are $75,000 for materials and $90,000 for conversion costs. This processing results in two outputs, Y and Z, that sell for a total of $332,000. The sales revenue from Y amounts to $200,000 of the total. Required: Using the net realizable method, assign costs to Y and Z for January.

91. Jamar Company has two production departments, Tubing and Packing, and two service departments, Quality Control and Maintenance. In June, the Quality Control department provided 2,000 hours of service 1,047 hours to Tubing, 255 hours to Maintenance, and 698 hours to Packing. In the same month, Maintenance provided 2,750 hours to Tubing, 1,900 hours to Packing, and 350 hours to Quality Control. Quality Control incurred costs of $100,000, and Maintenance incurred costs of $210,000. Required: Use the step method to allocate service department costs sequentially based on hours of service provided. Start with Maintenance and then allocate Quality Control. Check your solution by making certain that the firm finally allocates $310,000 to the production departments.

92. Clark Company has two production departments, Tubing and Packing, and two service departments, Quality Control and Maintenance. In June, the Quality Control department provided 2,000 hours of service 1,047 hours to Tubing, 255 hours to Maintenance, and 698 hours to Packing. In the same month, Maintenance provided 3,240 hours to Tubing, 1,890 hours to Packing, and 270 hours to Quality Control. Quality Control incurred costs of $100,000, and Maintenance incurred costs of $220,000. Required: Use the step method to allocate service department costs sequentially based on hours of service provided. Start with Maintenance and then allocate Quality Control. Check your solution by making certain that the firm finally allocates $320,000 to the production departments.

93. Transtech, Inc., processes silicon crystals into purified wafers and chips. Silicon crystals cost $60,000 per tank-car load. The process involves heating the crystals for 12 hours, producing 45,000 purified wafers with a market value of $20,000, and 15,000 chips with a market value of $140,000. The joint cost of the heat process is $25,600. Required: a. If the crystal costs and the heat process costs are to be allocated on the basis of units of output, what cost is assigned to each product? b. If the crystal costs and the heat process costs are allocated on the basis of the net realizable value, what cost is assigned to each product? c. How much profit or loss does the purified wafers product provide using the data in this problem and your analysis in requirement a.? Is it really possible to determine which product is more profitable? Explain why or why not.

94. Formula, Inc., processes sugar into candy and powdered drink mix. The sugar costs $61,000 per load. The process involves mixing the sugar for 2 hours, producing 60,000 packs of candy with a market value of $25,000, and 20,000 packs of drink mix with a market value of $100,000. The joint cost of the mixing process is $28,600. Required: a. If the sugar and the mixing process costs are to be allocated on the basis of units of output, what cost is assigned to each product? b. If the sugar and the mixing process costs are allocated on the basis of the net realizable value, what cost is assigned to each product? c. How much profit or loss does the candy product provide using the data in this problem and your analysis in requirement (a)? Is it really possible to determine which product is more profitable? Explain why or why not.

95. Northstar Timber processes timber into Grade A and Grade B lumber. Timber costs $200 per unit, where one unit equals 1,000 board feet. The process involves cutting timber into the two grades of lumber. Each unit of timber produces .25 unit (250 board feet) of Grade A lumber with a market value of $240 and .75 unit (750 board feet) of Grade B with a market value of $160. The joint cost of the production process is $100 per unit. Required: a. Assume that the joint costs of the two grades of lumber are to be allocated on the basis of units of output. What cost is assigned to each product (for .25 unit of Grade A and .75 unit of Grade B)? b. If the joint costs are allocated on the basis of the net realizable value, what cost is assigned to each product? How much profit or loss does the Grade A lumber earn? Is it really possible to determine which product is more profitable? Explain why or why not.

96. Big Sky Timber processes timber into Grade A and Grade B lumber. Timber costs $400 per unit, where one unit equals 1,000 board feet. The process involves cutting timber into the two grades of lumber. Each unit of timber produces .25 unit (250 board feet) of Grade A lumber with a market value of $560 and .75 unit (750 board feet) of Grade B with a market value of $240. The joint cost of the production process is $100 per unit. Required: a. Assume that the joint costs of the two grades of lumber are to be allocated on the basis of units of output. What cost is assigned to each product (for .25 unit of Grade A and .75 unit of Grade B)? b. If the joint costs are allocated on the basis of the net realizable value, what cost is assigned to each product? How much profit or loss does the Grade A lumber earn? Is it really possible to determine which product is more profitable? Explain why or why not.

Chapter 13--Allocating Costs to Responsibility Centers Key

1. Which of the following terms describes a cost that firms can identify specifically with, or trace directly to, a particular product, department, or process? A. direct cost. B. process cost. C. marginal cost. D. variable cost.

2. How can a department managers salary be characterized? A. direct cost of the department, but indirect to the units the department produces. B. process cost of the department, but indirect to the units the department produces. C. indirect cost of the department, but direct to the units the department produces. D. variable cost of the department, but direct to the units the department produces.

3. Which of these is a cost that results from the joint use of a facility or a service by several products, departments, or processes? A. direct cost. B. indirect cost. C. marginal cost. D. variable cost.

4. How do common costs arise? A. From the joint use of a facility or a service by several products, departments, or processes. B. From the direct use of a facility or a service by several products, departments, or processes. C. From the variable use of a facility or a service by several products, departments, or processes. D. From the marginal use of a facility or a service by several products, departments, or processes.

5. Why do companies allocate common costs to departments and products? A. pricing and bidding. B. contract cost reimbursement. C. motivation. D. All of the answers are correct.

6. Costs of operating the human resources, accounting, computer support, and maintenance departments are allocated to other departments. All are examples of which of the following? A. direct departments. B. producing departments. C. service departments. D. common departments.

7. Which of the following is the process by which the costs of operating the human resources, accounting, computer support, and maintenance departments are allocated to other departments? A. direct department cost allocation. B. producing department cost allocation. C. service department cost allocation. D. common department cost allocation.

8. Why are the costs of operating service departments allocated to other departments? A. Many departments consume the services provided by service departments and should be assigned a share of the costs associated with the services consumed. B. Allocating service costs to other departments for services provided gives department managers incentives to control the use of support services. C. External reporting regulations (for tax and financial reporting) require allocating manufacturing overhead to the units produced. D. All of the answers are correct.

9. What costs result from the joint use of a facility or a service by several products, departments, or process? A. Opportunity B. Direct C. Common (or indirect) costs D. All of the answers are correct.

10. The step method allocates costs of service departments to A. other service departments. B. producing departments. C. joint products. D. other service departments and producing departments.

11. Pricing and bidding, contract cost reimbursement, and motivation are reasons for A. allocating common costs to departments and products. B. allocating common costs to service departments, only. C. not allocating common costs to departments and products. D. not allocating common costs to production departments.

12. Companies do not allocate common costs to departments and products for which of the following reasons: A. to develop product cost information for purposes of pricing and bidding. B. contract cost reimbursement. C. motivation. D. dumping excess inventories on the market.

13. Why do companies allocate common costs to departments and products? A. to develop product cost information for purposes of pricing and bidding. B. contract cost reimbursement. C. motivation. D. All of the answers are correct.

14. Charley's Products allocates telephone expenses based on a variable rate of $1 per phone call. It allocates the fixed monthly charge equally over its budgeted usage. Able Division expected to make 300 telephone calls, but actually made 350. Baker Division expected to make 300 telephone calls, but actually made 250. Actual fixed costs for the month totaled $3,000. What are the amounts allocated to the two divisions using a dual rate of allocation? A. Able Division = $2,259, Baker Division = $1,291 B. Able Division = $2,209, Baker Division = $1,391 C. Able Division = $1,850, Baker Division = $1,750 D. Able Division = $1,800, Baker Division = $1,800

15. When are cost allocation concepts appropriate? A. only as management deems appropriate. B. in manufacturing, nonmanufacturing, and service organizations. C. in allocating costs to production departments, but not from one service department to another. D. None of the answers is correct.

16. Which of the following is a cost that is not usually allocated to a department? A. Direct labor used. B. Manager's salary for the department. C. Property taxes for the factory building. D. All of the answers are correct.

17. Which of the following is not a reason that costs of operating service departments are allocated to other departments? A. Many departments consume the services provided by service departments and should be assigned a share of the costs associated with the services consumed. B. Allocating service costs to other departments for services provided gives department managers incentives to control the use of support services. C. External reporting regulations (for tax and financial reporting) require allocating manufacturing overhead to the units produced. D. Many departments consume the services provided by service departments and should be charged an arbitrary share of the costs because the costs must be allocated to someone.

18. What is the proper sequence of steps in allocating costs to production departments? A. Assign direct costs to departments, allocate indirect costs to departments, and allocate service department costs to production departments. B. Assign indirect costs to departments, allocate direct costs to departments, and allocate service department costs to production departments. C. Assign service department costs to production departments, allocate direct costs to departments, and allocate indirect costs to production departments. D. Assign indirect costs to departments, allocate service department costs to departments, and allocate direct costs to production departments.

19. What is the first step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

20. What is the second step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

21. What is the third, or final, step in allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs based on appropriate cost drivers. C. Allocate service department costs to production departments. D. None of the answers is correct.

22. Pine Tar Forest Products has two production departments (Planting and Harvesting) and two service departments (Cafeteria and Repairs). The service department costs must be allocated to production departments. Management has decided to allocate the cost of the cafeteria to other departments based upon the average number of employees and the cost of the Repairs Department based upon the number of machine hours used.

Departments Cafeteria Repairs Planting Harvesting

Pre-Allocation Costs $43,200 60,000 350,000 700,000

Number of Employees 5 12 20 40

Machine Hours 100 12,000 40,000 20,000

Regardless of the allocation method used, Pine Tar Forest Products always starts the allocation process with the Cafeteria Department. If Pine Tar Forest Products distributes costs directly (direct method) from service departments to productions departments, what additional overhead costs should be allocated from the service departments to the Planting Department?

A. $56,800 B. $54,400 C. $35,940 D. $67,200 23. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department A? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

24. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department B? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

25. Peters Retail, Inc. Peters Retail, Inc. utilizes 8,000 square feet of floor space in departments A, B, and C. Rental of $30,000 is incurred annually for this space. Department A occupied 1,000 square feet, Department B occupied 3,000 square feet, and Department C occupied 4,000 square feet. Refer to Peters Retail, Inc. How much of the rent expense is allocated to Department C? A. $30,000 B. $15,000 C. $11,250 D. $ 3,750

26. Columbia Hospital for Women charges for labor and delivery room overhead based on hours of use. The following data represents the annual budget for the labor and delivery room:

Nurses compensation Supplies Allocated rent Allocated utilities Total budgeted cost

$2,000,000 600,000 300,000 100,000 $3,000,000

The total hours of labor and delivery room care expected for the year is 300,000 hours. If a patient spends 4 hours in the labor and delivery room, what is the total overhead costs that would be charged?

A. $80.00 B. $40.00 C. $20.00 D. $ 4.00 27. Which of the following statements best describes cost allocation? A. A company can maximize or minimize total company income by selecting different bases on which to allocate indirect costs. B. A company should select an allocation base to raise or lower reported income on given products. C. A company's total income will remain unchanged no matter how indirect costs are allocated. D. A company, as a general rule, should allocate indirect costs randomly or based on an "ability-to-bear" criterion.

28. To identify costs that relate to a specific product, what allocation base should be chosen? A. One that does not have a cause and effect relationship. B. One that has a causal relationship. C. One that considers variable costs but not fixed costs. D. One that considers direct materials and direct labor but not factory overhead.

29. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of personnel costs is allocated to Department J (rounded to the nearest $)?

A. $120,000 B. $240,000 C. $300,000 D. $360,000 30. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of personnel costs is allocated to Department D (rounded to the nearest $)?

A. $ 73,171 B. $240,000 C. $300,000 D. $333,333

31. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Shipping costs is allocated to Department D (rounded to the nearest $)?

A. $ 63,636 B. $318,182 C. $381,818 D. $450,000 32. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Shipping costs is allocated to Department J (rounded to the nearest $)?

A. $ 63,636 B. $318,182 C. $381,818 D. $450,000

33. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Administration costs is allocated to Department D (rounded to the nearest $)?

A. $ 97,561 B. $320,000 C. $400,000 D. $444,444 34. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the direct method, what amount of Administration costs is allocated to Department J (rounded to the nearest $)?

A. $ 97,561 B. $320,000 C. $400,000 D. $480,000

35. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Administration costs is allocated to Department D (rounded to the nearest $)?

A. $ 97,561 B. $216,216 C. $273,115 D. $409,673 36. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Administration costs is allocated to Department J (rounded to the nearest $)?

A. $ 97,561 B. $216,216 C. $273,115 D. $409,673

37. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Personnel costs is allocated to Department D (rounded to the nearest $)?

A. $ 73,171 B. $100,000 C. $105,263 D. $240,000 38. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Personnel costs is allocated to Department J (rounded to the nearest $)?

A. $ 73,171 B. $105,263 C. $157,895 D. $240,000

39. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Shipping costs is allocated to Department D (rounded to the nearest $)?

A. $304,348 B. $500,000 C. $524,570 D. $629,484 40. Stephanie Company Stephanie Company has two production departments: D and J. Stephanie also has 3 service departments: Personnel, Administration, and Shipping. Shipping costs are allocated on the basis of number of packages, while Personnel and Administration costs are allocated using number of employees. Assume that the ranking of the benefits provided is in the order listed below.

Department Personnel Administration Shipping D J

Costs $600,000 800,000 700,000 500,000 400,000

Employees 25 20 12 10 15

# of Packages 7,000 9,000 27,500 5,000 6,000

Refer to Stephanie Company. Using the step method, what amount of Shipping costs is allocated to Department J (rounded to the nearest $)?

A. $304,348 B. $500,000 C. $524,570 D. $629,484

41. What is the final step for allocating service department costs to production departments? A. Assign overhead costs that are directly attributable to a service or production department. B. Allocate other overhead costs (that are not directly attributable to a service or production department) based on some cost driver. C. Allocate service department costs to production departments D. Service department costs cannot be allocated to production departments.

42. The service department cost allocation methodology that begins with the service department that receives the smallest dollar amount of service from the other service departments has its costs allocated to the other service and production departments, then distributes the total costs of the service department receiving the next smallest amount of service from other service departments, and so on is called the A. wave method. B. activity-based method. C. step method. D. pass along method.

43. Which overhead allocation method allocates service department costs with consideration of services rendered to other service departments? A. step method. B. direct method. C. net realizable value method. D. physical measures method.

44. The costing process that (1) measures each service departments resource spending by unit, batch, product, customer, or facility, then (2) identifies and measures the activities demanded by other departments that require support-service spending, then (3) identifies appropriate cost-driver bases and calculates cost-driver rates, and finally allocates service department costs based on other departments usage of cost-driver bases, is called the A. usage method. B. activity-based method. C. step method. D. cost driver method.

45. Applying the techniques of activity-based costing typically results in identifying which of the following? A. less accurate cost-allocation bases (cost drivers). B. as accurate cost-allocation bases (cost drivers). C. more accurate cost-allocation bases (cost drivers). D. None of the answers is correct.

46. Why is activity-based costing used to allocate service department costs? A. To improve allocations of production department costs to production departments. B. To improve allocations of production department costs to service departments. C. To improve allocations of service department costs to production departments. D. None of the answers is correct.

47. Why is activity-based costing used to allocate service department costs? A. There are fewer cost-allocation bases. B. It can lead to improved allocation of production department costs to service departments. C. It results in identifying more accurate cost-allocation bases. D. None of the answers is correct.

48. Which of the following is a reason for using activity-based costing to allocate service department costs? A. It results in identifying more accurate cost drivers. B. It is required by generally accepted accounting principles. C. It is required by the tax authorities. D. All of the answers are correct.

49. Which of the following is a reason for using activity-based costing to allocate service department costs? A. It can lead to improved allocation of service department costs to production departments. B. It is required by generally accepted accounting principles. C. It is required by the tax authorities. D. All of the answers are correct.

50. Which of the following statements is true concerning finding a cost-allocation base for activity-based costing? A. Finding the cost-allocation base is justified if the benefits from improved decisions exceed the costs of finding and using the base. B. Finding the cost-allocation base is usually difficult and costly. C. Finding the cost-allocation base may require the accumulation of extensive data in addition to the regular accounting information. D. All of the answers are correct.

51. Marketing and administrative costs are allocated to departments for purposes of performance evaluation using techniques A. similar to those employed in allocating service department costs. B. different than those employed in allocating service department costs. C. similar to those employed in allocating production department costs. D. different than those employed in allocating common department costs.

52. Joint-process cost allocations arise from the need to assign joint-process costs to A. a single product manufactured from a common input. B. a single product manufactured from two or more common inputs. C. two or more products manufactured from a common input. D. two or more products manufactured from two or more common inputs.

53. The methodology(ies) of allocating joint-process costs is(are) based on A. net realizable value, only. B. physical measures, only. C. both net realizable value and physical measures. D. None of the answers is correct.

54. Net realizable value and physical measures are two methods for allocating which of the following costs? A. direct costs. B. opportunity costs. C. joint-process costs. D. sunk costs.

55. Why do companies allocate joint-process costs? A. Performance evaluation B. Reporting purposes C. Establishing regulated rates D. All of the answers are correct.

56. Why are joint-process costs are allocated? A. Due to the need to assign joint-process costs to two or more products manufactured from a common input. B. Due to the need to assign joint-process costs to two or more products manufactured from different inputs. C. Due to the need to assign joint-process costs to two or more products manufactured from a common output. D. Due to the need to assign joint-process costs to two or more products manufactured from different outputs.

57. A method for allocating joint-process costs is based on A. opportunity costs. B. outlay costs. C. indirect costs. D. net realizable value.

58. Why are joint-process costs allocated? A. Used for performance evaluations. B. Used for reporting purposes. C. Used for establishing regulated rates. D. All of the answers are correct.

59. The products that result from processing a common input in the forest products, oil and gas, chemicals and mining industries are called A. natural products. B. common products. C. joint products. D. environmentally-sound products.

60. The stage of processing when two or more products are separated from the processing of a common input in the forest products, oil and gas, chemicals and mining industries is called a A. point of no return. B. separation point. C. splitoff point. D. breakout point.

61. Which of the following statements is true concerning the net realizable value method of joint-process costing? A. The method implies a matching of output costs with revenues generated by each input. B. The method implies a matching of input costs with revenues generated by each output. C. The method implies a matching of input revenues with costs generated by each output. D. The method implies a matching of output costs with revenues generated by each input.

62. While the results of allocating joint-process costs in different ways can be very important to managers for planning, performance evaluation, and decision making, A. there is no precise way of tracing joint-process costs to joint products. B. activity-based costing provides a precise way of tracing joint-process costs to joint products. C. traditional costing provides a precise way of tracing joint-process costs to joint products. D. standard costing provides a precise way of tracing joint-process costs to joint products.

63. Why bother allocating joint-process costs? A. It is a performance measurement. B. It is used for determining and responding to regulatory rate changes. C. It is used in estimating casualty losses. D. All of the answers are correct.

64. Why bother allocating joint-process costs? A. It is a performance measurement. B. It is used in resolving contractual disputes. C. It is used for estimating casualty losses D. All of the answers are correct.

65. Manufacturing companies are required to allocate joint-process costs in the valuation of inventories and cost of goods sold for A. financial reporting, only. B. tax reporting, only. C. managerial reporting, only. D. both financial and tax reporting.

66. A method for allocating joint-process costs is based on A. opportunity costs. B. outlay costs. C. indirect costs. D. physical measures.

67. Which of the following is the method of allocating joint costs based on a physical measure of volume, weight, or any other common measure of physical characteristics? A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. absolute qualities method.

68. The method of allocating joint costs used when output product prices are highly volatile or when significant processing occurs between the splitoff point and the first point of marketability is called the A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. absolute qualities method.

69. The method of allocating joint costs used when product prices are not set by the market (for example with heavily regulated companies) is called the A. absolute quantities method. B. physical qualities method. C. physical quantities method. D. regulation method.

70. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using the step method, what is the total amount of costs allocated to (a) the Fabrication Department and (b) the Assembly Department?

(a)& (b)

Direct labor Other costs Total Allocation Total Allocation Total allocated costs

Gen. Fact $10,000 4,000 $14,000 -$14,000 0

Repair $40,000 2,000 $42,000 1,400 $43,400 -43,400 0

Fabric.

Assem.

$ 8,400 17,360 $25,760

$ 4,200 26,040 $30,240

71. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using the direct method, what is the total amount of costs allocated to (a) the Fabrication Department and (b) the Assembly Department?

(a) & (b)

Direct labor Other costs Total Allocation Total Allocation Total allocated costs

Gen. Fact. $10,000 4,000 $14,000 -14,000 0

Repair $ 40,000 2,000 $42,000 $ 42,000 -42,000 0

Fabric

Assem.

$ 9,333 16,800 $26,133

$ 4,667 25,200 $29,867

72. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using machine hours as the base and the step method of allocation, what is the overhead rate for the Fabrication Department?

(a) & (b)

Direct labor Other costs Total Allocation Total Allocation Total costs No. of machine hours Cost per machine hr.

Gen. Fact. $10,000 4,000 14,000 -14,000 0

Repair $40,000 2,000 $42,000 1,400 43,400 -43,400 0

Fabric. $ 80,000 8,400 17,360 $105,760 10,000 $10.576

Assem. $50,000 4,200 26,040 $80,240

73. Useful Tool Company Useful Tool Company has two service departments (General Factory and Repair) and two operating departments (Fabrication and Assembly). Management has decided to allocate repair costs on the basis of the area (square feet) in each department and to allocate General Factory on the basis of labor hours worked by the employees in each of their respective departments. The following data appear in the company records for the current period:

Square Feet Labor Hours Machine Hours Direct Labor Service Cost Center: Other Costs

Gen. Fact 2,000 1,000 $10,000 $4,000

Repair 500 3,500 $40,000 $2,000

Fabric 8,000 21,000 10,000 $90,000 $80,000

Assembly 12,000 10,500 12,000 $75,000 $50,000

The company allocates the costs from the General Factory Department first. Refer to the Useful Tool Company. Using direct labor hours as the base and the direct method of allocation, what is the overhead rate for the Assembly Department?

(a) & (b)

Direct labor Other costs Total Allocation Allocation Total costs Labor hours Cost per labor hour

Gen. Fact. $10,000 4,000 14,000 -14,000

Repair $40,000 2,000 $42,000 -42,000

Fabric. $ 80,000 9,333 16,800 $106,133

Assem. $50,000 4,667 25,200 $79,867 10,500 $7.606

74. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. Use the direct method to allocate service department costs to the operating departments.

Direct:

G.F.A. $3,600 ($3,600)

Maintenance 6,200 (6,200)

Cutting (1/4) $900 (1/4) 1,550 $2,450

Assembly (3/4) $2,700 (3/4) 4,650 $7,350

Total allocated

75. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. Use the step method to allocate service department costs to the operating departments, starting with general factory administration.

Step Method, Starting with General Factory Administration:

G.F.A $3,600 ($3,600) 0 Total Allocated

Maintenance $6,200 (1/5) 720 ($6,920)

Cutting N/A (1/5) $720 (1/4) $1,730 $2,450

Assembly N/A (3/5) $2,160 (3/4) $5,190 $7,350

76. Waterbury Box Company General Factory Administration and Maintenance are service departments in the Waterbury Box Company. Management has decided to allocate maintenance costs on the basis of the area in each department and general factory administration costs on the basis of labor hours the employees worked in each of their respective departments. The following data appears in the company records for the current period:

General Factory Admin. Area Occupied (square feet) Labor Hours Direct Labor Costs Service Dept. Costs 1,000 600 $3,600

Maintenance

Cutting

Assembly

500 100 $6,200

1,000 100 $1,500

3,000 300 $4,000

Refer to the Waterbury Box Company. What are the total service department costs allocated using each method?

Using the direct method, a total of $9,800 ($2,450 + $7,350) is allocated. Using the step method, a total of $9,800 ($2,450 + $7,350) is allocated.

77. Big Farms LLC has two production departments (Planting and Harvesting) and two service departments (Cafeteria and Repairs.) The service department's costs must be allocated to production departments. Management has decided to allocate the cost of the cafeteria to other departments based upon the average number of employees and the cost of the Repairs Department based upon the number of machine hours used.

Departments Cafeteria Repairs Planting Harvesting

Pre-Allocation Costs $ 43,200 60,000 350,000 700,000

Avg. No. Employees 5 12 20 40

Machine Hours 100 12,000 40,000 20,000

Regardless of the allocation method used, Big Farm always starts the allocation process with the Cafeteria Department. If Big Farm uses the step method, what additional overhead costs should be allocated from the service departments to the Planting Department?

$56,800

Cafeteria $43,200 (43,200) 0 0

Repairs $60,000 7,200 $67,200 ($67,200) 0

Planting $12,000 (a) $12,000 $44,800 (b) $56,800

Harvesting $24,000 $24,000 $22,400 $46,400

(a) (b)

20/72 43,200 40/60 67,200

78. Why are service department costs allocated to producing departments? Service departments provide services to producing departments. Allocation of service department costs to producing departments recognizes the utilization of these services. The support cost must be absorbed by the producing department for two reasons: financial reporting and managerial decision making. Financial reporting requires an asset's cost to include all the costs of getting that asset into its working condition. Pricing, planning, and control are assisted when managers know the full cost of a product.

79. Describe the factors that should be considered in allocating service department costs. Service department costs should be allocated on a cause-and-effect basis if possible and practical. If a cause-and-effect relation cannot be identified, managers may find some other basis that fairly allocates the cost to departments. However, any other allocation method may be somewhat arbitrary.

80. Why are joint-process costs allocated? Companies allocate joint-process costs for several reasons including performance evaluations, reporting purposes, and establishing regulated rates.

81. How are joint-process costs allocated? Joint-process cost allocations arise from the need to assign joint-process costs to two or more products manufactured from a common input. The two methods of allocating joint-process costs are based on net realizable value or physical measures.

82. How are marketing and administrative costs allocated to departments for purposes of performance evaluation? Management often applies techniques similar to those employed in allocating service department costs to allocate marketing and administrative costs for purposes of performance evaluation.

83. How is activity-based costing used to allocate service department costs? Applying the techniques of activity-based costing typically results in identifying more accurate cost-allocation bases (cost drivers). This can lead to improved allocation of service department costs to production departments.

84. How are service department costs allocated to production departments? First, assign overhead costs that are directly attributable to a service or production department. Second, allocate other overhead costs based on some cost driver. Third, allocate service department costs to production departments.

85. What is the nature of common (or indirect) costs? A common or indirect cost results from the joint use of a facility or a service by several products, departments, or processes.

86. Why do companies allocate common costs to departments and products? Firms must allocate common costs to develop product cost information for purposes of pricing and bidding, contract cost reimbursement, and motivation.

87. Lamar Company has two production departments and a maintenance department. In addition, the company keeps other costs for the general plant in a separate account. The estimated cost data for Year 1 follow:

Cost Direct Labor Indirect Labor Indirect Materials Miscellaneous Maintenance

Production Dept. 1 $100,000 56,000 18,000 6,000 $180,000 16,000 Hours

Production Dept. 2 $ 60,000 28,000 14,000 10,000 $112,000 24,000 Hours

Maintenance $45,000 1,800 3,200 $50,000

General Plant $40,000 16,000 10,000 $66,000

The general plant services the three departments in the following proportions: 50 percent (Department 1); 30 percent (Department 2); 20 percent (Maintenance). Required: Allocate maintenance costs based on maintenance hours. Allocate maintenance department and general plant costs to the production departments. Use the step method, starting with general plant costs.

(Allocating overhead.)
Department No. 1 Charged Directly to Department: Indirect Labor $ 56,000 Indirect Material 18,000 Miscellaneous 6,000 $ 80,000 Allocations: General Plant(a) 33,000 Maintenance(b) 25,280 Total Overhead(c) $ 138,280 Department No. 2 Maintenance General Plant $ 40,000 16,000 10,000 $ 66,000 (66,000) 0

$ 28,000 14,000 10,000 $ 52,000 19,800 37,920 $ 109,720

$ 45,000 1,800 3,200 $ 50,000 13,200 (63,200) 0

(a) Total costs for the General Plant ($66,000) are allocated 50% to Department 1, 30% to Department 2, and 20% to Maintenance. (b) Total costs for Maintenance ($63,200) are allocated based on maintenance hours. (c) $138,280 + $109,720 = $80,000 + $52,000 + $50,000 + $66,000.

88. Garfield Company has two production departments and a maintenance department. In addition, the company keeps other costs for the general plant in a separate account. The estimated cost data for Year 1 follow:

Cost Direct Labor Indirect Labor Indirect Materials Miscellaneous Maintenance

Production Dept. 1 $100,000 66,000 19,000 5,000 $190,000 12,000 Hours

Production Dept. 2 $ 60,000 29,000 15,000 10,000 $114,000 18,000 Hours

Maintenance $45,000 1,800 3,200 $50,000

General Plant $40,000 16,000 10,000 $66,000

The general plant services the three departments in the following proportions: 50 percent (Department 1); 30 percent (Department 2); 20 percent (Maintenance). Required: Allocate maintenance costs based on maintenance hours. Allocate maintenance department and general plant costs to the production departments. Use the step method, starting with general plant costs.

(Allocating overhead.)
Department No. 1 Charged Directly to Department: Indirect Labor $ 66,000 Indirect Material 19,000 Miscellaneous 5,000 $ 90,000 Allocations: General Plant(a) 44,000 Maintenance(b) 26,080 Total Overhead(c) $ 160,080 Department No. 2 Maintenance General Plant $ 40,000 16,000 10,000 $ 88,000 (88,000) 0

$ 29,000 15,000 10,000 $ 54,000 26,400 39,120 $ 119,520

$ 42,000 1,900 3,700 $ 47,600 17,600 (65,200) 0

(a) Total costs for the General Plant ($88,000) are allocated 50% to Department 1, 30% to Department 2, and 20% to Maintenance. (b) Total costs for Maintenance ($65,200) are allocated based on maintenance hours. (c) $160,080 + $119,520 = $90,000 + $54,000 + $47,600 + $88,000.

89. Evans Company processes a chemical, Exacto 7, through a pressure treatment operation. The complete process has two outputs, X and Y. The January costs to process Exacto 7 are $50,000 for materials and $100,000 for conversion costs. This processing results in two outputs, X and Y, that sell for a total of $250,000. The sales revenue from X amounts to $200,000 of the total. Required: Using the net realizable method, assign costs to X and Y for January. Total joint costs are $150,000 (based on the $50,000 materials plus $100,000 conversion). These costs are allocated as follows: To Output X: $200,000/$250,000 X $150,000 = $120,000 To Output Y: ($250,000 $200,000)/$250,000 X $150,000 = $30,000

90. Grimes Company processes a chemical, Techno 9, through a pressure treatment operation. The complete process has two outputs, Y and Z. The January costs to process Techno 9 are $75,000 for materials and $90,000 for conversion costs. This processing results in two outputs, Y and Z, that sell for a total of $332,000. The sales revenue from Y amounts to $200,000 of the total. Required: Using the net realizable method, assign costs to Y and Z for January. Total joint costs are $165,000 (based on the $75,000 materials plus $90,000 conversion). These costs are allocated as follows: To Output Y: $200,000/$332,000 X $165,000 = $99,000 To Output Z: ($332,000 $200,000)/$332,000 X $165,000 = $66,000

91. Jamar Company has two production departments, Tubing and Packing, and two service departments, Quality Control and Maintenance. In June, the Quality Control department provided 2,000 hours of service 1,047 hours to Tubing, 255 hours to Maintenance, and 698 hours to Packing. In the same month, Maintenance provided 2,750 hours to Tubing, 1,900 hours to Packing, and 350 hours to Quality Control. Quality Control incurred costs of $100,000, and Maintenance incurred costs of $210,000. Required: Use the step method to allocate service department costs sequentially based on hours of service provided. Start with Maintenance and then allocate Quality Control. Check your solution by making certain that the firm finally allocates $310,000 to the production departments.

Tubing Total Direct Costs to Service Departments Allocation of Maintenance Total Quality Control to Allocate Allocation of Quality Control Total Costs Allocated Allocation Percent for Maintenance: Hours Used Percent of Total Allocation Percent for Quality Control: $ 115,500 68,820 $ 184,320 Tubing 2,750 55% Tubing

Packing $ 79,800 45,880 $ 125,680 Packing 1,900 38% Packing

Quality Control $ 100,000 14,700 $ 114,700 (114,700) -0Quality Control 350 7% Total for Allocation Purposes 1,745

Maintenance $ 210,000 (210,000) -0-

Maintenance 5,000

Hours of Service Percent of Total

1,047 60%

698 40%

92. Clark Company has two production departments, Tubing and Packing, and two service departments, Quality Control and Maintenance. In June, the Quality Control department provided 2,000 hours of service 1,047 hours to Tubing, 255 hours to Maintenance, and 698 hours to Packing. In the same month, Maintenance provided 3,240 hours to Tubing, 1,890 hours to Packing, and 270 hours to Quality Control. Quality Control incurred costs of $100,000, and Maintenance incurred costs of $220,000. Required: Use the step method to allocate service department costs sequentially based on hours of service provided. Start with Maintenance and then allocate Quality Control. Check your solution by making certain that the firm finally allocates $320,000 to the production departments.

Tubing Total Direct Costs to Service Departments Allocation of Maintenance Total Quality Control to Allocate Allocation of Quality Control Total Costs Allocated Allocation Percent for Maintenance: Hours Used Percent of Total Allocation Percent for Quality Control: $ 132,000 66,600 $ 198,600 Tubing 3,240 60% Tubing

Packing $ 77,000 44,400 $ 121,400 Packing 1,890 35% Packing

Quality Control $ 100,000 11,000 $ 111,000 (111,000) -0Quality Control 270 5% Total for Allocation Purposes 1,745

Maintenance $ 220,000 (220,000) -0-

Maintenance 5,400

Hours of Service Percent of Total

1,047 60%

698 40%

93. Transtech, Inc., processes silicon crystals into purified wafers and chips. Silicon crystals cost $60,000 per tank-car load. The process involves heating the crystals for 12 hours, producing 45,000 purified wafers with a market value of $20,000, and 15,000 chips with a market value of $140,000. The joint cost of the heat process is $25,600. Required: a. If the crystal costs and the heat process costs are to be allocated on the basis of units of output, what cost is assigned to each product? b. If the crystal costs and the heat process costs are allocated on the basis of the net realizable value, what cost is assigned to each product? c. How much profit or loss does the purified wafers product provide using the data in this problem and your analysis in requirement a.? Is it really possible to determine which product is more profitable? Explain why or why not. a. Allocation on the Basis of Units of Output:
Purified Wafers 45,000/ (45,000 + 15,000) X $85,600 Chips 15,000/(15,000 + 45,0000 X $85,600 Total

$ 64,200

21,400 $ 85,600

b. Allocation on the Basis of Market Value: Purified Wafers $20,000/($20,000 + $140,000) X $85,600 Chips $140,000/($20,000 + $140,000) X $85,600 Total

$ 10,700

74,900 $ 85,600

c. It is not possible to determine which product is more profitable because costs are joint. One product cannot be produced without the otherhence only the profitability of the total output is relevant. In total the company has combined revenue of $160,000 and costs of $85,600, making this a profitable joint product.

94. Formula, Inc., processes sugar into candy and powdered drink mix. The sugar costs $61,000 per load. The process involves mixing the sugar for 2 hours, producing 60,000 packs of candy with a market value of $25,000, and 20,000 packs of drink mix with a market value of $100,000. The joint cost of the mixing process is $28,600. Required: a. If the sugar and the mixing process costs are to be allocated on the basis of units of output, what cost is assigned to each product? b. If the sugar and the mixing process costs are allocated on the basis of the net realizable value, what cost is assigned to each product? c. How much profit or loss does the candy product provide using the data in this problem and your analysis in requirement (a)? Is it really possible to determine which product is more profitable? Explain why or why not. a. Allocation on the Basis of Units of Output:
Candy 60,000/ (60,000 + 20,000) X $89,600 Drink Mix 20,000/(60,000 + 20,000) X $89,600 Total

$ 67,200

22,400 $ 89,600

b. Allocation on the Basis of Market Value: Candy $25,000/($25,000 + $100,000) X $89,600 Drink Mix $100,000/($25,000 + $100,000) X $89,600 Total

$ 17,920

71,680 $ 89,600

c. It is not possible to determine which product is more profitable because costs are joint. One product cannot be produced without the otherhence only the profitability of the total output is relevant. In total the company has combined revenue of $125,000 and costs of $89,600, making this a profitable joint product.

95. Northstar Timber processes timber into Grade A and Grade B lumber. Timber costs $200 per unit, where one unit equals 1,000 board feet. The process involves cutting timber into the two grades of lumber. Each unit of timber produces .25 unit (250 board feet) of Grade A lumber with a market value of $240 and .75 unit (750 board feet) of Grade B with a market value of $160. The joint cost of the production process is $100 per unit. Required: a. Assume that the joint costs of the two grades of lumber are to be allocated on the basis of units of output. What cost is assigned to each product (for .25 unit of Grade A and .75 unit of Grade B)? b. If the joint costs are allocated on the basis of the net realizable value, what cost is assigned to each product? How much profit or loss does the Grade A lumber earn? Is it really possible to determine which product is more profitable? Explain why or why not. Joint cost = $300 (= $200 cost of timber + $100 joint process costs). a. Allocation on the Basis of Units of Output:

Grade A (per 1,000 board feet) .25 X $300 Grade B (per 1,000 board feet) .75 X $300 Total

$ 75 225 $ 300

b. Allocation on the Basis of Market Value: Grade A (per 1,000 board feet) $240/$400 X $300 Grade B (per 1,000 board feet) $160/$400 X $300 Total $ 180 120 $ 300

It is not possible to determine how much profit is made on either product or which product is more profitable. One product cannot be produced without the otherhence only the profitability of the total output is relevant. In total, the company sells lumber for a combined $400 per board feet and incurs a cost of $300 per 1,000 board feet, making the joint products profitable.

96. Big Sky Timber processes timber into Grade A and Grade B lumber. Timber costs $400 per unit, where one unit equals 1,000 board feet. The process involves cutting timber into the two grades of lumber. Each unit of timber produces .25 unit (250 board feet) of Grade A lumber with a market value of $560 and .75 unit (750 board feet) of Grade B with a market value of $240. The joint cost of the production process is $100 per unit. Required: a. Assume that the joint costs of the two grades of lumber are to be allocated on the basis of units of output. What cost is assigned to each product (for .25 unit of Grade A and .75 unit of Grade B)? b. If the joint costs are allocated on the basis of the net realizable value, what cost is assigned to each product? How much profit or loss does the Grade A lumber earn? Is it really possible to determine which product is more profitable? Explain why or why not. Joint cost = $500 (= $400 cost of timber + $100 joint process costs). a. Allocation on the Basis of Units of Output:

Grade A (per 1,000 board feet) .25 X $500 Grade B (per 1,000 board feet) .75 X $500 Total

$ 125 375 $ 500

b. Allocation on the Basis of Market Value: Grade A (per 1,000 board feet) $560/$800 X $500 Grade B (per 1,000 board feet) $240/$800 X $500 Total $ 350 150 $ 500

It is not possible to determine how much profit is made on either product or which product is more profitable. One product cannot be produced without the otherhence only the profitability of the total output is relevant. In total, the company sells lumber for a combined $800 per board feet and incurs a cost of $500 per 1,000 board feet, making the joint products profitable.

Chapter 6--Financial Modeling for Short-Term Decision Making


Student: ___________________________________________________________________________ 1. Financial modeling can be used by managers for which of the following purposes? A. staff rotation planning purposes. B. analyzing financial relationships that are useful for decision making. C. forecasting political unrest. D. employee cross-training purposes.

2. What enables analysts to test the interaction of economic variables in a variety of settings? A. A benchmark B. A PERT chart C. The value chain D. A financial model

3. The relative proportion of various products sold by a company is called the A. marketing mix. B. product mix. C. operating mix. D. output mix.

4. Which of the following are benefits of financial models to users? A. Users can use the model for business purposes without becoming overwhelmed by the related number crunching. B. Models allow an organization to study the impact of a possible business action by reviewing the potential results before taking action. C. Models help managers identify a bad project or decision ahead of time, before it negatively impacts the company involved. D. All of the answers are correct.

5. A financial model is only as good as A. the rate of growth in the economy. B. the companys operating leverage. C. the assumptions it uses and the data it uses. D. None of the answers are correct.

6. Which statement is true concerning the cost-volume-profit (CVP) model? A. The CVP model can be used to determine a desired selling price. B. The CVP model can be used to determine a new break-even point when fixed costs increase. C. The CVP model can be used to determine a new break-even point when variable costs decrease. D. All of the answers are correct.

7. A basic financial model that summarizes the effects of volume changes on an organizations costs, revenue, and income is the A. total revenue-total cost model. B. break-even model. C. cost-volume-profit model. D. program, planning, and profit model.

8. The CVP model is one example of a financial model that can be used to calculate which of the following? A. required selling price and conduct sensitivity analysis. B. new break-even points and calculate multiple break-even points. C. target profit points and compare alternatives. D. All of the answers are correct.

9. How does cost-volume-profit analysis allows management to determine the relative profitability of a product? A. By highlighting potential bottlenecks in the production process. B. By keeping fixed costs to an absolute minimum. C. By determining the contribution margin and projected profits at various levels of production. D. By assigning costs to a product in a manner that maximizes the contribution margin.

10. How might a company with a negative contribution margin reach the break-even point? A. Increase sales volume. B. Decrease sales volume. C. Decrease fixed costs. D. Decrease variable costs.

11. How can a company increase their break-even point? A. Decrease fixed costs. B. Increase the contribution margin ratio. C. Increase variable costs. D. Decrease in variable costs.

12. If a company's sales price per unit is $100, variable costs per unit are $60, and fixed costs for the year are $600,000. How many units must the company sell to break even? A. 36,000 B. 22,500 C. 15,000 D. 9,000

13. If a company has variable costs of $40 per unit, fixed costs of $3,000 per month and sells its product for $50, how many units must it sell to break-even? A. 300 B. 250 C. 100 D. 50

14. Calculate break-even when a company's selling price per unit is $15, variable costs per unit are $8, fixed costs for the year are $70,000. A. 8,750 units B. 4,667 units C. 7,000 units D. 10,000 units

15. A company currently breaks even at 1,000 units. Its fixed costs are $40,000 and its variable costs are $10 per unit. What is the product's selling price per unit? A. $100 B. $ 50 C. $ 35 D. $ 25

16. A company's selling price is $12 per unit, variable cost is $3 per unit, and fixed costs are $25,000. What is the break-even point in sales dollars? A. $53,333 B. $44,444 C. $33,333 D. $ 1,333

17. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed Costs for the period are $35,000. An equal number of A and B units are sold. At the break-even volume, how many units of A will be sold? A. 14,000 B. 8,750 C. 7,000 D. 3,500

18. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed Costs for the period are $35,000. Normally four units of A are sold for every two units of B units. How many units of B must be sold if the company expects profits of $50,000? A. 15,947 B. 10,637 C. 5,313 D. Cannot be determined

19. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the selling price per unit.

A. $ 8 B. $ 6 C. $ 2 D. $12 20. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the variable cost per unit.

A. $ 6 B. $ 2 C. $ 4 D. $12 21. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the contribution margin per unit.

A. $ 6 B. $ 2 C. $ 4 D. $12 22. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the break-even point in units.

A. 700,000 B. 2,100,000 C. 1,400,000 D. 450,000

23. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company; how many units must be sold to make an operating profit of $300,000 for the year?

A. 500,000 B. 1,000,000 C. 1,500,000 D. 2,000,000 24. Which of the following is the correct formula to use to calculate the contribution margin per unit? A. Selling price per unit less fixed costs and variable costs per unit. B. Selling price per unit less fixed costs per unit. C. Selling price per unit less variable costs per unit. D. None of the answers is correct.

25. Which of the following is the correct formula for the break-even sales volume? A. Fixed costs divided by the variable costs per unit. B. Fixed costs divided by the contribution margin per unit. C. Variable costs divided by the contribution margin per unit. D. Variable costs divided by the fixed costs per unit.

26. What is the formula for the Break-Even Point in Units? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

27. What is the formula for Break-Even Point in Sales Dollars? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. Total Fixed Costs / Contribution Margin Ratio.

28. What happens to the contribution margin if fixed expenses decrease while variable cost per unit remain constant. A. Contribution margin will be unchanged. B. Contribution margin will be higher. C. Contribution margin will be lower. D. Cannot determine the change.

29. The profit-volume graph shows one line that represents which of the following? A. operating profits of the company for a given sales volume. B. operating revenues of the company for a given sales volume. C. total costs of the company for a given sales volume. D. total profits of the company for a given sales volume.

30. What does sensitivity analysis refers to? A. control. B. what-if situations. C. variable costs only. D. fixed costs only.

31. How is the contribution margin ratio calculated? A. variable costs/contribution margin. B. fixed costs/contribution margin. C. sales/contribution margin. D. contribution margin/sales.

32. A company's selling price is $18 per unit, variable cost is $6 per unit, and fixed costs are $36,000. If fixed costs increased by $6,000, how many additional units must be sold to break even? A. 5,000 B. 1,000 C. 500 D. 250

33. How is target profit volume calculated? A. The sum of fixed costs and target profit divided by contribution margin per unit. B. The sum of fixed costs and target profit divided by variable cost per unit. C. The sum of fixed costs and target profit divided by sales price per unit. D. None of the answers is correct.

34. Sensitivity analysis is used to show how the financial model responds to changes in which of the following? A. any or all of its variables. B. fixed costs, only. C. variable costs, only. D. operating profit.

35. What is the formula for the Target Profit in Units? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

36. What is the formula for Target Profit in Sales Dollars? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. (Total Fixed Costs + Target Profit) / Contribution Margin Ratio. D. Total Fixed Costs / Contribution Margin Ratio

37. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; how many units must be sold to break even?

A. 4,000 B. 6,000 C. 12,000 D. 3,000 38. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; how many units must be sold to make an operating profit of $15,000?

A. 4,200 B. 12,600 C. 6,300 D. 3,150 39. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; if 7,000 units are sold, what operating profit is expected?

A. $ 225,000 B. $ 50,000 C. $ 525,000 D. $ 350,000 40. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; what would be the break-even point in units if the sales price decreased by 20%?

A. 5,000 B. 7,500 C. 20,000 D. 8,571

41. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; what would be the break-even point in units if fixed costs were increased by $50,000?

A. 7,000 B. 4,667 C. 14,000 D. 3,500 42. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer Shenandoah Company. How many units must be sold to break even?

A. 900 B. 2,250 C. 2,000 D. 1,500 43. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. How many units must be sold to make an operating profit of $15,000?

A. B. C. D.

1,667 1,000 2,500 2,000

44. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. If 2,000 units are sold, what operating profit is expected?

A. $100,000 B. $ 75,000 C. $ 15,000 D. $ 45,000 45. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. Calculate the break-even point in units if the sales price decreased by 20%.

A. B. C. D.

1,500 2,250 2,000 1,000

46. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. Calculate the break-even point in units if variable costs per unit increased by $10.00 and fixed costs increased to $140,000.

A. 2,000 B. 934 C. 1,750 D. 1,500 47. SunDevil Co. plans to sell 200,000 special Rose Bowl footballs with fixed costs of $400,000 and variable expenses at 60% of sales. To have a net income of $100,000 SunDevil management must set the sales price at A. $3.75 B. $4.17 C. $5.00 D. $6.25

48. What effect would a decrease in wage rates (applicable to direct, strictly variable, labor) have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

49. What effect would an increase in fixed costs have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

50. What effect would an increase in the selling price of the product have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

51. What effect would an increase in building insurance rates have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Increase D. Decrease Contribution Margin Increase Decrease No effect Decrease

52. Which of the following represents the formula for the margin of safety? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

53. Which of the following represents the margin of safetyin units? A. The excess of projected (or actual) sales units over the break-even unit sales level. B. The excess of projected (or actual) sales price per unit over the break-even sales price in units. C. The excess of projected (or actual) cost of sales in units over the break-even costs of sales level in units. D. None of the answers is correct.

54. Which of the following statements is the correct calculation for the margin of safety in dollars? A. The excess of projected (or actual) sales dollars over the break-even sales dollars. B. The excess of projected (or actual) sales price over the break-even sales price. C. The excess of projected (or actual) cost of sales in dollars over the break-even costs of sales in dollars level. D. None of the answers is correct.

55. Calculate margin of safety using the following assumptions:

Sales Price per unit Variable cost per unit Fixed Costs in total Actual Sales Volume

$100 $ 75 $200,000 10,000 units

A. 2,000 units B. 10,000 units C. 7,500 units D. 8,000 units 56. Calculate margin of safety using the following assumptions:

Sales Price per unit Variable cost per unit Fixed Costs in total Actual Sales Volume

$500 $300 $200,000 1,750 units

A. 1,000 units B. $500,000 C. 1,750 units D. 750 units 57. What is the excess of projected sales units or dollars over the break-even point? A. gross profit. B. margin of safety. C. contribution margin. D. gross margin.

58. The cost structureof an organization refers to the which of the following? A. proportion of fixed and variable costs to total costs. B. proportion of total revenue to total costs. C. proportion of profits to total costs. D. None of the answers is correct.

59. Manufacturers using computer-integrated manufacturing systems have a large investment in plant and equipment. This results in which of the following cost structures? A. high fixed costs. B. high total costs. C. high variable costs. D. None of the answers is correct.

60. Which of the following is a typical cost structure for home builders? A. high fixed costs relative to variable costs. B. high variable costs relative to fixed costs. C. high profits relative to total costs. D. None of the answers is correct.

61. Which of the following statements best defines the contribution margin ratio? A. Total contribution margin divided by total sales. B. Unit contribution margin divided by unit sales price. C. Total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. None of the answers is correct.

62. The cost structure of an organization is the proportion of which of the following? A. opportunity and variable costs to total costs. B. fixed and opportunity costs to total costs. C. variable and opportunity costs to total costs. D. fixed and variable costs to total costs.

63. Operating leverage is high in firms with: Fixed Costs A. small proportion B. high proportion C. small proportion D. high proportion Variable Costs high proportion small proportion high proportion small proportion Contribution Margin Per Unit high high low low

64. The extent to which an organizations cost structure is made up of fixed costs is called its A. fixed cost leverage. B. operating leverage. C. fixed cost multiple. D. long-term leverage.

65. Which of the following statements is true? A. The higher the firm's leverage, the higher the degree of sensitivity of profits to cost changes. B. The higher the firm's leverage, the lower the degree of sensitivity of profits to cost changes. C. The higher the firm's leverage, the higher the degree of sensitivity of profits to volume changes. D. The higher the firm's leverage, the lower the degree of sensitivity of profits to volume changes.

66. In planning its operations for next year based on a sales forecast of $3,000,000, Jan's Auto Company, Inc. prepared the following estimated costs and expenses:

Direct Material Direct Labor Factory Overhead Selling Expense General Admin. Expense TOTAL

Variable $ 650,000 700,000 300,000 120,000 30,000 $1,800,000

Fixed

$450,000 180,000 70,000 $700,000

Calculate sales dollars at the break-even point.

A. $1,125,000 B. $1,750,000 C. $2,000,000 D. $2,650,000 67. Deering Company is contemplating an expansion program based on the following budget data:

Projected Sales Variable Expenses Fixed Expense

$300,000 210,000 63,000

Calculate the budgeted break-even point in sales dollars.

A. $200,000 B. $210,000 C. $270,000 D. $330,000 68. When will the contribution margin ratio increase? A. when the break-even point increases. B. when the break-even point decreases. C. when the variable expenses as a percentage of sales decrease. D. when the variable expenses as a percentage of sales increase.

69. The formula used in performing cost-volume-profit (CVP) analysis for the Target Profit in Units, where t is the tax rate, is A. (Total Fixed Costs + Before-Tax Target Profit) / Unit Contribution Margin. B. (Total Fixed Costs + Before-Tax Target Profit) / Contribution Margin Ratio. C. (Total Fixed Costs t) / Unit Contribution Margin. D. (Total Fixed Costs + (Target Profit t))/ Unit Contribution Margin.

70. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for which of the following? A. total revenue required to break even rather than total units. B. a target profit rather than total units. C. total revenue required to break even rather than total units and a target profit rather than total units. D. One cannot utilize cost-volume-profit relationships to solve for sales dollars.

71. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. The contribution margin ratio is defined as which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. the sum of fixed costs plus target profits divided by unit sales price.

72. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. Break-Even Point in Sales Dollars equals which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total fixed costs divided by the contribution margin ratio. D. (sum of total fixed costs plus target profit) divided by the contribution margin ratio.

73. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. Target Profit in Sales Dollars equals which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total fixed costs divided by the contribution margin ratio. D. (sum of total fixed costs plus target profit) divided by the contribution margin ratio.

74. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. The contribution margin ratio is defined as which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. the sum of fixed costs plus target profits divided by unit sales price.

75. The formula used in performing cost-volume-profit (CVP) analysis for the "before-tax target", where t is the tax rate, is A. (Total Fixed Costs t) / Unit Contribution Margin. B. (Total Fixed Costs + (Target Profit t)) / Unit Contribution Margin. C. (Total Fixed Costs + Target Profit) / Contribution Margin Ratio. D. After-Tax Profit / (1-t).

76. The formula used in performing cost-volume-profit (CVP) analysis for the Target Profit in Sales Dollars, where t is the tax rate, is A. (Total Fixed Costs + Before-Tax Target Profit) / Unit Contribution Margin. B. (Total Fixed Costs + Before-Tax Target Profit) / Contribution Margin Ratio. C. (Total Fixed Costs t) / Unit Contribution Margin. D. (Total Fixed Costs + (Target Profit t)) / Unit Contribution Margin.

77. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the same contribution margin. B. assume that a particular product mix does not change. C. treat each product line as a separate entity. D. All of the answers are correct.

78. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the same contribution margin. B. use contribution margin as a measure of volume. C. assume a weighted-average sales volume. D. All of the answers are correct.

79. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the a different contribution margin. B. assume a weighted average contribution margin. C. use contribution margin as a measure of volume. D. All of the answers are correct.

80. Multiple products make using financial models more complex. To deal with this, managers can A. treat each product line as a separate entity. B. assume a weighted average contribution margin. C. use sales dollars as a measure of volume. D. All of the answers are correct.

81. What does (Contribution Margin for Product 1 Sales Volume for Product 1) + (Contribution Margin for Product 2 Sales Volume for Product 2) + (Contribution Margin for Product n Sales volume for Product n) Fixed Costs equal? A. Net sales B. Target sales C. Operating profit D. Target profits

82. Which of the following is the major assumption as to cost and revenue behavior underlying conventional cost-volume-profit calculations? A. variability of fixed costs. B. variability of unit prices and efficiency. C. curvilinearity of relationships. D. linearity of relationships.

83. Cost-volume-profit analysis includes some inherent, simplifying assumptions. Which of the following is not one of these assumptions? A. Cost and revenues are predictable and are linear over the relevant range. B. Variable costs fluctuate proportionally. C. Changes in beginning and ending inventory levels are insignificant in amount. D. Sales mix will change as fixed costs increase beyond the relevant range.

84. Which of the following is not a major assumption underlying CVP analysis? A. All costs incurred by a firm can be separated into their fixed and variable components. B. The product selling price per unit is constant at all volume levels. C. Operating efficiency and employees productivity are constant at all volume levels. D. For multiproduct situations, the sales mix can vary at all volume levels.

85. Which of the following is not a valid assumption for cost-volume-profit analysis? A. Variable costs per unit are not affected by changes in the rate of production. B. An increase in fixed costs will cause the break-even point to rise. C. Demand is constant regardless of price. D. A decrease in variable cost per unit will lower the break-even point.

86. Which of the following is not an assumption of cost-volume-profit analysis? A. The variable cost per unit varies over the relevant range of activity. B. The sales mix is unchanged over the relevant range of activity. C. The total fixed cost is constant over the relevant range of activity. D. The total variable cost changes in direct proportion to changes in the level of activity over the relevant range of activity.

87. Which of the following is activity for which cost-volume-profit analysis would not provide useful data? A. product pricing. B. market research for product distribution. C. reporting on income tax returns. D. assessing the level of labor needed in the production process.

88. Which of the following is not an underlying assumption of cost-volume-profit analysis? A. Fixed costs will not change over a wide range of activity. B. All costs behave linearly. C. Sales prices change in the relevant range. D. Sales mix must remain constant.

89. Which of the following is not an underlying assumption of cost-volume-profit analysis? A. Variable costs are strictly variable. B. All costs can be classified either as a fixed or variable cost and behave linearly. C. Sales prices do not change in the relevant range. D. Sales mix changes within the relevant range of production.

90. Which of the following are underlying assumptions of cost-volume-profit analysis? A. Fixed costs will not change over a wide range of activity and variable costs are strictly variable. B. All costs can be classified either as a fixed or variable cost and behave linearly. C. Sales prices do not change in the relevant range and the sales mix must remain constant. D. All of the answers are correct.

91. The following equation is used for determining cost-volume-profit relationships by firms Total Cost = (Unit-Level Cost Number of Units) + (Batch-Level Cost Batch Cost Driver Activity) + (Product-Level Cost Product Cost Driver Activity) + (Customer-Level Cost Customer Cost Driver Activity) + (Facility-Level Cost Facility-Cost Driver Activity) A. using activity-based costing systems. B. using traditional costing systems. C. following generally accepted accounting principles. D. using game theory.

92. An activity-based costing system A. can provide a much more complete picture of cost-volume-profit relationships. B. is not compatible with cost-volume-profit relationships because not all costs are based on volumes. C. is too expensive to combine with a cost-volume-profit model. D. cannot utilize cost-volume-profit relationships.

93. Spreadsheets are used in financial modeling. Once you have set up the basic formula it is easy to determine the effect of changing price, costs, volume amounts, or any other variable deemed important to the analysis. This analysis is called which of the following? A. single substitution analysis B. variable substitution analysis C. multiple substitution analysis D. "what-if" analysis.

94. Catfish Company produces two products, C and F, with the following characteristics:

Selling price per unit Variable cost per unit Expected sales (units)

Product C $10 $8 10,000

Product F $15 $10 5,000

Total fixed costs for the company are $21,000. REQUIRED: a. What is the anticipated level of profits for the expected sales volume? b. Assuming the product mix would be the same at the break-even point, compute the break-even point in terms of each of the products. c. If only product C were sold, how many units would be needed to break even? d. If only product F were sold, how many units would be needed to break even? e. If the product mix changed so that equal units of C and F were sold, what would be the new break-even point in total units? f. Discuss the accuracy of the above calculations with regards to planning. What types of occurrences could affect the accuracy of the calculations? What assumptions must be made to use the calculations in planning and decision making?

95. Arron company sells three products, X, Y, and Z. The company has fixed costs in the amount of $3,900. The following information is presented to you:

Price per unit Variable costs per unit Number of units sold

X $11 $6 1,000

Y $15 $12 2,000

Z $17 $16 2,000

REQUIRED: a. Assuming the product mix will be the same at the break-even point, compute the break-even in total units. b. What are the break-even units for each product line?

96. Potomac Corporation wishes to earn a 20% return on its $100,000 investment in equipment used to produce product M. Based on estimated sales of 10,000 units of product M, the cost per unit would be as follows:

Variable manufacturing costs Fixed selling and administrative costs Fixed manufacturing costs

$5 $2 $1

At how much per unit should Product M be priced for sale?

97. MultiFrame Company has the following revenue and cost budgets for the two products it sells:

Sales price Direct materials Direct labor Fixed overhead Net income per unit Budgeted unit sales

Plastic Frames $10.00 (2.00) (3.00) (3.00) $2.00 100,000

Glass Frames $15.00 (3.00) (5.00) (4.00) $3.00 300,000

The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit. REQUIRED: a. What is the total number of units MultiFrame needs to produce and sell to break even? b. What is the total number of units needed to break even if the budgeted direct labor costs were $2 for plastic frames instead of $3? c. What is the total number of units needed to break even if sales were budgeted at 150,000 units of plastic frames and 300,000 units of glass frames with all other costs remaining constant?

98. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed costs for the period are $35,000. Normally, two units of A are sold for every one unit of B. How many units of B must be sold if the company expects profits of $50,000?

99. Discuss why cost-volume-profit analysis could be useful to managers.

100. Identify the underlying assumptions of cost-volume-profit analysis.

101. Explain what is meant by the margin of safety and how it is used by managers.

102. Allan Miller, cost accountant for the Southeast Company, has just finished his break-even analysis for each product line within the company. The analysis reveals a deficiency with three product lines, A, B and C. Each of these products is manufactured by a different division. Based on current sales forecasts, the company as a whole will not reach the sales volume needed to break even. If two of the three product lines, (A, B, and C) are dropped, the company will be able to remain profitable. Allan recommended that product lines A and C be dropped. When Allan started with the company he worked for the division which manufactures product line B. In fact, his wife, Vaida, still works for Division B. What are the ethical issues involved in this decision?

103. Susan Shumaker assisted in developing break-even points for various products within her company. She was hired by another company to determine selling prices of their products. Susan feels it is unacceptable to use the information she gathered for her previous employer, but is being pressured by her new supervisor to divulge this information. What should Susan do?

104. Discuss the meaning of the term "break-even". Why would a manager be concerned with the break-even point? Does a break-even calculation provide absolute accuracy? Why or why not? Discuss the impact of multiple products on the calculation of break-even.

105. Identify the effects of cost structure and operating leverage on the sensitivity of profit to changes in volume. Use a nuclear power plant and an ice cream store as examples.

106. Describe the use of spreadsheets in financial modeling.

107. How can financial modeling be used for profit planning purposes?

108. How can financial modeling be used with multiple cost drivers?

109. Explain how to perform cost-volume-profit (CVP) analysis.

110. Explain how to use sales dollars as the measure of volume in performing cost-volume-profit (CVP) analysis.

111. Explain the effect of taxes on financial modeling.

112. Explain the use of financial modeling in a multiple product setting.

113. Break-even and target profits. Analysis of the operations of Reyes Company shows the fixed costs to be $140,000 and the variable costs to be $7 per unit. Selling price is $14 per unit. Required: a. Derive the break-even point expressed in units. b. How many units must the firm sell to earn a profit of $168,000? c. What would profits be if revenue from sales were $2,100,000?

114. Cost-volume-profit; volume defined in sales dollars. An excerpt from the income statement of the Dawson Company follows. Fixed costs in Year 1 are $660,000. Dawson Company Income Statement Year ended December 31, year 1
Sales Operating Expenses: Cost of Goods Sold Selling Costs Administrative Costs Total Operating Costs Profit $3,000,000 $1,425,000 450,000 225,000 2,100,000 $ 900,000

Required: a. What percentage of sales revenue is variable cost? b. What is the break-even point in sales dollars for Dawson Company? c. If sales revenue falls to $2,500,000, what will be the estimated amount of profit? d. What amount of sales dollars produces a profit of $1,000,000?

115. Cost-volume-profit; volume defined in sales dollars. An excerpt from the income statement of the Kingston Company follows. Fixed costs in Year 1 are $325,000. Kingston Company Income Statement Year ended December 31, year 1
Sales Operating Expenses: Cost of Goods Sold Selling Costs Administrative Costs Total Operating Costs Profit $4,000,000 $1,400,000 425,000 250,000 2,075,000 $1,925,000

Required: a. What percentage of sales revenue is variable cost? b. What is the break-even point in sales dollars for Kingston Company? c. If sales revenue falls to $2,900,000, what will be the estimated amount of profit? d. What amount of sales dollars produces a profit of $1,000,000?

116. Cost-volume-profit analysis. Patton Company produces one type of sunglasses with the following costs and revenues for the year:

Total Revenues Total Fixed Costs Total Variable Costs Total Quantity Produced and Sold

$6,000,000 $2,000,000 $2,000,000 100,000 Units

Required: a. What is the selling price per unit? b. What is the variable cost per unit? c. What is the contribution margin per unit? d. What is the break-even point in units? e. Assume an income-tax rate of 40 percent. Assuming a relevant range, what quantity of units is required for Patton Company to make an after-tax operating profit of $6,000,000 for the year?

117. Break-even and target profits; volume defined in sales dollars. The manager of Joses Food Court Express estimates operating costs for the year will total $300,000 for fixed costs. Required: a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent. b. Find the break-even point in sales dollars with a contribution margin ratio of 25 percent. c. Find the sales dollars required with a contribution margin ratio of 40 percent to generate a profit of $100,000.

118. Break-even and target profits; volume defined in sales dollars. The manager of Hsus Carryout Express estimates operating costs for the year will total $230,000 for fixed costs. Required: a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent. b. Find the break-even point in sales dollars with a contribution margin ratio of 20 percent. c. Find the sales dollars required with a contribution margin ratio of 50 percent to generate a profit of $150,000.

119. CVPsensitivity analysis. Joans Beauty College is considering introducing a new nail design seminar to run on an annual basis with the following price and cost characteristics:

Tuition Variable Costs (polish, supplies, etc.) Fixed Costs (advertising, instructors salary, insurance, etc.)

$320 per Student $20 per Student $60,000 per Year

Required: a. What enrollment enables Joans Beauty College to break even? b. How many students will enable Joans Beauty College to make an operating profit of $30,000 for the year? c. Assume that the projected enrollment for the year is 600 students for each of the following situations: (1) What will be the operating profit for 600 students? (2) What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent? (3) What would be the operating profit if variable costs per student increased by 10 percent? Decreased by 20 percent? (4) Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 20 percent higher than projected. What would be the operating profit for the year?

120. Multiple-product profit analysis. Miguels Supreme Tacos produces two types of soft tacos, chicken and steak, with the following characteristics:

Selling Price per Unit Variable Cost per Unit Expected Sales (units)

Chicken $4 $2 200,000

Steak $6 $3 300,000

The total fixed costs for the company are $200,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix would be 40 percent chicken and 60 percent steak at the break-even point, compute the break-even volume. c. If the product sales mix were to change to four chicken tacos for each steak taco, what would be the new break-even volume?

121. Multiple-product profit analysis. Coney Island produces two types of hotdogs, chili dogs and cheese dogs, with the following characteristics:

Selling Price per Unit Variable Cost per Unit Expected Sales (units)

Chili $6 $2 300,000

Cheese $5 $3 100,000

The total fixed costs for the company are $100,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix would be 75 percent chili and 25 percent cheese at the break-even point, compute the break-even volume. c. If the product sales mix were to change to four chili dogs for each cheese dog, what would be the new break-even volume?

122. CVP analysis with step costs. Sparkle Company has one product: printing t-shirts with logos for various businesses. The sales price of $20 remains constant per unit regardless of volume, as does the variable cost of $12 per unit. The company is considering operating at one of the following three monthly levels of operations:

Volume Range (production and sales) Level 1 Level 2 Level 3 010,000 10,00125,000 25,00140,000

Total Fixed Costs $ 40,000 80,000 100,000

Increase in Fixed Costs from Previous Level -$40,000 20,000

Required: a. Calculate the break-even point(s) in units. b. If the company can sell everything it makes, should it operate at level 1, level 2, or level 3? Support your answer.

123. CVP analysis with step costs. Techniques Company has one product: customized thumb drives with logos for various businesses. The sales price of $18 remains constant per unit regardless of volume, as does the variable cost of $10 per unit. The company is considering operating at one of the following three monthly levels of operations:

Volume Range (production and sales) Level 1 Level 2 Level 3 05,000 5,00115,000 15,00130,000

Total Fixed Costs $ 30,000 50,000 80,000

Increase in Fixed Costs from Previous Level -$30,000 30,000

Required: a. Calculate the break-even point(s) in units. b. If the company can sell everything it makes, should it operate at level 1, level 2, or level 3? Support your answer.

124. Felix Company sells a single product at a price of $57 per unit. Variable costs per unit are $35 and total fixed costs are $719,400. Felix is considering the purchase of a new piece of equipment that would increase the fixed costs to $1,023,700, but decrease the variable costs per unit to $28. Required: a. If Felix Company expects to sell 40,000 units next year, should they purchase this new equipment? b.What would Felixs volume have to be to change your recommendation in A above?

Chapter 6--Financial Modeling for Short-Term Decision Making Key

1. Financial modeling can be used by managers for which of the following purposes? A. staff rotation planning purposes. B. analyzing financial relationships that are useful for decision making. C. forecasting political unrest. D. employee cross-training purposes.

2. What enables analysts to test the interaction of economic variables in a variety of settings? A. A benchmark B. A PERT chart C. The value chain D. A financial model

3. The relative proportion of various products sold by a company is called the A. marketing mix. B. product mix. C. operating mix. D. output mix.

4. Which of the following are benefits of financial models to users? A. Users can use the model for business purposes without becoming overwhelmed by the related number crunching. B. Models allow an organization to study the impact of a possible business action by reviewing the potential results before taking action. C. Models help managers identify a bad project or decision ahead of time, before it negatively impacts the company involved. D. All of the answers are correct.

5. A financial model is only as good as A. the rate of growth in the economy. B. the companys operating leverage. C. the assumptions it uses and the data it uses. D. None of the answers are correct.

6. Which statement is true concerning the cost-volume-profit (CVP) model? A. The CVP model can be used to determine a desired selling price. B. The CVP model can be used to determine a new break-even point when fixed costs increase. C. The CVP model can be used to determine a new break-even point when variable costs decrease. D. All of the answers are correct.

7. A basic financial model that summarizes the effects of volume changes on an organizations costs, revenue, and income is the A. total revenue-total cost model. B. break-even model. C. cost-volume-profit model. D. program, planning, and profit model.

8. The CVP model is one example of a financial model that can be used to calculate which of the following? A. required selling price and conduct sensitivity analysis. B. new break-even points and calculate multiple break-even points. C. target profit points and compare alternatives. D. All of the answers are correct.

9. How does cost-volume-profit analysis allows management to determine the relative profitability of a product? A. By highlighting potential bottlenecks in the production process. B. By keeping fixed costs to an absolute minimum. C. By determining the contribution margin and projected profits at various levels of production. D. By assigning costs to a product in a manner that maximizes the contribution margin.

10. How might a company with a negative contribution margin reach the break-even point? A. Increase sales volume. B. Decrease sales volume. C. Decrease fixed costs. D. Decrease variable costs.

11. How can a company increase their break-even point? A. Decrease fixed costs. B. Increase the contribution margin ratio. C. Increase variable costs. D. Decrease in variable costs.

12. If a company's sales price per unit is $100, variable costs per unit are $60, and fixed costs for the year are $600,000. How many units must the company sell to break even? A. 36,000 B. 22,500 C. 15,000 D. 9,000

13. If a company has variable costs of $40 per unit, fixed costs of $3,000 per month and sells its product for $50, how many units must it sell to break-even? A. 300 B. 250 C. 100 D. 50

14. Calculate break-even when a company's selling price per unit is $15, variable costs per unit are $8, fixed costs for the year are $70,000. A. 8,750 units B. 4,667 units C. 7,000 units D. 10,000 units

15. A company currently breaks even at 1,000 units. Its fixed costs are $40,000 and its variable costs are $10 per unit. What is the product's selling price per unit? A. $100 B. $ 50 C. $ 35 D. $ 25

16. A company's selling price is $12 per unit, variable cost is $3 per unit, and fixed costs are $25,000. What is the break-even point in sales dollars? A. $53,333 B. $44,444 C. $33,333 D. $ 1,333

17. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed Costs for the period are $35,000. An equal number of A and B units are sold. At the break-even volume, how many units of A will be sold? A. 14,000 B. 8,750 C. 7,000 D. 3,500

18. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed Costs for the period are $35,000. Normally four units of A are sold for every two units of B units. How many units of B must be sold if the company expects profits of $50,000? A. 15,947 B. 10,637 C. 5,313 D. Cannot be determined

19. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the selling price per unit.

A. $ 8 B. $ 6 C. $ 2 D. $12 20. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the variable cost per unit.

A. $ 6 B. $ 2 C. $ 4 D. $12 21. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the contribution margin per unit.

A. $ 6 B. $ 2 C. $ 4 D. $12 22. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company. Calculate the break-even point in units.

A. 700,000 B. 2,100,000 C. 1,400,000 D. 450,000

23. TopSail Company TopSail Company produces one type of machine with the following costs and revenues for the year

Total revenues Total fixed costs Total variable costs Total units produced and sold

$5,600,000 $2,700,000 $1,400,000 700,000

Refer to the TopSail Company; how many units must be sold to make an operating profit of $300,000 for the year?

A. 500,000 B. 1,000,000 C. 1,500,000 D. 2,000,000 24. Which of the following is the correct formula to use to calculate the contribution margin per unit? A. Selling price per unit less fixed costs and variable costs per unit. B. Selling price per unit less fixed costs per unit. C. Selling price per unit less variable costs per unit. D. None of the answers is correct.

25. Which of the following is the correct formula for the break-even sales volume? A. Fixed costs divided by the variable costs per unit. B. Fixed costs divided by the contribution margin per unit. C. Variable costs divided by the contribution margin per unit. D. Variable costs divided by the fixed costs per unit.

26. What is the formula for the Break-Even Point in Units? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

27. What is the formula for Break-Even Point in Sales Dollars? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. Total Fixed Costs / Contribution Margin Ratio.

28. What happens to the contribution margin if fixed expenses decrease while variable cost per unit remain constant. A. Contribution margin will be unchanged. B. Contribution margin will be higher. C. Contribution margin will be lower. D. Cannot determine the change.

29. The profit-volume graph shows one line that represents which of the following? A. operating profits of the company for a given sales volume. B. operating revenues of the company for a given sales volume. C. total costs of the company for a given sales volume. D. total profits of the company for a given sales volume.

30. What does sensitivity analysis refers to? A. control. B. what-if situations. C. variable costs only. D. fixed costs only.

31. How is the contribution margin ratio calculated? A. variable costs/contribution margin. B. fixed costs/contribution margin. C. sales/contribution margin. D. contribution margin/sales.

32. A company's selling price is $18 per unit, variable cost is $6 per unit, and fixed costs are $36,000. If fixed costs increased by $6,000, how many additional units must be sold to break even? A. 5,000 B. 1,000 C. 500 D. 250

33. How is target profit volume calculated? A. The sum of fixed costs and target profit divided by contribution margin per unit. B. The sum of fixed costs and target profit divided by variable cost per unit. C. The sum of fixed costs and target profit divided by sales price per unit. D. None of the answers is correct.

34. Sensitivity analysis is used to show how the financial model responds to changes in which of the following? A. any or all of its variables. B. fixed costs, only. C. variable costs, only. D. operating profit.

35. What is the formula for the Target Profit in Units? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

36. What is the formula for Target Profit in Sales Dollars? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. (Total Fixed Costs + Target Profit) / Contribution Margin Ratio. D. Total Fixed Costs / Contribution Margin Ratio

37. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; how many units must be sold to break even?

A. 4,000 B. 6,000 C. 12,000 D. 3,000 38. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; how many units must be sold to make an operating profit of $15,000?

A. 4,200 B. 12,600 C. 6,300 D. 3,150 39. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; if 7,000 units are sold, what operating profit is expected?

A. $ 225,000 B. $ 50,000 C. $ 525,000 D. $ 350,000 40. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; what would be the break-even point in units if the sales price decreased by 20%?

A. 5,000 B. 7,500 C. 20,000 D. 8,571

41. Sun Devil, Inc. Sun Devil, Inc. is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$75 each $25 each $300,000 per year

It expects to sell 70,000 units for the year. Refer to Sun Devil, Inc; what would be the break-even point in units if fixed costs were increased by $50,000?

A. 7,000 B. 4,667 C. 14,000 D. 3,500 42. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer Shenandoah Company. How many units must be sold to break even?

A. 900 B. 2,250 C. 2,000 D. 1,500 43. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. How many units must be sold to make an operating profit of $15,000?

A. B. C. D.

1,667 1,000 2,500 2,000

44. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. If 2,000 units are sold, what operating profit is expected?

A. $100,000 B. $ 75,000 C. $ 15,000 D. $ 45,000 45. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. Calculate the break-even point in units if the sales price decreased by 20%.

A. B. C. D.

1,500 2,250 2,000 1,000

46. Shenandoah Company Shenandoah Company is considering the introduction of a new product with the following price and cost characteristics

Sales price Variable cost Fixed cost

$150 each $60 each $135,000 per year

The company expects to sell 2,000 units for the year. Refer to Shenandoah Company. Calculate the break-even point in units if variable costs per unit increased by $10.00 and fixed costs increased to $140,000.

A. 2,000 B. 934 C. 1,750 D. 1,500 47. SunDevil Co. plans to sell 200,000 special Rose Bowl footballs with fixed costs of $400,000 and variable expenses at 60% of sales. To have a net income of $100,000 SunDevil management must set the sales price at A. $3.75 B. $4.17 C. $5.00 D. $6.25

48. What effect would a decrease in wage rates (applicable to direct, strictly variable, labor) have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

49. What effect would an increase in fixed costs have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

50. What effect would an increase in the selling price of the product have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Decrease D. Decrease Contribution Margin Increase Decrease Increase Decrease

51. What effect would an increase in building insurance rates have on the break-even point and the contribution margin? Break-even Point A. Increase B. Increase C. Increase D. Decrease Contribution Margin Increase Decrease No effect Decrease

52. Which of the following represents the formula for the margin of safety? A. Total Fixed Costs / Unit Contribution Margin. B. (Total Fixed Costs + Target Profit) / Unit Contribution Margin. C. Sales Units - Break-Even Sales Units. D. None of the answers is correct.

53. Which of the following represents the margin of safetyin units? A. The excess of projected (or actual) sales units over the break-even unit sales level. B. The excess of projected (or actual) sales price per unit over the break-even sales price in units. C. The excess of projected (or actual) cost of sales in units over the break-even costs of sales level in units. D. None of the answers is correct.

54. Which of the following statements is the correct calculation for the margin of safety in dollars? A. The excess of projected (or actual) sales dollars over the break-even sales dollars. B. The excess of projected (or actual) sales price over the break-even sales price. C. The excess of projected (or actual) cost of sales in dollars over the break-even costs of sales in dollars level. D. None of the answers is correct.

55. Calculate margin of safety using the following assumptions:

Sales Price per unit Variable cost per unit Fixed Costs in total Actual Sales Volume

$100 $ 75 $200,000 10,000 units

A. 2,000 units B. 10,000 units C. 7,500 units D. 8,000 units 56. Calculate margin of safety using the following assumptions:

Sales Price per unit Variable cost per unit Fixed Costs in total Actual Sales Volume

$500 $300 $200,000 1,750 units

A. 1,000 units B. $500,000 C. 1,750 units D. 750 units 57. What is the excess of projected sales units or dollars over the break-even point? A. gross profit. B. margin of safety. C. contribution margin. D. gross margin.

58. The cost structureof an organization refers to the which of the following? A. proportion of fixed and variable costs to total costs. B. proportion of total revenue to total costs. C. proportion of profits to total costs. D. None of the answers is correct.

59. Manufacturers using computer-integrated manufacturing systems have a large investment in plant and equipment. This results in which of the following cost structures? A. high fixed costs. B. high total costs. C. high variable costs. D. None of the answers is correct.

60. Which of the following is a typical cost structure for home builders? A. high fixed costs relative to variable costs. B. high variable costs relative to fixed costs. C. high profits relative to total costs. D. None of the answers is correct.

61. Which of the following statements best defines the contribution margin ratio? A. Total contribution margin divided by total sales. B. Unit contribution margin divided by unit sales price. C. Total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. None of the answers is correct.

62. The cost structure of an organization is the proportion of which of the following? A. opportunity and variable costs to total costs. B. fixed and opportunity costs to total costs. C. variable and opportunity costs to total costs. D. fixed and variable costs to total costs.

63. Operating leverage is high in firms with: Fixed Costs A. small proportion B. high proportion C. small proportion D. high proportion Variable Costs high proportion small proportion high proportion small proportion Contribution Margin Per Unit high high low low

64. The extent to which an organizations cost structure is made up of fixed costs is called its A. fixed cost leverage. B. operating leverage. C. fixed cost multiple. D. long-term leverage.

65. Which of the following statements is true? A. The higher the firm's leverage, the higher the degree of sensitivity of profits to cost changes. B. The higher the firm's leverage, the lower the degree of sensitivity of profits to cost changes. C. The higher the firm's leverage, the higher the degree of sensitivity of profits to volume changes. D. The higher the firm's leverage, the lower the degree of sensitivity of profits to volume changes.

66. In planning its operations for next year based on a sales forecast of $3,000,000, Jan's Auto Company, Inc. prepared the following estimated costs and expenses:

Direct Material Direct Labor Factory Overhead Selling Expense General Admin. Expense TOTAL

Variable $ 650,000 700,000 300,000 120,000 30,000 $1,800,000

Fixed

$450,000 180,000 70,000 $700,000

Calculate sales dollars at the break-even point.

A. $1,125,000 B. $1,750,000 C. $2,000,000 D. $2,650,000 67. Deering Company is contemplating an expansion program based on the following budget data:

Projected Sales Variable Expenses Fixed Expense

$300,000 210,000 63,000

Calculate the budgeted break-even point in sales dollars.

A. $200,000 B. $210,000 C. $270,000 D. $330,000 68. When will the contribution margin ratio increase? A. when the break-even point increases. B. when the break-even point decreases. C. when the variable expenses as a percentage of sales decrease. D. when the variable expenses as a percentage of sales increase.

69. The formula used in performing cost-volume-profit (CVP) analysis for the Target Profit in Units, where t is the tax rate, is A. (Total Fixed Costs + Before-Tax Target Profit) / Unit Contribution Margin. B. (Total Fixed Costs + Before-Tax Target Profit) / Contribution Margin Ratio. C. (Total Fixed Costs t) / Unit Contribution Margin. D. (Total Fixed Costs + (Target Profit t))/ Unit Contribution Margin.

70. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for which of the following? A. total revenue required to break even rather than total units. B. a target profit rather than total units. C. total revenue required to break even rather than total units and a target profit rather than total units. D. One cannot utilize cost-volume-profit relationships to solve for sales dollars.

71. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. The contribution margin ratio is defined as which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. the sum of fixed costs plus target profits divided by unit sales price.

72. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. Break-Even Point in Sales Dollars equals which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total fixed costs divided by the contribution margin ratio. D. (sum of total fixed costs plus target profit) divided by the contribution margin ratio.

73. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. Target Profit in Sales Dollars equals which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total fixed costs divided by the contribution margin ratio. D. (sum of total fixed costs plus target profit) divided by the contribution margin ratio.

74. When sales dollars are used as the measure of volume in the cost-volume-profit equation, the focus is on solving for total revenue required to break even or a target profit rather than total units. The contribution margin ratio is defined as which of the following? A. total contribution margin divided by total sales. B. unit contribution margin divided by unit sales price. C. total contribution margin divided by total sales and unit contribution margin divided by unit sales price. D. the sum of fixed costs plus target profits divided by unit sales price.

75. The formula used in performing cost-volume-profit (CVP) analysis for the "before-tax target", where t is the tax rate, is A. (Total Fixed Costs t) / Unit Contribution Margin. B. (Total Fixed Costs + (Target Profit t)) / Unit Contribution Margin. C. (Total Fixed Costs + Target Profit) / Contribution Margin Ratio. D. After-Tax Profit / (1-t).

76. The formula used in performing cost-volume-profit (CVP) analysis for the Target Profit in Sales Dollars, where t is the tax rate, is A. (Total Fixed Costs + Before-Tax Target Profit) / Unit Contribution Margin. B. (Total Fixed Costs + Before-Tax Target Profit) / Contribution Margin Ratio. C. (Total Fixed Costs t) / Unit Contribution Margin. D. (Total Fixed Costs + (Target Profit t)) / Unit Contribution Margin.

77. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the same contribution margin. B. assume that a particular product mix does not change. C. treat each product line as a separate entity. D. All of the answers are correct.

78. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the same contribution margin. B. use contribution margin as a measure of volume. C. assume a weighted-average sales volume. D. All of the answers are correct.

79. Multiple products make using financial models more complex. To deal with this, managers can do which of the following? A. assume that all products have the a different contribution margin. B. assume a weighted average contribution margin. C. use contribution margin as a measure of volume. D. All of the answers are correct.

80. Multiple products make using financial models more complex. To deal with this, managers can A. treat each product line as a separate entity. B. assume a weighted average contribution margin. C. use sales dollars as a measure of volume. D. All of the answers are correct.

81. What does (Contribution Margin for Product 1 Sales Volume for Product 1) + (Contribution Margin for Product 2 Sales Volume for Product 2) + (Contribution Margin for Product n Sales volume for Product n) Fixed Costs equal? A. Net sales B. Target sales C. Operating profit D. Target profits

82. Which of the following is the major assumption as to cost and revenue behavior underlying conventional cost-volume-profit calculations? A. variability of fixed costs. B. variability of unit prices and efficiency. C. curvilinearity of relationships. D. linearity of relationships.

83. Cost-volume-profit analysis includes some inherent, simplifying assumptions. Which of the following is not one of these assumptions? A. Cost and revenues are predictable and are linear over the relevant range. B. Variable costs fluctuate proportionally. C. Changes in beginning and ending inventory levels are insignificant in amount. D. Sales mix will change as fixed costs increase beyond the relevant range.

84. Which of the following is not a major assumption underlying CVP analysis? A. All costs incurred by a firm can be separated into their fixed and variable components. B. The product selling price per unit is constant at all volume levels. C. Operating efficiency and employees productivity are constant at all volume levels. D. For multiproduct situations, the sales mix can vary at all volume levels.

85. Which of the following is not a valid assumption for cost-volume-profit analysis? A. Variable costs per unit are not affected by changes in the rate of production. B. An increase in fixed costs will cause the break-even point to rise. C. Demand is constant regardless of price. D. A decrease in variable cost per unit will lower the break-even point.

86. Which of the following is not an assumption of cost-volume-profit analysis? A. The variable cost per unit varies over the relevant range of activity. B. The sales mix is unchanged over the relevant range of activity. C. The total fixed cost is constant over the relevant range of activity. D. The total variable cost changes in direct proportion to changes in the level of activity over the relevant range of activity.

87. Which of the following is activity for which cost-volume-profit analysis would not provide useful data? A. product pricing. B. market research for product distribution. C. reporting on income tax returns. D. assessing the level of labor needed in the production process.

88. Which of the following is not an underlying assumption of cost-volume-profit analysis? A. Fixed costs will not change over a wide range of activity. B. All costs behave linearly. C. Sales prices change in the relevant range. D. Sales mix must remain constant.

89. Which of the following is not an underlying assumption of cost-volume-profit analysis? A. Variable costs are strictly variable. B. All costs can be classified either as a fixed or variable cost and behave linearly. C. Sales prices do not change in the relevant range. D. Sales mix changes within the relevant range of production.

90. Which of the following are underlying assumptions of cost-volume-profit analysis? A. Fixed costs will not change over a wide range of activity and variable costs are strictly variable. B. All costs can be classified either as a fixed or variable cost and behave linearly. C. Sales prices do not change in the relevant range and the sales mix must remain constant. D. All of the answers are correct.

91. The following equation is used for determining cost-volume-profit relationships by firms Total Cost = (Unit-Level Cost Number of Units) + (Batch-Level Cost Batch Cost Driver Activity) + (Product-Level Cost Product Cost Driver Activity) + (Customer-Level Cost Customer Cost Driver Activity) + (Facility-Level Cost Facility-Cost Driver Activity) A. using activity-based costing systems. B. using traditional costing systems. C. following generally accepted accounting principles. D. using game theory.

92. An activity-based costing system A. can provide a much more complete picture of cost-volume-profit relationships. B. is not compatible with cost-volume-profit relationships because not all costs are based on volumes. C. is too expensive to combine with a cost-volume-profit model. D. cannot utilize cost-volume-profit relationships.

93. Spreadsheets are used in financial modeling. Once you have set up the basic formula it is easy to determine the effect of changing price, costs, volume amounts, or any other variable deemed important to the analysis. This analysis is called which of the following? A. single substitution analysis B. variable substitution analysis C. multiple substitution analysis D. "what-if" analysis.

94. Catfish Company produces two products, C and F, with the following characteristics:

Selling price per unit Variable cost per unit Expected sales (units)

Product C $10 $8 10,000

Product F $15 $10 5,000

Total fixed costs for the company are $21,000. REQUIRED: a. What is the anticipated level of profits for the expected sales volume? b. Assuming the product mix would be the same at the break-even point, compute the break-even point in terms of each of the products. c. If only product C were sold, how many units would be needed to break even? d. If only product F were sold, how many units would be needed to break even? e. If the product mix changed so that equal units of C and F were sold, what would be the new break-even point in total units? f. Discuss the accuracy of the above calculations with regards to planning. What types of occurrences could affect the accuracy of the calculations? What assumptions must be made to use the calculations in planning and decision making?

a. b.

10,000 (2) + 5,000 (5) - 21,000 = $24,000 $2 0.667 = $1.33 $5 0.333 = $1.67 3.00 = weighted average contribution margin 21,000/3.00 = 7,000 units Product C: 0.667 7,000 = 4,667 Product F: 0.333 7,000 = 2,333 21,000/2 = 10,500 units 21,000/5 = 4,200 units $2 0.5 = $1.00 $5 0.5 = $2.50 3.50 = weighted average contribution margin 21,000/3.5 = 6,000 Accuracy of break-even calculations are based on the accuracy of the estimated fixed costs to be covered and the accuracy of the contribution margin. In the case of multiple products the accuracy is further complicated by the estimation of the sales mix. Any variance in the actual sales mix vs the estimated sales mix will cause break-even to change. Any change in any of the values used in the calculation will cause the break-even to change (sales price, variable cost per unit, fixed cost, sales mix). The assumptions that must be made are 1) assume that all products have the same contribution margin 2) assume a weighted-average contribution margin, 3) treat each product line as a separate entity, and 4) use sales dollars as a measure of volume.

c. d. e.

f.

95. Arron company sells three products, X, Y, and Z. The company has fixed costs in the amount of $3,900. The following information is presented to you:

Price per unit Variable costs per unit Number of units sold

X $11 $6 1,000

Y $15 $12 2,000

Z $17 $16 2,000

REQUIRED: a. Assuming the product mix will be the same at the break-even point, compute the break-even in total units. b. What are the break-even units for each product line?

a. Contribution margin Product mix Product mix as % CM PM%

X 5 1/5 0.2 1.0

Y 3 2/5 0.4 1.2

Z 1 2/5 0.4 0.4 = 2.6 (weighted average CM)

3,900/2.6 = 1,500 units

b.

X: 0.2 1,500 = 300 units Y: 0.4 1,500 = 600 units Z: 0.4 1,500 = 600 units

96. Potomac Corporation wishes to earn a 20% return on its $100,000 investment in equipment used to produce product M. Based on estimated sales of 10,000 units of product M, the cost per unit would be as follows:

Variable manufacturing costs Fixed selling and administrative costs Fixed manufacturing costs

$5 $2 $1

At how much per unit should Product M be priced for sale?

Variable costs per unit Fixed selling & administrative Fixed manufacturing costs Profit per unit (0.2 100,000/10,000) Selling price per unit

$5 $2 $1 $2 $10

97. MultiFrame Company has the following revenue and cost budgets for the two products it sells:

Sales price Direct materials Direct labor Fixed overhead Net income per unit Budgeted unit sales

Plastic Frames $10.00 (2.00) (3.00) (3.00) $2.00 100,000

Glass Frames $15.00 (3.00) (5.00) (4.00) $3.00 300,000

The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit. REQUIRED: a. What is the total number of units MultiFrame needs to produce and sell to break even? b. What is the total number of units needed to break even if the budgeted direct labor costs were $2 for plastic frames instead of $3? c. What is the total number of units needed to break even if sales were budgeted at 150,000 units of plastic frames and 300,000 units of glass frames with all other costs remaining constant?

a. Sales price Variable costs Contribution margin Mix CM Mix

Plastic $10 5 5 .25 1.25

Glass $15 8 7 .75 5.25 = 6.50 (Weighted avg CM)

break-even

$975,000/6.50 = 150,000 units

b.

Plastic Sale $10 s pric e Var 4 iabl e cost s Con 6 trib utio n mar gin Mix 0.25 CM 1.50 Mix

Glass $15

0.75 5.25 = 6.75 (Weighted avg CM)

brea $975,000/6.75 = 144,444 k-e ven

c. Sales price Variable costs Contribution margin Mix CM Mix

Plastic $10 5 5 0.33 1.65

Glass $15 8 7 0.67 4.69 = 6.34 (Weighted avg CM)

break-even

$975,00 0/6.34 = 153,785

(Note that the answers may vary based on rounding conventions)

98. A company produces two products, A and B. A sells for $16 and has variable costs of $10. B sells for $12 and has variable costs of $8. Fixed costs for the period are $35,000. Normally, two units of A are sold for every one unit of B. How many units of B must be sold if the company expects profits of $50,000?

Sales price Variable costs Contribution margin Mix CM Mix break-even Units of B

A $16 10 6 0.67 4.02 $35,000+50,000/5.34 = 15,918 15,918 0.33 = 5,306

B $12 8 4 0.33 1.32 = 5.34 (Weighted avg CM)

(Note that the answer may vary based on rounding conventions)

99. Discuss why cost-volume-profit analysis could be useful to managers. CVP analysis shows the relations between selling prices, total sales revenue, costs, volume and profit. Managers need to understand how these elements are interrelated for decision making, planning, and performance evaluation. CVP analysis can be used to determine break-even sales volume or to estimate profits at anticipated levels of sales activity. CVP analysis can aid managers in predicting the impact on profits due to a change in variable costs, fixed cost, selling price, and volume. In addition, for multiple product line companies, CVP analysis aids managers in identifying the impact of a change in sales mix on profits.

100. Identify the underlying assumptions of cost-volume-profit analysis. When using CVP analysis, several assumptions must be made. These assumptions include that fixed costs will not change over a wide range of activity and variable costs are strictly variable. That is, all costs can be classified either as a fixed or variable cost and behave linearly. In addition, CVP analysis assumes sales prices do not change in the relevant range. Also, the sales mix must remain constant. In most cases, it is assumed inventory levels and productivity do not change.

101. Explain what is meant by the margin of safety and how it is used by managers. The margin of safety is the excess of actual sales revenue over the break-even sales revenue. All other elements held constant, the company's sales can decrease by this amount and still break even. The margin of safety indicates the measure of risk associated with the predicted level of sales.

102. Allan Miller, cost accountant for the Southeast Company, has just finished his break-even analysis for each product line within the company. The analysis reveals a deficiency with three product lines, A, B and C. Each of these products is manufactured by a different division. Based on current sales forecasts, the company as a whole will not reach the sales volume needed to break even. If two of the three product lines, (A, B, and C) are dropped, the company will be able to remain profitable. Allan recommended that product lines A and C be dropped. When Allan started with the company he worked for the division which manufactures product line B. In fact, his wife, Vaida, still works for Division B. What are the ethical issues involved in this decision? Management accountants have a responsibility to avoid actual or apparent conflicts of interest and to advise all appropriate parties of any potential conflict. If the exclusive reason for keeping product B is to save the jobs of his wife and former coworkers, he did not act ethically.

103. Susan Shumaker assisted in developing break-even points for various products within her company. She was hired by another company to determine selling prices of their products. Susan feels it is unacceptable to use the information she gathered for her previous employer, but is being pressured by her new supervisor to divulge this information. What should Susan do? Management accountants have a responsibility to refrain from disclosing confidential information acquired in the course of their work except when authorized to do so. Susan should not reveal the information she gathered while working for her previous employer.

104. Discuss the meaning of the term "break-even". Why would a manager be concerned with the break-even point? Does a break-even calculation provide absolute accuracy? Why or why not? Discuss the impact of multiple products on the calculation of break-even. Break-even is the point at which contribution margin equals fixed costs and results in zero (0) net income. Managers should be concerned with the break-even point as a planning tool. Break-even helps in setting a selling price for products and can direct managers to problem areas in costing. Knowing break-even and comparing it to industry standards can help manage costs and revenue. Break-even can also be used in evaluation of existing products or new potential products or branches. Break-even calculations are only as accurate as the estimates used to calculate them. They are not absolutely accurate but are close enough for planning purposes. Multiple products introduce more potential error due to the sales mix problem. The only way to compute break-even for multiple products is to assume a constant sales mix. Any variance from the assumed mix will change the break-even point.

105. Identify the effects of cost structure and operating leverage on the sensitivity of profit to changes in volume. Use a nuclear power plant and an ice cream store as examples. The cost structure of an organization is the proportion of fixed and variable costs to total costs. Operating leverage is high in firms with a high proportion of fixed costs, a small proportion of variable costs, and the resulting high contribution margin per unit such as a nuclear power plant The higher the firm's leverage the higher the degree of sensitivity of profits to volume changes. Operating leverage is low in firms with a low proportion of fixed costs, a large proportion of variable costs, and the resulting lower contribution margin per unit such as an ice cream store. The lower the firm's leverage, the lower the degree of sensitivity of profits to volume changes.

106. Describe the use of spreadsheets in financial modeling. Spreadsheets can be used to conduct "what-if" analyses. Once the basic formula has been set up, it is easy to determine the effect of changing price, costs, volume amounts, or any other variable deemed important to the analysis.

107. How can financial modeling be used for profit planning purposes? Financial models help management to analyze financial relationships that are useful for decision making. Examples include the relation of contribution margin to sales, the relative proportion of various products sold (product mix), and the relation of changes in cost to operating profit.

108. How can financial modeling be used with multiple cost drivers? A financial model can be developed with multiple cost drivers for the purpose of assessing how changes to the model's variables will impact other variables. Costs are analyzed using the five cost hierarchy categories: unit-level, batch-level, product-level, customer-level, and facility-level.

109. Explain how to perform cost-volume-profit (CVP) analysis. The CVP model is one example of a financial model. It can be used to calculate required selling price, find new break-even points, find target profit points, conduct sensitivity analysis, compare alternatives, and calculate multiple break-even points. The margin of safety is the excess of projected sales units over the break-even unit sales level. Break-Even Point in Units = (Total Fixed Costs) / Unit Contribution Margin Target Profit in Units = (Total Fixed Costs + Target Profit) / Unit Contribution Margin Margin of Safety = Sales Units - Break-Even Sales Units

110. Explain how to use sales dollars as the measure of volume in performing cost-volume-profit (CVP) analysis. The CVP model is one example of a financial model. It can be used to calculate required selling price, find new break-even points, find target profit points, conduct sensitivity analysis, compare alternatives, and calculate multiple break-even points. The margin of safety is the excess of projected sales units over the break-even unit sales level. The focus is on solving for total revenue required to break even or to reach a target profit rather than total units. Note that the contribution margin ratio is defined as the total contribution margin divided by total sales, or, alternatively, unit contribution margin divided by unit sales price. Break-Even Point in Sales Dollars = Total Fixed Costs / Contribution Margin Ratio Target Profit in Sales Dollars = (Total Fixed Costs + Target Profit) / Contribution Margin Ratio

111. Explain the effect of taxes on financial modeling. To solve for after-tax target profit points, simply input the after-tax target profit amount and tax rate into the following equation. Note that t is the tax rate. This will result in the before-tax target profit. Before-Tax Profit = After-Tax Profit / (1-t) The resulting before-tax profit is used in the following formulas to find the target profit in units or the target profit in sales dollars. Target Profit in Units = (Total Fixed Costs + Before-Tax Target Profit) / Unit Contribution Margin Target Profit in Sales Dollars = (Total Fixed Costs + Before-Tax Target Profit) / Contribution Margin Ratio

112. Explain the use of financial modeling in a multiple product setting. Multiple products make using financial models more complex. To deal with this, managers can (1) assume that all products have the same contribution margin;, (2) assume that a particular product mix does not change; (3) assume a weighted-average contribution margin; or (4) treat each product line as a separate entity.

Operating Profit =

(Contribution Margin for Product 1 Sales Volume for Product 1) + (Contribution Margin for Product 2 Sales Volume for Product 2) - Fixed Costs

113. Break-even and target profits. Analysis of the operations of Reyes Company shows the fixed costs to be $140,000 and the variable costs to be $7 per unit. Selling price is $14 per unit. Required: a. Derive the break-even point expressed in units. b. How many units must the firm sell to earn a profit of $168,000? c. What would profits be if revenue from sales were $2,100,000? (Reyes Company; break-even and target profits.) a. Contribution Margin (per Unit) = Unit Selling Price Unit Variable Cost = $14 $7 = $7. Profit = (Contribution Margin per Unit X Units) Fixed Costs $0 = ($7 X Units) $140,000 Units = 20,000. b. $168,000 = ($7 X Units) $140,000 $308,000 = $7 X Units 44,000 = Units. c. Profit = (.5* X $2,100,000) $140,000 = $910,000. *Contribution Margin Ratio: = (Unit Selling Price Unit Variable Cost) / Unit Selling Price = ($14 $7) / $14 = $7 / $14 = 0.5 = 50%.

114. Cost-volume-profit; volume defined in sales dollars. An excerpt from the income statement of the Dawson Company follows. Fixed costs in Year 1 are $660,000. Dawson Company Income Statement Year ended December 31, year 1
Sales Operating Expenses: Cost of Goods Sold Selling Costs Administrative Costs Total Operating Costs Profit $3,000,000 $1,425,000 450,000 225,000 2,100,000 $ 900,000

Required: a. What percentage of sales revenue is variable cost? b. What is the break-even point in sales dollars for Dawson Company? c. If sales revenue falls to $2,500,000, what will be the estimated amount of profit? d. What amount of sales dollars produces a profit of $1,000,000?

(Dawson Company; cost-volume-profit; volume defined in sales dollars.) a. $2,100,000 $660,000 = $1,440,000 $1,440,000/$3,000,000 = 0.48 = 48%. b. Break-even Revenue = Fixed Costs / Contribution Margin Ratio Contribution Margin Ratio = ($3,000,000 $1,440,000)/$3,000,000 = .52 Break-even Revenue = $660,000/.52 = $1,269,231. c. Profit = (.52 X $2,500,000) $660,000 = $640,000. d. Sales = $1,660,000/.52 = $3,192,308.

115. Cost-volume-profit; volume defined in sales dollars. An excerpt from the income statement of the Kingston Company follows. Fixed costs in Year 1 are $325,000. Kingston Company Income Statement Year ended December 31, year 1
Sales Operating Expenses: Cost of Goods Sold Selling Costs Administrative Costs Total Operating Costs Profit $4,000,000 $1,400,000 425,000 250,000 2,075,000 $1,925,000

Required: a. What percentage of sales revenue is variable cost? b. What is the break-even point in sales dollars for Kingston Company? c. If sales revenue falls to $2,900,000, what will be the estimated amount of profit? d. What amount of sales dollars produces a profit of $1,000,000?

(Kingston Company; cost-volume-profit; volume defined in sales dollars.) a. $1,925,000 $325,000 = $1,600,000 $1,600,000/$4,000,000 = 0.40 = 40%. b. Break-even Revenue = Fixed Costs / Contribution Margin Ratio Contribution Margin Ratio = ($4,000,000 $1,600,000)/$4,000,000 = .60 Break-even Revenue = $325,000/.60 = $541,667. c. Profit = (.60 X $2,900,000) $325,000 = $1,415,000. d. Sales = $1,325,000/.60 = $2,208,333.

116. Cost-volume-profit analysis. Patton Company produces one type of sunglasses with the following costs and revenues for the year:

Total Revenues Total Fixed Costs Total Variable Costs Total Quantity Produced and Sold

$6,000,000 $2,000,000 $2,000,000 100,000 Units

Required: a. What is the selling price per unit? b. What is the variable cost per unit? c. What is the contribution margin per unit? d. What is the break-even point in units? e. Assume an income-tax rate of 40 percent. Assuming a relevant range, what quantity of units is required for Patton Company to make an after-tax operating profit of $6,000,000 for the year?

(Patton Company; cost-volume-profit analysis.) a. $6,000,000 100,000 Units = $60 per Unit. b. $2,000,000 100,000 Units = $20 per Unit. c. $60 $20 = $40 per Unit. d. Operating Profit = [(Sales Price per Unit Variable Cost per Unit) X Unit Sales] Fixed Cost 0 = [($60 $20) X Unit Sales] $2,000,000 Unit Sales = $2,000,000/$40 = 50,000 Units. e. After Tax Profit/(1 t) = Before Tax Profit $6,000,000/(1 .4) = Before Tax Profit $10,000,000 = Before Tax Profit Then, go back to equation shown in Part d. above and set operating profit to $10,000,000 as follows: $10,000,000 = [($60 $20) X Unit Sales] $2,000,000 Unit Sales = $12,000,000/$40 = 300,000 Units.

117. Break-even and target profits; volume defined in sales dollars. The manager of Joses Food Court Express estimates operating costs for the year will total $300,000 for fixed costs. Required: a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent. b. Find the break-even point in sales dollars with a contribution margin ratio of 25 percent. c. Find the sales dollars required with a contribution margin ratio of 40 percent to generate a profit of $100,000. (Joses Food Court Express; break-even and target profits; volume defined in sales dollars.) a. Sales = $300,000/.40 = $750,000. b. Sales = $300,000/.25 = $1,200,000. c. Sales = ($300,000 + $100,000)/.4 = $1,000,000.

118. Break-even and target profits; volume defined in sales dollars. The manager of Hsus Carryout Express estimates operating costs for the year will total $230,000 for fixed costs. Required: a. Find the break-even point in sales dollars with a contribution margin ratio of 40 percent. b. Find the break-even point in sales dollars with a contribution margin ratio of 20 percent. c. Find the sales dollars required with a contribution margin ratio of 50 percent to generate a profit of $150,000. (Hsus Carryout Express; break-even and target profits; volume defined in sales dollars.) a. Sales = $230,000/.40 = $575,000. b. Sales = $230,000/.20 = $1,150,000. c. Sales = ($230,000 + $150,000)/.5 = $760,000.

119. CVPsensitivity analysis. Joans Beauty College is considering introducing a new nail design seminar to run on an annual basis with the following price and cost characteristics:

Tuition Variable Costs (polish, supplies, etc.) Fixed Costs (advertising, instructors salary, insurance, etc.)

$320 per Student $20 per Student $60,000 per Year

Required: a. What enrollment enables Joans Beauty College to break even? b. How many students will enable Joans Beauty College to make an operating profit of $30,000 for the year? c. Assume that the projected enrollment for the year is 600 students for each of the following situations: (1) What will be the operating profit for 600 students? (2) What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent? (3) What would be the operating profit if variable costs per student increased by 10 percent? Decreased by 20 percent? (4) Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 20 percent higher than projected. What would be the operating profit for the year?

a. Break-Even Point in Units = Fixed Costs/ Unit Contribution Margin = $60,000/($320 $20) = $60,000/$300 = 200 Students. b. Target Profit Point in Units = (Fixed Costs + Target Profit) / Unit Contribution Margin = ($60,000 + $30,000)/$300 = 300 Students. c. (1) Profit = [($320 $20) X 600] $60,000 = $120,000. (2) 10% price decrease. Now price = $288 Profit = [($288 $20) X 600] $60,000 = $100,800. Profit decreases by $19,200 (16%). 20% price increase. Now price = $384 Profit = [($384 $20) X 600] $60,000 = $158,400. Profit increases by $38,400 (32%). (3) 10% variable cost increase. Now variable cost = $22 Profit = [($320 $22) X 600] $60,000= $118,800. Profit decreased by $1,200 (1%). 20% variable cost decrease. Now variable cost = $16 Profit = [($320 $16) X 600] $60,000 = $122,400. Profit increases by $2,400 (2%). (4) Profit = [($320 $24) X 600] $54,000 = $123,600. Profit increases by $3,600 (3%).

120. Multiple-product profit analysis. Miguels Supreme Tacos produces two types of soft tacos, chicken and steak, with the following characteristics:

Selling Price per Unit Variable Cost per Unit Expected Sales (units)

Chicken $4 $2 200,000

Steak $6 $3 300,000

The total fixed costs for the company are $200,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix would be 40 percent chicken and 60 percent steak at the break-even point, compute the break-even volume. c. If the product sales mix were to change to four chicken tacos for each steak taco, what would be the new break-even volume?

(Miguels Supreme Tacos; multiple product profit analysis.) a.


Chicken Tacos (200,000)($4) + (200,000) ($2) + (200,000)($2) + Steak Tacos (300,000)($6) = (300,000)($3) = (300,000)($3) = Total $ 2,600,000 1,300,000 $ 1,300,000 200,000 $ 1,100,000

b. Weighted Average Unit Contribution Margin = (0.4)($2) + (0.6)($3) = $0.80 + $1.80 = $2.60, where 0.4 = 200,000 chicken/(200,000 chicken + 300,000 steak) and 0.6 = 300,000 steak/(200,000 chicken + 300,000 steak) Break-Even Point in Units = Fixed Costs/ Weighted Average Unit Contribution Margin = 200,000/$2.60 = 76,923 total units Chicken Tacos: (0.4)(76,923) = 30,769 Units. Steak Tacos: (0.6)(76,923) = 46,154 Units. c. Weighted Average Unit Contribution Margin (answers are rounded) [4/ (4 + 1 )] ($2) + [1/ (4 + 1 )] ($3) = (0.8)($2) + (0.2)($3) = $1.60 + $0.60 = $2.20. Break-Even Point in Units = Fixed Costs/ Weighted Average Unit Contribution Margin = $200,000/$2.20 = 90,910 Total Units Chicken Tacos: (0.8)(90,190) = 72,728 Units. Steak Tacos: (0.2)(90,190) = 18,182 Units.

121. Multiple-product profit analysis. Coney Island produces two types of hotdogs, chili dogs and cheese dogs, with the following characteristics:

Selling Price per Unit Variable Cost per Unit Expected Sales (units)

Chili $6 $2 300,000

Cheese $5 $3 100,000

The total fixed costs for the company are $100,000. Required: a. What is the anticipated level of profits for the expected sales volumes? b. Assuming that the product mix would be 75 percent chili and 25 percent cheese at the break-even point, compute the break-even volume. c. If the product sales mix were to change to four chili dogs for each cheese dog, what would be the new break-even volume?

(Coney Island; multiple product profit analysis.) a.


Chili Dog (300,000)($6) + (300,000) ($2) + (300,000)($4) + Cheese Dog (100,000)($5) = (100,000)($3) = (100,000)($2) = Total $ 2,300,000 900,000 $ 1,400,000 100,000 $ 1,300,000

b. Weighted Average Unit Contribution Margin = (0.75)($4) + (0.25)($2) = $3.00 + $0.50 = $3.50, where 0.75 = 300,000 chili/(300,000 chili + 100,000 cheese) and 0.25 = 100,000 cheese/(300,000 chili + 100,000 cheese) Break-Even Point in Units = Fixed Costs/ Weighted Average Unit Contribution Margin = 100,000/$3.50 = 28,571 total units Chili Dogs: (0.75)(28,571) = 21,428 Units. Cheese Dogs: (0.25)(28,571) = 7,143 Units. c. Weighted Average Unit Contribution Margin (answers are rounded) [4/ (4 + 1 )] ($4) + [1/ (4 + 1 )] ($2) = (0.8)($4) + (0.2)($2) = $3.20 + $0.40 = $3.60. Break-Even Point in Units = Fixed Costs/ Weighted Average Unit Contribution Margin = $100,000/$3.60 = 27,778 Total Units Chili Dogs: (0.8)(27,778) = 22,222 Units. Cheese Dogs: (0.2)(27,778) = 5,556 Units.

122. CVP analysis with step costs. Sparkle Company has one product: printing t-shirts with logos for various businesses. The sales price of $20 remains constant per unit regardless of volume, as does the variable cost of $12 per unit. The company is considering operating at one of the following three monthly levels of operations:

Volume Range (production and sales) Level 1 Level 2 Level 3 010,000 10,00125,000 25,00140,000

Total Fixed Costs $ 40,000 80,000 100,000

Increase in Fixed Costs from Previous Level -$40,000 20,000

Required: a. Calculate the break-even point(s) in units. b. If the company can sell everything it makes, should it operate at level 1, level 2, or level 3? Support your answer.

(Sparkle Company; CVP analysis with step costs.) a. Break-Even points: Break-Even Unit Sales = Total Fixed Costs / Unit Contribution Margin Break-Even Units (Level 1) = $40,000/($20 $12) = 5,000 Units Break-Even Units (Level 2) = $80,000/($20 $12) = 10,000 Units Break-Even Units (Level 3) = $100,000/($20 $12) = 12,500 Units Levels 2 and 3 provide a profit for the entire range of activity, hence, there is no break-even point for either of these levels. b. Profit: Level 1 (10,000 units): (10,000 X $8) $40,000 = $40,000 Level 2 (25,000 units): (25,000 X $8) $80,000 = $120,000 Level 3 (40,000 units): (40,000 X $8) $100,000 = $220,000 Profit is optimal at Level 3.

123. CVP analysis with step costs. Techniques Company has one product: customized thumb drives with logos for various businesses. The sales price of $18 remains constant per unit regardless of volume, as does the variable cost of $10 per unit. The company is considering operating at one of the following three monthly levels of operations:

Volume Range (production and sales) Level 1 Level 2 Level 3 05,000 5,00115,000 15,00130,000

Total Fixed Costs $ 30,000 50,000 80,000

Increase in Fixed Costs from Previous Level -$30,000 30,000

Required: a. Calculate the break-even point(s) in units. b. If the company can sell everything it makes, should it operate at level 1, level 2, or level 3? Support your answer.

(Techniques Company; CVP analysis with step costs.) a. Break-even points: Break-Even Unit Sales = Total Fixed Costs / Unit Contribution Margin Break-Even Units (Level 1) = $30,000/($18 $10) = 3,750 Units Break-Even Units (Level 2) = $50,000/($18 $10) = 6,250 Units Break-Even Units (Level 3) = $80,000/($18 $10) = 10,000 Units Level 3 provides a profit for the entire range of activity, hence, there is no breakeven point for this level. b. Profit: Level 1 (5,000 units): (5,000 X $8) $30,000 = $10,000 Level 2 (15,000 units): (15,000 X $8) $50,000 = $70,000 Level 3 (30,000 units): (30,000 X $8) $80,000 = $160,000 Profit is optimal at Level 3.

124. Felix Company sells a single product at a price of $57 per unit. Variable costs per unit are $35 and total fixed costs are $719,400. Felix is considering the purchase of a new piece of equipment that would increase the fixed costs to $1,023,700, but decrease the variable costs per unit to $28. Required: a. If Felix Company expects to sell 40,000 units next year, should they purchase this new equipment? b.What would Felixs volume have to be to change your recommendation in A above? a. Under the current system, Felixs profit when 40,000 units are sold is (($57 - $35) X 40,000) - $719,400 = $160,600 If the new equipment is purchased, Felixs profit when 40,000 units are sold is (($57 - $28) X 40,000) - $1,023,700 = $136,300 Felix is better off not buying the new equipment. b. 57x 35x 719,400 = 57x 28x 1,023,700 x = 43,471 units (rounded)

Chapter 7--Differential Cost Analysis for Operating Decisions


Student: ___________________________________________________________________________ 1. A differential cost is a cost that changes (differs) as a result of changing which of the following? A. products or levels of products. B. departments or levels of departments. C. batches or levels of batches. D. activities or levels of activities.

2. What is the analysis of differences among particular alternative actions called? A. incremental analysis. B. marginal analysis. C. differential analysis. D. All of the answers are correct.

3. A cost that changes as a result of changing activitiesor levels of activities is called which of the following? A. product cost. B. department cost. C. batch cost. D. differential cost.

4. A cost or revenue is _________ if the change results in a difference between alternatives. A. relevant B. differential C. effective D. strategic

5. Differential analysis focuses mostly on which of the following? A. opportunity costs B. cash outflows only. C. both cash inflows and outflows. D. accrual accounting.

6. Which of the following represent the three major influences on pricing decisions? A. customers, competitors, and costs. B. controls, customer, and competitors. C. costs, competitors, and controls. D. costs, controls, and customers.

7. How do customers influence pricing decisions? A. By substituting a more expensive product. B. By using credit cards instead of cash. C. By substituting a less expensive product. D. None of the answers is correct.

8. The internal focus on continuous improvement is the key to which of the following? A. cutting costs. B. increasing employee morale. C. profit maximization. D. cutting profits.

9. Customer costs generally fall under several categories, including A. cost to acquire the customer and cost to provide goods and services. B. cost to maintain customers. C. cost to retain customers. D. All of the answers are correct.

10. Customer costs generally fall under several categories. Which is not one of these categories? A. Cost to acquire the customer B. Cost to provide goods and services C. Cost to maintain customers D. Cost to terminate customers

11. The short-run differential costs of a product are $25. Fixed costs are $5 per unit based on 10,000 units produced during this period. The company has adequate capacity to accept a special order of 1,000 units. What is the minimum price that could be charged using the differential approach to pricing? A. $ 5.00 B. $20.00 C. $25.00 D. $30.00

12. In the short run, which element is critical to product choice decisions? A. Contribution margin per unit B. Fixed costs per unit C. Fixed costs associated with product lines D. Contribution margin per unit of scarce resource

13. The Fast Trax Company manufactures adding machines. The company's capacity is 5,000 units per month; however, it currently is selling only 3,000 units per month. Company X has asked Fast Trax to sell 1,000 adding machines at $25 each. Normally, Fast Trax sells its product for $35. The company records report each adding machine's full absorption costs are $30 which includes fixed costs of $20. If Fast Trax was to accept Company X's offer, what would be the impact on Fast Trax's operating income? A. Additional profit of $15,000 B. Additional profit of $25,000 C. A loss of $5,000 on this order D. A loss of $10,000 on this order

14. Sebastian Enterprises sells a product for $25 per unit and has the following costs for the product

Direct Materials Direct Labor Variable Overhead Fixed Overhead Total

$10 5 3 2 $20

The company received a special order for 100 units of the product. The order would require rental of a special tool which costs $200. What is the minimum price per unit that Sebastian Enterprises should charge for this special order if they wish to earn a $300 profit on this order? Assume there is sufficient idle capacity to accept this order.

A. $18 B. $20 C. $23 D. $25 15. Kandy Corporation sells a product for $25 per unit and has the following costs for the product

Direct Materials Direct Labor Variable Overhead Fixed Overhead Total

$10 5 3 2 $20

Kandy received a special order for 100 units of the product. The order would require rental of a special tool which costs $200. What is the minimum price per unit the company should charge for this special order if they wish to earn a $600 profit? Assume Kandy is currently producing and selling at maximum capacity.

A. $23 B. $24 C. $26 D. $28 16. In considering a special order that will enable a company to make use of presently idle capacity, which of the following costs would be irrelevant? A. Materials B. Depreciation C. Direct Labor D. Variable Overhead

17. Short-run decisions include pricing for a special order with no long-term implications. Typically the time horizon is A. six months or less. B. over six months but less than a year. C. one to two years. D. over two years.

18. Which statement is true concerning long-run decisions? A. Long-run decisions include pricing a minor product in a minor market. B. Long-run decisions include pricing a minor product in a major market. C. Long-run decisions include pricing a main product in a minor market. D. Long-run decisions include pricing a main product in a major market.

19. Short-run decisions include pricing for which of the following? A. a special order with no long-term implications. B. a special order with long-term implications. C. a main product in a major market. D. a period greater than six months.

20. What does the differential approach to pricing presume? A. The price must be less than the differential cost of producing and selling the product. B. The price must at least equal the differential cost of producing and selling the product. C. The price must equal the market price. D. The price must equal full costs plus a profit margin.

21. In the short run, the practice of setting price so that it must at least equal the differential cost of producing and selling the product will result in which of the following? A. predatory pricing violation. B. anti-trust violation. C. dumping. D. positive contribution to covering fixed costs and generating profit.

22. In the long run, the practice of setting price so that it must at least equal the differential cost of producing and selling the product will cover all costs because A. fixed costs are differential in the long run. B. variable costs are differential in the long run. C. fixed and variable costs are differential in the long run. D. fixed and variable costs are discretionary in the long run.

23. Which of the following cost allocation methods would be used to determine the lowest price that could be quoted for a special order that would utilize idle capacity within a production area? A. Job order B. Process C. Variable D. Standard

24. Mitchs Microbrew's regular selling price for a case of its product is $6. Variable costs are $4 per case. Fixed costs total $1 per case based on 100,000 cases, and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases. After sales of 80,000 cases were projected for the year, a special order was received for an additional 10,000 cases. What is the minimum selling price for the special order? A. $3. B. $4. C. $5. D. $6.

25. Grizzly Company Grizzly Company manufactures footballs. The forecasted income statement for the year before any special orders is as follows:

Sales Manufacturing CGS Gross Profit Selling Expenses Operating Income

Amount $4,000,000 3,200,000 800,000 300,000 $ 500,000

Per Unit $10.00 8.00 2.00 0.75 $ 1.25

Refer to Grizzly Company. Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing CGS and $100,000 in selling expenses. Grizzly received a special order offering to buy 50,000 footballs for $7.50 each. There will be no additional selling expenses if Grizzly accepts. Assume Grizzly has sufficient capacity to manufacture 50,000 more footballs. The unit relevant cost for Grizzly's decision is

A. $8.00 B. $5.00 C. $8.75 D. $5.75 26. Grizzly Company Grizzly Company manufactures footballs. The forecasted income statement for the year before any special orders is as follows:

Sales Manufacturing CGS Gross Profit Selling Expenses Operating Income

Amount $4,000,000 3,200,000 800,000 300,000 $ 500,000

Per Unit $10.00 8.00 2.00 0.75 $ 1.25

Refer to Grizzly Company. By what amount would operating income of Grizzly be increased or decreased as a result of accepting the special order?

A. $25,000 decrease B. $62,500 decrease C. $100,000 increase D. $125,000 increase 27. Which of the following influences should not be considered in short-run pricing decisions? A. The value customers place on the product B. The pricing strategies of competitors C. The costs of the product D. Total fixed costs allocated to the specific product

28. Which statement is true with regards to differential pricing? A. Only fixed costs become differential costs in the long run. B. Both fixed and variable costs become differential costs in the long run. C. Fixed costs are never differential costs. D. When considering a special order all costs become differential costs.

29. Which of the following is true about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of six months or less. C. Long-run decisions include pricing a main product in a major market. D. All of the answers are correct.

30. Which of the following is true about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of two years or more. C. Short-run decisions include pricing a main product in a major market. D. Long-run decisions include pricing for a special order with no short-term implications.

31. Which of the following is false about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of six months or less. C. Long-run decisions include pricing a main product in a major market. D. Long-run decisions include pricing for a special order with no short-term implications.

32. In the short run, __________ limitations require choices among alternatives. A. capacity B. joint cost C. split-off point D. full cost

33. The value chain influences long-run pricing decisions because __________ cost is the total of all the costs incurred by the activities in the value chain. A. differential B. full C. marginal D. variable

34. The total of all the costs incurred by the activities in the value chain are A. variable costs. B. fixed costs. C. total costs. D. full costs.

35. Using full costs for pricing decisions can be justified in which of the following circumstances? A. When a firm enters into a long-term contractual relationship to supply a product. B. For development and production of customized products and contracts with the government. C. When managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions. D. All of the answers are correct.

36. What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

37. Which product pricing practice is used by the majority of Japanese companies in assembly-type operations (e.g. electronics and automobiles)? A. Variable costs, only B. Fixed costs, only C. Full costs D. Absorption costs

38. Which product pricing factor is primarily used by the majority of Japanese, Irish, and English companies? A. Market-based B. Cost-based C. Quality-based D. Quantity-based

39. Which product pricing factor is primarily used by the majority of American companies? A. Market-based B. Cost-based C. Quality-based D. Quantity-based

40. What costs can be justified when a firm enters into agreements for the development and production of customized products with the Federal government? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

41. What costs can be justified when a firm enters into a long-term contractual relationship to supply a product? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

42. Which statement is true with regards to the product lifecycle? A. The product life cycle is usually 10 to 20 years. B. Life-cycle costs should never been considered in short run pricing decisions. C. Life-cycle costs provide important information for pricing. D. Life-cycle costs are not relevant in differential analysis.

43. The product life cycle lasts from A. obtaining financing through paying off investors. B. product design through product termination. C. initial research and development through termination of customer support. D. None of the answers is correct.

44. When can using full costs for pricing decisions be justified? A. when a firm enters into a long-term contractual relationship to supply a product. B. when a firm enters into a short-term contractual relationship to supply a product. C. for development and production of standardized commercial products. D. when setting short-term market prices.

45. When can using full costs for pricing decisions be justified? A. when a firm enters into a short term contractual relationship to supply a product. B. for development and production of customized products and contracts with the government. C. when managers initially set prices to cover development costs and then adjust to reflect market conditions. D. for development and production of standardized commercial products.

46. When can a firm justify the use of full costs for pricing decisions? A. when a firm enters into a short term contractual relationship to supply a product. B. for development and production of standardized products. C. when managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions. D. because they are required by generally accepted accounting principles.

47. What is term used to describe the pricing practice in effect when a business deliberately prices below its costs in an effort to drive out competitors? A. competitive pricing. B. cost-based pricing. C. target pricing. D. predatory pricing.

48. Predatory pricing A. occurs when a business deliberately prices below its costs in an effort to drive out competitors. B. occurs when a business unintentionally prices below its costs which results in driving out competitors. C. is legal in all 50 States. D. is generally accepted in the United States.

49. Which statement is true concerning target costing? A. Target costing is setting price below costs in the short run to drive out competitors. B. Target costing is the systematic evaluation of all costs relevant to a decision. C. Target costing is the concept of price-based costing. D. None of the answers is correct.

50. Which statement is true concerning target pricing? A. Target pricing is based on customers' perceived value for the product. B. Target pricing is illegal under Federal law. C. Target pricing is anti-competitive. D. Target pricing is the same as predatory pricing.

51. Target costs equal which of the following? A. target prices minus target profits. B. fixed costs plus variable costs. C. prime costs plus conversion costs. D. opportunity cost plus cost of capital.

52. Which of the following terms describes the systematic evaluation of all aspects of research and development, design of products and processes, production, marketing, distribution, and customer service? A. quality engineering. B. incremental engineering. C. systems engineering. D. value engineering.

53. What is the objective of value engineering? A. to increase quality in order to satisfy customer needs. B. to reduce quality while satisfying customer needs. C. to increase profits while satisfying customer needs. D. to reduce costs while satisfying customer needs.

54. What is the first step in value engineering? A. an analysis of the value-chain activities. B. developing a product that satisfies the needs of potential customers. C. choosing a target price based on customers perceived value for the product and the competitors prices. D. reducing costs while satisfying customer needs.

55. Under United States laws, dumping occurs when A. when a business deliberately prices below its costs in an effort to drive out competitors. B. when a business unintentionally prices below its costs which results in driving out competitors. C. when a foreign company sells a product in the United States at a price below the market value in the country of its creation, and this action materially injuries (or threatens to materially injure) an industry in the United States. D. when a U.S. company sells a product in a foreign country at a price below the market value in the U.S., and this action materially injuries (or threatens to materially injure) an industry in the foreign country.

56. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire the customer, which includes such activities as A. promoting the product. B. conducting a campaign to win back lost customers. C. running advertising campaigns. D. All of the answers are correct.

57. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to provide goods and services, which includes such activities as A. order processing. B. product delivery. C. processing returns. D. All of the answers are correct.

58. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers, which includes such activities as A. billing customers. B. processing payments. C. issuing refunds. D. All of the answers are correct.

59. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to retain customers,which includes such activities as A. follow-up calls. B. conducting campaign to win back customers. C. promoting the product. D. All of the answers are correct.

60. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers, which includes such activities as A. billing customers B. follow up calls C. process returns D. run advertising campaigns

61. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire customers, which includes such activities as A. process payments B. conduct campaign to win back lost customers C. issue refunds D. deliver products

62. Which of the following statements is true when there is only one scarce resource? A. Choose the product that gives the largest contribution per unit of the scarce resource used. B. Choose the product that gives the smallest contribution per unit of the scarce resource used. C. Choose the product that gives the largest contribution per unit of all of the resources used. D. Choose the product that gives the smallest contribution per unit of all of the resources used.

63. Which of the following is a mathematical tool for solving such multiply-constrained decision problems? A. curvi-linear programming. B. random number generators. C. mini-max decision-making. D. linear programming.

64. Which of the following is/are examples of incorrect use(s) of accounting data by decision makers? A. Reliance on data that include cost allocations. B. Reliance on cost information produced by the full-absorption method of product costing, which allocates fixed manufacturing costs to units produced by manufacturing companies. C. Reliance on full-absorption unit costs for short-run decision making. D. All of the answers are correct.

65. Pete's Sports Products makes caps and uniforms. It can sell all of either product it can make. The relevant data for these two products follows:

Machine time per unit Selling price per unit Variable costs per unit

Caps 0.5 Hour $10 $2

Uniforms 2 Hours $20 $4

Total fixed overhead is $240,000. The company has 100,000 machine hours available for production. The company should select which product to maximize operating profits?

A. Uniforms, because its contribution margin per unit is $16. B. Uniforms, because its contribution margin per hour is $8. C. Caps, because its contribution margin per hour is $16 D. Caps, because its contribution margin per unit is $8. 66. A company makes two products. The company can sell all of either product it can make. The relevant data for these two products follows:

Machine time per unit Selling price per unit Variable costs per unit

Product A 1 hour $15 $10

Product B 1.5 hours $20 $10

Total fixed overhead is $250,000. The company has 100,000 machine hours available for production. The company should select which product to maximize operating profits?

A. Product A because it uses less machine time. B. Product A because its contribution margin per machine hour is $5.00. C. Product B because its contribution margin per unit is $10. D. Product B because its contribution margin per machine hour is $6.67. 67. External financial reporting requires which costing method? A. standard costing. B. variable costing C. full-absorption costing. D. normal costing.

68. Most managerial decision models require which costing method? A. standard costing unit cost data. B. variable costing unit cost data. C. full-absorption costing unit cost data. D. normal costing unit cost data.

69. What kind of unit cost data is needed for external reporting and managerial decision making? External Reporting Managerial Decision Making A. standard costing variable costing B. variable costing full-absorption costing C. full-absorption costing variable costing D. normal costing full-absorption costing

70. Which focuses on increasing the excess of differential revenue over differential costs when the firm faces bottlenecks? A. Differential income analysis B. Throughput analysis C. Theory of bottlenecks D. Theory of constraints

71. Which of the following is an operation in which the work to be performed equals or exceed the available capacity? A. capacity inhibitor. B. throughput blocker. C. bottleneck. D. push-pull constraint.

72. The theory of constraints focuses on which of the following? A. throughput contribution. B. investments. C. other operating costs. D. All of the answers are correct.

73. The theory of constraintsfocuses on which of the following? A. sales dollars minus short-run variable costs (e.g., materials, energy, and piecework labor). B. the assets required for production and sales. C. all operating costs other than short-run variable costs. D. All of the answers are correct.

74. The theory of constraintsfocuses on all operating costs other than short-run variable costs. These costs are incurred to earn throughput contribution and include A. salaries and wages that are fixed costs. B. rent and utilities. C. depreciation. D. All of the answers are correct.

75. Which of the following is the objective of the theory of constraints? A. maximize throughput contribution while maximizing investments and operating costs. B. minimizing throughput contribution while minimizing investments and operating costs. C. minimizing throughput contribution while maximizing investments and operating costs. D. maximize throughput contribution while minimizing investments and operating costs.

76. The objective of the theory of constraintsis to throughput contribution investments and operating costs A. maximize maximize B. minimize minimize C. minimize maximize D. maximize minimize

77. What does the theory of constraintsassume? A. a short time horizon. B. a long time horizon. C. a short or long time horizon. D. None of the answers is correct.

78. Which of the following would be a means of dealing with a production bottleneck? A. Reduce the number of units produced by the machine or process constituting the bottleneck. B. Reduce the number of workers assigned to bottleneck machines or processes. C. Increase the number of workers assigned to bottleneck machines or processes. D. Reduce the number of defective units produced by the machine or process constituting the bottleneck.

79. Which of the following is/are a step in the theory of constraints? A. Recognize that the bottleneck resource determines the throughput contribution of the product. B. Search for and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on. C. Subordinate all non-bottleneck resources to the bottleneck resource and increase bottleneck efficiency and capacity. D. All of the answers are correct.

80. Using the theory of constraints,what is/are remedial action(s) that managers can take? A. Eliminate idle time on the bottleneck operation. B. Shift parts that do not have to be made on the bottleneck machine to non-bottleneck machines or to outside facilities. C. Increase the capacity of the bottleneck process. D. All of the answers are correct.

81. Which of the following is a valid assumption of the theory of constraints? A. few costs are variable--generally only materials, purchased parts, piecework labor, and energy to run machines. B. most direct labor costs are fixed. C. most overhead costs are fixed. D. All of the answers are correct.

82. The theory of constraints identifies bottlenecks and possible disruption that threatens throughput. When disruptions are hard to pinpoint or eliminate, managers may utilize which of the following techniques? A. quality control techniques from Total Quality Management. B. quantity control techniques from Total Quantity Management. C. price control techniques from Total Price Management. D. cost control techniques from Total Cost Management.

83. Which of the following statements is correct? A. The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. B. The theory of constraints decreases throughput contribution (sales dollars minus direct material costs). C. The theory of constraints maximizes investments. D. The theory of constraints manages production by letting non-constrained activities set the pace for the rest of operations.

84. The objectives of the theory of constraints include which of the following? A. minimizing investments and managing production by letting the bottleneck set the pace for the rest of operations. B. maximizing investments and managing production by letting the bottleneck set the pace for the rest of operations. C. maximizing investments and decreasing throughput contribution. D. maximizing investments and increasing throughput contribution.

85. The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. The objective is to do the following Throughput Contribution A. increase B. increase C. decrease D. decrease

Investments minimize maximize minimize maximize

86. What is throughput contribution? A. sales dollars minus direct materials costs. B. sales dollars minus direct materials and direct labor costs. C. sales dollars minus direct materials, direct labor, and overhead costs. D. sales dollars minus actual total direct and indirect costs.

87. The objective of the theory of constraints is to increase throughput contribution (sales dollars minus direct materials costs), minimize investments, and manage production by A. letting the bottleneck set the pace for the rest of operations. B. hiring more direct labor. C. increasing distribution channels. D. increasing production facilities.

88. Clear Sailing Lifeboats Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are

Direct materials Direct Labor Variable Overhead Fixed Overhead (based on production of 8,000 units per month) Annual salary of new supervisor

$3 per unit $3 per unit $2 per unit $2 per unit $12,000

Refer to Clear Sailing Lifeboats. Assuming other things stay the same, at what price per unit from the outside supplier would the company be indifferent (on economic grounds) to buying or making the components?

A. $9.50 B. $9.00 C. $8.50 D. $8.00

89. Clear Sailing Lifeboats Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are

Direct materials Direct Labor Variable Overhead Fixed Overhead (based on production of 8,000 units per month) Annual salary of new supervisor

$3 per unit $3 per unit $2 per unit $2 per unit $12,000

Refer to Clear Sailing Lifeboats. If the company chooses to make the component instead of buying it from an outside supplier, the changes in the company's net income per year would be a

A. $6,000 decrease. B. $6,000 increase. C. $8,400 decrease. D. $8,400 increase. 90. What stabilizes and improves processes to decrease variation, and is well suited to removing disruptions in the process? A. Total Quality Management B. Total Quantity Management C. Total Price Management D. Total Cost Management

91. A firm facing a make-or-buy decision must decide whether to meet its needs internally or to acquire goods or services from external sources. Whether to make or buy depends on which of the following factors? A. cost factors. B. dependability of suppliers. C. quality of purchased materials. D. All of the answers are correct.

92. A firm facing a make-or-buy decision must decide whether to meet its needs internally or to acquire goods or services from external sources. Buying from external sources is often called A. down-sizing. B. right-sizing. C. out-sourcing. D. in-sourcing.

93. Julianna LLC is facing a make-or-buy decision and must decide whether to meet its needs internally or to acquire goods or services from external sources. Julianna LLC adopted an activity-based costing system and found that its overhead costs were more than 50 percent of total product costs and the managers wanted to identify the activities that drove overhead costs. Based on the cost of activities, the management decided to outsource many of the activities that drove overhead costs. The expected result of this action would be that overhead costs decreased decreased increased increased cost of goods purchased from suppliers increased decreased increased decreased

A. B. C. D.

94. Which of the following is an example of a make-or-buy decision? A. Adding a product line B. Dropping a segment C. Subcontracting work in place of using the company's own employees D. Hiring skilled labor in place of unskilled labor

95. M Corporation makes automobile engines. The company's records show the following costs to manufacture part #308FD:
Direct Materials Direct Labor Variable Overhead Fixed Overhead $13 $15 $20 $10

Another manufacturer has offered to supply M Corporation with part #308FD for a cost of $50 per unit. M Corporation uses 1,000 units annually. If M Corporation accepts the offer, what will be the short-run impact on operating income?

A. Decrease in profits equal to $8,000. B. Decrease in profits equal to $2,000. C. Increase in profits equal to $8,000. D. Increase in profits equal to $2,000. 96. For the past 10 years, Husky Company has produced the small gas motors that fit into its main product line of weed cutting machines. As material costs have steadily increased, the Controller of Husky Company is reviewing the decision to continue to make the small motors and has identified the following facts:
1) 2) 3) 4) 5) The equipment used to manufacture the gas motors has a book value of $350,000. The space now occupied by the gas motor manufacturing department could be used to eliminate the need for storage space now being rented. Comparable units can be purchased from an outside supplier for $89.95. Five of the persons who work in the gas motor manufacturing department would be terminated and given eight weeks' severance pay. A $25,000 unsecured note is still outstanding on the equipment used in the manufacturing process.

Which of the items above are relevant to the decision that the controller has to make?

A. 1, 3, and 4 B. 2, 3, and 4 C. 2, 3, 4, and 5 D. 1, 2, 4, and 5 97. Which of the following qualitative factors favors the buy choice in a make or buy decision? A. Maintaining a long-run relationship with suppliers B. The utilization of idle capacity C. Quality control is critical. D. All of the answers are correct.

98. In deciding whether to manufacture a part or buy it from an outside vendor, which of the following represents a cost that is not relevant to the short-run decision? A. direct labor. B. variable overhead. C. fixed overhead that will be avoided if the part is bought from an outside vendor. D. fixed overhead that will continue even if the part is bought from an outside vendor.

99. BLUE Company BLUE Company needs 10,000 units of a certain part to be used in production. If BLUE buys the part from RED Company instead of making it, BLUE could not use the present facilities for another manufacturing activity. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:
Cost to BLUE to make the part: Direct materials Direct labor Variable overhead Fixed overhead applied Cost to buy the part from RED company $7 24 12 15 $58 $53

Refer to BLUE Company. In deciding whether to make or buy the part, BLUE' s total relevant cost to make the part is

A. $352,000. B. $490,000. C. $540,000. D. $580,000.

100. BLUE Company BLUE Company needs 10,000 units of a certain part to be used in production. If BLUE buys the part from RED Company instead of making it, BLUE could not use the present facilities for another manufacturing activity. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:
Cost to BLUE to make the part: Direct materials Direct labor Variable overhead Fixed overhead applied Cost to buy the part from RED company $7 24 12 15 $58 $53

Refer to BLUE Company. Which alternative is more desirable for BLUE and by what amount?

A. Buy, $40,000 B. Make, $40,000 C. Buy, $50,000 D. Make, $50,000 101. The Knott Division of Wright Company produces rope. One-third of the Knott Division's output is sold to the Hammock Products division of Wright and the remainder is sold to outside customers. The Knott Division's estimated sales and standard cost data for the fiscal year ending Sept. 30 are as follows:

Sales Variable Costs Fixed Costs Gross Margin Unit Sales

Hammock Products $ 17,500 (10,000) (3,000) 4,500 10,000

Outside Customers $ 40,000 (20,000) (6,000) $ 14,000 20,000

The Knott Division has an opportunity to purchase 10,000 feet of identical quality rope from an outside supplier at a cost of $1.50 per unit on a continuing basis. Assume that the Knott Division cannot sell any additional product to outside customers. Should Wright allow its Knott Division to purchase the rope from the outside supplier, and why?

A. Yes, because buying the rope would save Wright Company $2,500 B. No, because making the rope would save Wright Company $2,500. C. Yes, because buying the rope would save Wright Company $5,000. D. No, because making the rope would save Wright Company $5,000 102. The use of total quality management and flexible manufacturing practices to reduce setup costs enhances a company's ability to use A. economic order quantity methods. B. just-in-time inventory methods. C. first-in, first-out inventory methods. D. last-in, last-out inventory methods.

103. Factors underlying make-or-buy decisions include non-quantitative factors, such as A. dependability of suppliers and the quality of purchased materials. B. dependability of suppliers and the quantity of purchased materials. C. dependability of employees and the quality of manufactured materials. D. dependability of employees and the quantity of purchased materials.

104. Why is differential analysis considered to be an extension of financial modeling which focuses on cash flows? A. Cash is the medium of exchange. B. Cash serves as a common, objective measure of the benefits of alternatives. C. Cash serves as a common, objective measure of the costs of alternatives. D. All of the answers are correct.

105. In the joint production process, the point at which the identifiable products emerge is called the A. joint processing point. B. decision point. C. go-no-go point. D. splitoff point.

106. During the joint production process, the costs incurred up to the splitoff point are known as which of the following? A. joint costs. B. sunk costs. C. fixed costs. D. lost costs.

107. During the joint production process, the costs incurred after the splitoff point are called A. additional processing costs. B. standard processing costs. C. fixed processing costs. D. normal processing costs.

108. Which of the following statements regarding joint cost allocation is not true? A. The sales value of the end products is the most common method used to allocate joint costs. B. Inventory cost and cost of goods sold computations for internal reporting purposes require joint cost allocation. C. Inventory cost and cost of goods sold computations for external reporting purposes require joint cost allocation. D. Joint cost allocation is unnecessary in deciding to sell or process further beyond the split-off point.

109. In producing joint products, which are the relevant costs for decisions to sell or process further? A. Costs incurred up to the splitoff point B. Costs incurred after the splitoff point C. Joint costs D. Sunk costs

110. When producing joint products, what are the relevant costs for a decision to sell or process further? A. Joint costs B. Costs incurred before the splitoff point C. Costs incurred at the splitoff point D. Costs incurred after the splitoff point.

111. Relevant costs for decisions to sell or process further include A. joint costs. B. additional processing costs. C. fixed costs. D. sunk costs.

112. ABC Company has three products that use common facilities. The relevant data concerning these three products follows:

Product Sales Variable costs Contribution Margin Fixed cost Operating loss

A $10,000 5,000 5,000 5,000 0

B $30,000 20,000 10,000 15,000 -$ 5,000

C $40,000 25,000 15,000 30,000 -$15,000

Total $80,000 50,000 30,000 50,000 -$20,000

Fixed costs are allocated common costs. If product line C is dropped, what will be the impact on operating profits?

A. Operating loss will decrease to ($15,000). B. Operating loss will decrease to ($5,000). C. Operating loss will increase to ($35,000). D. There would be no change in operating profits. 113. Ben's Foods has two sales offices: North and South. The company's records report the following information

Sales Direct Costs: Variable Fixed Allocated common costs

North $40,000 $15,000 $15,000 $20,000

South $50,000 $25,000 $10,000 $10,000

Management is considering dropping the North office. What will happen to operating income if North is eliminated?

A. Profit of $10,000 B. Profit of $5,000 C. Loss of $15,000 D. Company would be at break-even. 114. On which of the following factors should the decision to drop a product line should be based? A. the fact that the product line shows a net loss over several periods. B. the ability of the firm to eliminate some fixed costs as a result of dropping the product. C. whether the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost. D. whether the fixed costs that can be avoided by dropping the product line are greater than the contribution margin lost.

115. How is differential analysis used to determine when to add or drop parts of an operation? A. If the differential costs required to provide the product for sale exceeds the differential revenue from the sale of a product, then the product generates profits and the firm should continue its production. B. If the differential costs required to provide the product for sale exceeds the differential revenue from the sale of a product, then the product generates losses and the firm should continue its production. C. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits and the firm should continue its production. D. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits and the firm should discontinue its production.

116. When using differential analysis to determine when to add or drop parts of operations, if the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then A. the product generates losses and the firm should discontinue its production. B. the product generates losses and the firm should continue its production. C. the product generates profits and the firm should discontinue its production. D. the product generates profits and the firm should continue its production.

117. When using differential analysis to determine when to add or drop parts of operations, if the differential revenue from the sale of a product is less than the differential costs required to provide the product for sale, then A. the product generates losses and the firm should discontinue its production. B. the product generates losses and the firm should continue its production. C. the product generates profits and the firm should discontinue its production. D. the product generates profits and the firm should continue its production.

118. Which of the following is the term that represents the costs of preparing machinery for each production run? A. production costs. B. setup costs. C. discretionary costs. D. sunk costs.

119. Which of the following is the term that represents the costs of processing each purchase order? A. production costs. B. setup costs. C. order costs. D. sunk costs.

120. Which of the following is an objective of inventory management? A. minimize the sum of ordering and carrying costs. B. minimize ordering costs and maximize carrying costs. C. maximize the sum of ordering and carrying costs. D. maximize the ordering costs and minimize carrying costs.

121. Which of the following describes the cost of maintaining warehouse facilities? A. carrying costs. B. set-up costs. C. order costs. D. sunk costs.

122. Which of the following terms describes the optimal number of units to order or produce? A. economic order quantity. B. effective order quantity. C. efficient order quantity. D. elastic order quantity.

123. Which of the following is a method of managing production by which the firm attempts to produce each item only as needed for the next step in the production process? A. supply-push. B. just-in-time. C. demand-push. D. economic order quantity.

124. Just-in-time is A. a method of managing production by which the firm attempts to produce each item only as needed for the next step in the production process. B. a method of managing purchasing by which the firm attempts to time purchases so that items arrive just in time for sale. C. a practice that can reduce inventory levels to virtually zero. D. All of the answers are correct.

125. Just-in-time A. is a set of tools. B. adds non-value-added activities to the production process. C. seeks continuous improvement involving all employees. D. All of the answers are correct.

126. Just-in-time A. requires the acquisition of new tracking software. B. has the objective to eliminate all non-value-added activities and reduce costs. C. seeks to increase inventory levels to prevent stock-outs. D. All of the answers are correct.

127. Which of the following represents the performance measures used in a just-in-time system? A. inventory levels. B. materials, people, and machine failures. C. moving and storing. D. All of the answers are correct.

128. Just-in-time systems enable accountants to spend A. more time on inventory valuation for external reporting and less time obtaining data for managerial decisions. B. less time on inventory valuation for external reporting and more time obtaining data for managerial decisions. C. no time on inventory valuation for external reporting and more time obtaining data for managerial decisions. D. less time on inventory valuation for external reporting and no time obtaining data for managerial decisions.

129. Which of the following describes just-in-time inventory methods? A. JIT inventory is a method of managing purchasing only. B. JIT inventory is a method of managing production only C. JIT inventory is a method of sales only. D. JIT inventory is a method of managing purchasing, production, and sales.

130. With just-in-time inventory, what does a firm attempt to do? A. Produce each item only as needed for the next step in the production process. B. Time purchases so that items arrive just in time for production. C. Time purchases so that items arrive just in time for sale. D. All of the answers are correct.

131. In estimating order costs and carrying costs, only __________ costs matter. A. controllable B. differential C. fixed D. variable

132. Which of the following is a method of managing purchasing, production, and sales, by which the firm attempts to produce each item only as needed for the next step in the production process? A. Flexible manufacturing practices B. Just-in-time inventory C. Theory of constraints D. Total quality management

133. Just-in-time inventory is a method of managing purchasing, production, and sales, by which A. the firm attempts to produce each item only as needed for the next step in the production process. B. the firm attempts to time purchases so that items arrive just in time for sale or production. C. the firm attempts to produce each item only as needed for the next step in the production process, and the firm attempts to time purchases so that items arrive just in time for sale or production. D. None of the answers is correct.

134. Which of the following is a method of managing purchasing, production, and sales, by which the firm attempts to time purchases so that items arrive just in time for sale or production? A. total quality management. B. flexible manufacturing practices. C. just-in-time inventory. D. theory of constraints.

135. Which statement is true concerning flexible manufacturing systems? A. Although costs are saved, flexible manufacturing systems increase the amount of time it takes to make changeovers. B. These systems require that accountants spend an increased amount of time on inventory valuation for external reporting. C. These systems enhance a firms ability to utilize just-in-time. D. All of the answers are correct.

136. The optimal solution to a linear programming problem will always be which of the following? A. on the horizontal axis of the graph of a linear programming problem. B. on the vertical axis of the graph of a linear programming problem. C. on a corner of the feasible production area of the graph of a linear programming problem. D. at the origin of the graph of a linear programming problem.

137. The economic order quantity model is used to A. set the target cost. B. set the target profit. C. set the target sales price. D. derive the optimal number of orders or production runs.

138. Linear programming A. finds the product mix that will maximize profits given the constraints. B. provides opportunity costs of constraints. C. allows for sensitivity analysis. D. All of the answers are correct.

139. What is the objective of economic order quantity? A. minimize the sum of carrying costs and order costs for the period. B. maximize the sum of carrying costs and order costs for the period. C. minimize carrying costs and maximize order costs for the period. D. maximize carrying costs and minimize order costs for the period.

140. The economic order quantity is the square root of 2 times A. the demand for the period divided by the cost of carrying one unit in inventory for the period. B. order set up cost divided by the cost of carrying one unit in inventory for the period. C. the cost of carrying one unit in inventory for the period divided by the order set up cost. D. order set up cost times the demand for the period divided by the cost of carrying one unit in inventory for the period.

141. The optimal number of units to order or produce is the economic order quantity, which is the optimal trade-off between which of the following? A. controllable and non-controllable costs. B. fixed costs and variable costs. C. setup (or order) costs and carrying costs. D. sunk and opportunity costs.

142. What is the term that describes the optimal number units to order or produce to achieve the optimal trade-off between setup (or order) costs and carrying costs? A. total quality management. B. flexible manufacturing practices. C. just-in-time inventory. D. the economic order quantity.

143. How does linear programming optimize the use of scarce resources? A. by finding the product mix that will maximize profits given the constraints. B. by providing opportunity costs of constraints. C. by allowing for sensitivity analysis. D. All of the answers are correct.

144. Which of the following optimizes the use of scarce resources? A. Total quality management B. Linear programming C. Just-in-time inventory D. The economic order quantity

145. Which statement is true concerning linear programming? A. Linear programming will find the product mix that will maximize profits given the constraints. B. Linear programming does not provide opportunity costs of constraints. C. Linear programming does not allow for sensitivity analysis. D. Linear programming cannot find the product mix that will maximize profits given the constraints.

146. The economic order quantity model derives the optimal number of which of the following costs? A. fixed and variable costs. B. orders or production runs. C. direct materials and direct labor. D. direct materials and conversion costs.

147. Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expected operations for the year are

Sales (10,000 units @ $20) Manufacturing costs: Variable Fixed Marketing and administrative costs: Variable Fixed

$200,000 $8 per unit $40,000 $3 per unit $20,000

REQUIRED: a. What is the expected level of operating profits? b. Should the company accept a special order for 1,000 units at a selling price of $15 if variable marketing expenses associated with this special order would be $2 per unit? Calculate the incremental profits if the order is accepted. c. Suppose the company received a special order for 3,000 units at a selling price of $15 with no variable marketing expenses. Calculate the impact on operating profits.

148. The Star Company has the capacity to produce 5,000 units per year. Its predicted operations for the year are:

Sales 4,000 units @ $20 each Manufacturing costs: Variable Fixed Marketing and administrative costs: Variable Fixed

$ 80,000 $5 per unit $ 10,000 $1 per unit $ 8,000

REQUIRED: a. Prepare a projected income statement for the coming year. b. Should the company accept a special order for 500 units at a selling price of $8? There are no variable marketing and administrative costs for this order and regular sales will not be affected. What is the impact of this decision on profits? c. Suppose there was a one-time set-up fee of $1,000 for the order above; should the special order be accepted? Why?

149. What makes a cost relevant for decision making?

150. Why aren't fixed costs relevant for most short-term decisions?

151. Compare and contrast the terms relevant costs and non-relevant costs as used in decision making.

152. Explain the term incremental cost. Compare and contrast incremental cost to the term variable cost.

153. Are avoidable costs relevant in all situations where discontinuance of a product line or business segment decisions are made?

154. How do the value chain and product life cycle influence long-run pricing decisions?

155. Explain how to base target costs on target prices.

156. What is the difference between short-run and long-run pricing decisions?

157. Explain the differential principle and how to identify costs for differential analysis.

158. Explain why costs must be covered by prices.

159. Describe how to use differential analysis to measure customer profitability.

160. Explain the relation between costs and prices.

161. Explain why businesses apply differential analysis to product choice decisions.

162. Explain the theory of constraints.

163. Identify the factors underlying make-or-buy decisions.

164. Explain how to identify the costs of producing joint products and the relevant costs for decisions to sell or process further.

165. Explain the use of differential analysis to determine when to add or drop parts of operations.

166. Identify the factors of inventory management decisions.

167. Explain how linear programming optimizes the use of scarce resources.

168. Identify the use of economic order quantity model.

169. Waldo Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000. Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals market rebounds and prices once again rise. Management has implemented a cost reduction program over the past year that has been successful in reducing costs to the point that suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month. REQUIRED: Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?

170. New Brands Company is currently operating at 80 percent capacity. Worried about the company's performance, the general manager reviewed the company's operating performance. (All fixed costs are allocated costs.)

Segment Sales Less: variable costs Contribution margin Less: fixed costs Operating profit (loss)

North 30 11 19 9 10

South 40 8 32 12 20

East 20 21 (1) 6 (7)

West 10 8 2 3 (1)

REQUIRED: a. What is the current operating profit for the company as a whole? b. If the manager eliminated the two unprofitable segments, what would be the new operating profit for the company as a whole? c. How can management maximize profits?

171. Given the following facts for the Histep Company:

Differential costs per order Annual requirement Inventory carrying costs Purchase cost per unit

$20 1,000 units $1.00 per unit per year $10

REQUIRED: a. Complete the following chart:

Average Annual Orders

Order Size

No. of Units in Inventory

Inventory Carrying Costs

Order Costs

Total Costs

2 4 5 8 10 b. Using trial and error, which order size should be used?

c.

Using the economic order quantity formula, what is the optimal number of units in each order?

172. The theory of constraints focuses on three factors; list and discuss these three factors.

173. The objective of the theory of constraints is to maximize throughput contribution while minimizing investments and operating costs. The theory of constraints assumes a short-run time horizon. How is this accomplished?

174. What are the costs of producing joint products and the relevant costs for decisions to sell or process further?

175. What is the theory of constraints and how is it applied?

176. How is differential analysis used to determine when to add or drop parts of an operation?

177. How is linear programming used to optimize the use of scarce resources?

178. Target costing and pricing. Mega Products makes valves for a variety of oil extraction equipment. Mega Products sells the valves to companies that manufacture and sell pumps. The companys market research department has discovered a market for valves that is similar in automated manufacturing equipment in another industry. The market research department indicates that they could sell to these new outlets for $250. Assume Mega Products desires an operating profit of 20 percent of sales. Required: What is the highest acceptable manufacturing cost for which Mega Products would produce the valves?

179. Make or buy. Towson, Inc., produces semiconductors of which part no. 200 is a subassembly. Towson, Inc., currently produces part no. 200 in its own shop. The Baltic Company offers to supply it at a cost of $205 per 500 units. An analysis of the costs Towson incurs producing part no. 200 reveals the following information:

Direct (Variable) Material Direct (Variable) Labor Other Variable Costs Fixed Costs(a) Total (a) Fixed overhead comprises largely depreciation on general-purpose equipment and factory buildings.

Cost per 500 Units $ 70 80 20 40 $210

Required: Management of Towson, Inc., needs your advice in answering the following questions: a. Should Towson, Inc., accept the offer from Baltic if Towsons plant is operating well below capacity? b. Should the offer be accepted if Baltic reduces the price to $170 per 500 units? c. Suppose Towson can find other profitable uses for the facilities that it now uses in turning out part no. 200. How would that fact affect the price Towson is willing to pay Baltic?

180. Customer profitability analysis. TMBanks management is evaluating the profitability of providing special Christmas Club accounts. The companys financial analysts have developed the following cost information:

Cost to Acquire New Christmas Club Accounts, Including Advertising and Account Setup Costs Cost to Process Transactions and Service These Accounts

$100,000 per year $50 per account per year

On average, each account generates $75 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $100,000 per year cost to acquire accounts includes $10,000 of advertising that TMBank would have done with or without the new accounts. The remainder of the $100,000 costs are differential. Further, you learn that $5 of the $50 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 3,500 new Christmas Club accounts each year. Required: Should TMBank continue to offer these promotional accounts?

181. Inventory management. Here are facts about inventory costs for Tops Shoes, a retailer:

Differential Costs per Order Total Units Purchased per Year Differential Carrying Costs per Unit of Inventory

$100 50,000 Units $5 per Unit

Required: Prepare a table like Exhibit 7.14 in the text. Find the costs of ordering and carrying inventory for each of the following number of annual orders: 40 orders, 50 orders, 60 orders.

182. Inventory management. Here are facts about inventory costs for Winston Wines, a retailer:

Differential Costs per Order Total Units Purchased per Year Differential Carrying Costs per Unit of Inventory

$100 60,000 Units $8 per Unit

Required: Prepare a table like Exhibit 7.14 in the text. Find the costs of ordering and carrying inventory for each of the following number of annual orders: 20 orders, 30 orders, 40 orders.

183. Customer profitability analysis. ChoiceBanks management is evaluating the profitability of providing special checking accounts to new businesses that start in its town. The companys financial analysts have developed the following cost information:

Cost to Acquire New Commercial Accounts, Including Advertising and Account $200,000 per year Setup Costs Cost to Process Transactions and Service These Accounts $150 per account per year

On average, each account generates $180 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $200,000 per year cost to acquire accounts includes $30,000 of advertising that ChoiceBank would have done with or without the new accounts. The remainder of the $200,000 costs are differential. Further, you learn that $10 of the $150 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 7,000 new business commercial accounts each year. Required: Should ChoiceBank continue to offer these promotional new business accounts?

184. Dropping a product line. Timepiece Products, a clock manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last years operations:

Machine Time per Unit Selling Price per Unit Less Variable Costs per Unit Contribution Margin

Manual 0.4 Hour $20 10 $10

Electric 2.5 Hours $30 14 $16

Quartz 5.0 Hours $50 28 $22

Required: Which line should Timepiece Products drop? (Hint: Compute the contribution per machine hour because machine time is the constraint.)

185. Dropping a product line. Sparkle Products, a Christmas ornament manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last years operations:

Machine Time per Unit Selling Price per Unit Less Variable Costs per Unit Contribution Margin

Red 0.4 Hour $22 10 $12

Green 2.0 Hours $29 14 $15

Blue 5.0 Hours $50 30 $20

Required: Which line should Sparkle Products drop? (Hint: Compute the contribution per machine hour because machine time is the constraint.)

186. Product mix decision. The Jackson Company has one machine on which it can produce either of two products, Y or Z. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Jackson can sell all output at current prices. Product Y requires one hour of machine time per unit of output and Product Z requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products Y and Z.

Selling Price Materials Labor Allocated Portion of Fixed Costs Total Cost per Unit Gross Margin per Unit

Product Y (per unit) $30 $4 1 14 $19 $11

Product Z (per unit) $55 $6 3 26 $35 $20

Selling costs are the same whether Jackson produces Product Y or Z, or both; you may ignore them. Required: Should Jackson Company plan to produce Product Y, Product Z, or some mixture of both? Why?

187. Product mix decision. The Gulf Shores Company has one machine on which it can produce either of two products, S or T. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Gulf Shores can sell all output at current prices. Product S requires one hour of machine time per unit of output and Product T requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products S and T.

Selling Price Materials Labor Allocated Portion of Fixed Costs Total Cost per Unit Gross Margin per Unit

Product S (per unit) $40 $3 1 12 $16 $24

Product T (per unit) $50 $5 3 22 $30 $20

Selling costs are the same whether Gulf Shores produces Product S or T, or both; you may ignore them. Required: Should Gulf Shores Company plan to produce Product S, Product T, or some mixture of both? Why?

Chapter 7--Differential Cost Analysis for Operating Decisions Key

1. A differential cost is a cost that changes (differs) as a result of changing which of the following? A. products or levels of products. B. departments or levels of departments. C. batches or levels of batches. D. activities or levels of activities.

2. What is the analysis of differences among particular alternative actions called? A. incremental analysis. B. marginal analysis. C. differential analysis. D. All of the answers are correct.

3. A cost that changes as a result of changing activitiesor levels of activities is called which of the following? A. product cost. B. department cost. C. batch cost. D. differential cost.

4. A cost or revenue is _________ if the change results in a difference between alternatives. A. relevant B. differential C. effective D. strategic

5. Differential analysis focuses mostly on which of the following? A. opportunity costs B. cash outflows only. C. both cash inflows and outflows. D. accrual accounting.

6. Which of the following represent the three major influences on pricing decisions? A. customers, competitors, and costs. B. controls, customer, and competitors. C. costs, competitors, and controls. D. costs, controls, and customers.

7. How do customers influence pricing decisions? A. By substituting a more expensive product. B. By using credit cards instead of cash. C. By substituting a less expensive product. D. None of the answers is correct.

8. The internal focus on continuous improvement is the key to which of the following? A. cutting costs. B. increasing employee morale. C. profit maximization. D. cutting profits.

9. Customer costs generally fall under several categories, including A. cost to acquire the customer and cost to provide goods and services. B. cost to maintain customers. C. cost to retain customers. D. All of the answers are correct.

10. Customer costs generally fall under several categories. Which is not one of these categories? A. Cost to acquire the customer B. Cost to provide goods and services C. Cost to maintain customers D. Cost to terminate customers

11. The short-run differential costs of a product are $25. Fixed costs are $5 per unit based on 10,000 units produced during this period. The company has adequate capacity to accept a special order of 1,000 units. What is the minimum price that could be charged using the differential approach to pricing? A. $ 5.00 B. $20.00 C. $25.00 D. $30.00

12. In the short run, which element is critical to product choice decisions? A. Contribution margin per unit B. Fixed costs per unit C. Fixed costs associated with product lines D. Contribution margin per unit of scarce resource

13. The Fast Trax Company manufactures adding machines. The company's capacity is 5,000 units per month; however, it currently is selling only 3,000 units per month. Company X has asked Fast Trax to sell 1,000 adding machines at $25 each. Normally, Fast Trax sells its product for $35. The company records report each adding machine's full absorption costs are $30 which includes fixed costs of $20. If Fast Trax was to accept Company X's offer, what would be the impact on Fast Trax's operating income? A. Additional profit of $15,000 B. Additional profit of $25,000 C. A loss of $5,000 on this order D. A loss of $10,000 on this order

14. Sebastian Enterprises sells a product for $25 per unit and has the following costs for the product

Direct Materials Direct Labor Variable Overhead Fixed Overhead Total

$10 5 3 2 $20

The company received a special order for 100 units of the product. The order would require rental of a special tool which costs $200. What is the minimum price per unit that Sebastian Enterprises should charge for this special order if they wish to earn a $300 profit on this order? Assume there is sufficient idle capacity to accept this order.

A. $18 B. $20 C. $23 D. $25 15. Kandy Corporation sells a product for $25 per unit and has the following costs for the product

Direct Materials Direct Labor Variable Overhead Fixed Overhead Total

$10 5 3 2 $20

Kandy received a special order for 100 units of the product. The order would require rental of a special tool which costs $200. What is the minimum price per unit the company should charge for this special order if they wish to earn a $600 profit? Assume Kandy is currently producing and selling at maximum capacity.

A. $23 B. $24 C. $26 D. $28 16. In considering a special order that will enable a company to make use of presently idle capacity, which of the following costs would be irrelevant? A. Materials B. Depreciation C. Direct Labor D. Variable Overhead

17. Short-run decisions include pricing for a special order with no long-term implications. Typically the time horizon is A. six months or less. B. over six months but less than a year. C. one to two years. D. over two years.

18. Which statement is true concerning long-run decisions? A. Long-run decisions include pricing a minor product in a minor market. B. Long-run decisions include pricing a minor product in a major market. C. Long-run decisions include pricing a main product in a minor market. D. Long-run decisions include pricing a main product in a major market.

19. Short-run decisions include pricing for which of the following? A. a special order with no long-term implications. B. a special order with long-term implications. C. a main product in a major market. D. a period greater than six months.

20. What does the differential approach to pricing presume? A. The price must be less than the differential cost of producing and selling the product. B. The price must at least equal the differential cost of producing and selling the product. C. The price must equal the market price. D. The price must equal full costs plus a profit margin.

21. In the short run, the practice of setting price so that it must at least equal the differential cost of producing and selling the product will result in which of the following? A. predatory pricing violation. B. anti-trust violation. C. dumping. D. positive contribution to covering fixed costs and generating profit.

22. In the long run, the practice of setting price so that it must at least equal the differential cost of producing and selling the product will cover all costs because A. fixed costs are differential in the long run. B. variable costs are differential in the long run. C. fixed and variable costs are differential in the long run. D. fixed and variable costs are discretionary in the long run.

23. Which of the following cost allocation methods would be used to determine the lowest price that could be quoted for a special order that would utilize idle capacity within a production area? A. Job order B. Process C. Variable D. Standard

24. Mitchs Microbrew's regular selling price for a case of its product is $6. Variable costs are $4 per case. Fixed costs total $1 per case based on 100,000 cases, and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases. After sales of 80,000 cases were projected for the year, a special order was received for an additional 10,000 cases. What is the minimum selling price for the special order? A. $3. B. $4. C. $5. D. $6.

25. Grizzly Company Grizzly Company manufactures footballs. The forecasted income statement for the year before any special orders is as follows:

Sales Manufacturing CGS Gross Profit Selling Expenses Operating Income

Amount $4,000,000 3,200,000 800,000 300,000 $ 500,000

Per Unit $10.00 8.00 2.00 0.75 $ 1.25

Refer to Grizzly Company. Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing CGS and $100,000 in selling expenses. Grizzly received a special order offering to buy 50,000 footballs for $7.50 each. There will be no additional selling expenses if Grizzly accepts. Assume Grizzly has sufficient capacity to manufacture 50,000 more footballs. The unit relevant cost for Grizzly's decision is

A. $8.00 B. $5.00 C. $8.75 D. $5.75 26. Grizzly Company Grizzly Company manufactures footballs. The forecasted income statement for the year before any special orders is as follows:

Sales Manufacturing CGS Gross Profit Selling Expenses Operating Income

Amount $4,000,000 3,200,000 800,000 300,000 $ 500,000

Per Unit $10.00 8.00 2.00 0.75 $ 1.25

Refer to Grizzly Company. By what amount would operating income of Grizzly be increased or decreased as a result of accepting the special order?

A. $25,000 decrease B. $62,500 decrease C. $100,000 increase D. $125,000 increase 27. Which of the following influences should not be considered in short-run pricing decisions? A. The value customers place on the product B. The pricing strategies of competitors C. The costs of the product D. Total fixed costs allocated to the specific product

28. Which statement is true with regards to differential pricing? A. Only fixed costs become differential costs in the long run. B. Both fixed and variable costs become differential costs in the long run. C. Fixed costs are never differential costs. D. When considering a special order all costs become differential costs.

29. Which of the following is true about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of six months or less. C. Long-run decisions include pricing a main product in a major market. D. All of the answers are correct.

30. Which of the following is true about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of two years or more. C. Short-run decisions include pricing a main product in a major market. D. Long-run decisions include pricing for a special order with no short-term implications.

31. Which of the following is false about short-run and long-run pricing decisions? A. Short-run decisions include pricing for a special order with no long-term implications. B. Short-run decisions typically have a time horizon of six months or less. C. Long-run decisions include pricing a main product in a major market. D. Long-run decisions include pricing for a special order with no short-term implications.

32. In the short run, __________ limitations require choices among alternatives. A. capacity B. joint cost C. split-off point D. full cost

33. The value chain influences long-run pricing decisions because __________ cost is the total of all the costs incurred by the activities in the value chain. A. differential B. full C. marginal D. variable

34. The total of all the costs incurred by the activities in the value chain are A. variable costs. B. fixed costs. C. total costs. D. full costs.

35. Using full costs for pricing decisions can be justified in which of the following circumstances? A. When a firm enters into a long-term contractual relationship to supply a product. B. For development and production of customized products and contracts with the government. C. When managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions. D. All of the answers are correct.

36. What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

37. Which product pricing practice is used by the majority of Japanese companies in assembly-type operations (e.g. electronics and automobiles)? A. Variable costs, only B. Fixed costs, only C. Full costs D. Absorption costs

38. Which product pricing factor is primarily used by the majority of Japanese, Irish, and English companies? A. Market-based B. Cost-based C. Quality-based D. Quantity-based

39. Which product pricing factor is primarily used by the majority of American companies? A. Market-based B. Cost-based C. Quality-based D. Quantity-based

40. What costs can be justified when a firm enters into agreements for the development and production of customized products with the Federal government? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

41. What costs can be justified when a firm enters into a long-term contractual relationship to supply a product? A. Variable costs B. Fixed costs C. Full costs D. Absorption costs

42. Which statement is true with regards to the product lifecycle? A. The product life cycle is usually 10 to 20 years. B. Life-cycle costs should never been considered in short run pricing decisions. C. Life-cycle costs provide important information for pricing. D. Life-cycle costs are not relevant in differential analysis.

43. The product life cycle lasts from A. obtaining financing through paying off investors. B. product design through product termination. C. initial research and development through termination of customer support. D. None of the answers is correct.

44. When can using full costs for pricing decisions be justified? A. when a firm enters into a long-term contractual relationship to supply a product. B. when a firm enters into a short-term contractual relationship to supply a product. C. for development and production of standardized commercial products. D. when setting short-term market prices.

45. When can using full costs for pricing decisions be justified? A. when a firm enters into a short term contractual relationship to supply a product. B. for development and production of customized products and contracts with the government. C. when managers initially set prices to cover development costs and then adjust to reflect market conditions. D. for development and production of standardized commercial products.

46. When can a firm justify the use of full costs for pricing decisions? A. when a firm enters into a short term contractual relationship to supply a product. B. for development and production of standardized products. C. when managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions. D. because they are required by generally accepted accounting principles.

47. What is term used to describe the pricing practice in effect when a business deliberately prices below its costs in an effort to drive out competitors? A. competitive pricing. B. cost-based pricing. C. target pricing. D. predatory pricing.

48. Predatory pricing A. occurs when a business deliberately prices below its costs in an effort to drive out competitors. B. occurs when a business unintentionally prices below its costs which results in driving out competitors. C. is legal in all 50 States. D. is generally accepted in the United States.

49. Which statement is true concerning target costing? A. Target costing is setting price below costs in the short run to drive out competitors. B. Target costing is the systematic evaluation of all costs relevant to a decision. C. Target costing is the concept of price-based costing. D. None of the answers is correct.

50. Which statement is true concerning target pricing? A. Target pricing is based on customers' perceived value for the product. B. Target pricing is illegal under Federal law. C. Target pricing is anti-competitive. D. Target pricing is the same as predatory pricing.

51. Target costs equal which of the following? A. target prices minus target profits. B. fixed costs plus variable costs. C. prime costs plus conversion costs. D. opportunity cost plus cost of capital.

52. Which of the following terms describes the systematic evaluation of all aspects of research and development, design of products and processes, production, marketing, distribution, and customer service? A. quality engineering. B. incremental engineering. C. systems engineering. D. value engineering.

53. What is the objective of value engineering? A. to increase quality in order to satisfy customer needs. B. to reduce quality while satisfying customer needs. C. to increase profits while satisfying customer needs. D. to reduce costs while satisfying customer needs.

54. What is the first step in value engineering? A. an analysis of the value-chain activities. B. developing a product that satisfies the needs of potential customers. C. choosing a target price based on customers perceived value for the product and the competitors prices. D. reducing costs while satisfying customer needs.

55. Under United States laws, dumping occurs when A. when a business deliberately prices below its costs in an effort to drive out competitors. B. when a business unintentionally prices below its costs which results in driving out competitors. C. when a foreign company sells a product in the United States at a price below the market value in the country of its creation, and this action materially injuries (or threatens to materially injure) an industry in the United States. D. when a U.S. company sells a product in a foreign country at a price below the market value in the U.S., and this action materially injuries (or threatens to materially injure) an industry in the foreign country.

56. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire the customer, which includes such activities as A. promoting the product. B. conducting a campaign to win back lost customers. C. running advertising campaigns. D. All of the answers are correct.

57. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to provide goods and services, which includes such activities as A. order processing. B. product delivery. C. processing returns. D. All of the answers are correct.

58. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers, which includes such activities as A. billing customers. B. processing payments. C. issuing refunds. D. All of the answers are correct.

59. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to retain customers,which includes such activities as A. follow-up calls. B. conducting campaign to win back customers. C. promoting the product. D. All of the answers are correct.

60. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to maintain customers, which includes such activities as A. billing customers B. follow up calls C. process returns D. run advertising campaigns

61. Using activity-based costing to analyze customer profitability requires the analyst to determine the cost to acquire customers, which includes such activities as A. process payments B. conduct campaign to win back lost customers C. issue refunds D. deliver products

62. Which of the following statements is true when there is only one scarce resource? A. Choose the product that gives the largest contribution per unit of the scarce resource used. B. Choose the product that gives the smallest contribution per unit of the scarce resource used. C. Choose the product that gives the largest contribution per unit of all of the resources used. D. Choose the product that gives the smallest contribution per unit of all of the resources used.

63. Which of the following is a mathematical tool for solving such multiply-constrained decision problems? A. curvi-linear programming. B. random number generators. C. mini-max decision-making. D. linear programming.

64. Which of the following is/are examples of incorrect use(s) of accounting data by decision makers? A. Reliance on data that include cost allocations. B. Reliance on cost information produced by the full-absorption method of product costing, which allocates fixed manufacturing costs to units produced by manufacturing companies. C. Reliance on full-absorption unit costs for short-run decision making. D. All of the answers are correct.

65. Pete's Sports Products makes caps and uniforms. It can sell all of either product it can make. The relevant data for these two products follows:

Machine time per unit Selling price per unit Variable costs per unit

Caps 0.5 Hour $10 $2

Uniforms 2 Hours $20 $4

Total fixed overhead is $240,000. The company has 100,000 machine hours available for production. The company should select which product to maximize operating profits?

A. Uniforms, because its contribution margin per unit is $16. B. Uniforms, because its contribution margin per hour is $8. C. Caps, because its contribution margin per hour is $16 D. Caps, because its contribution margin per unit is $8. 66. A company makes two products. The company can sell all of either product it can make. The relevant data for these two products follows:

Machine time per unit Selling price per unit Variable costs per unit

Product A 1 hour $15 $10

Product B 1.5 hours $20 $10

Total fixed overhead is $250,000. The company has 100,000 machine hours available for production. The company should select which product to maximize operating profits?

A. Product A because it uses less machine time. B. Product A because its contribution margin per machine hour is $5.00. C. Product B because its contribution margin per unit is $10. D. Product B because its contribution margin per machine hour is $6.67. 67. External financial reporting requires which costing method? A. standard costing. B. variable costing C. full-absorption costing. D. normal costing.

68. Most managerial decision models require which costing method? A. standard costing unit cost data. B. variable costing unit cost data. C. full-absorption costing unit cost data. D. normal costing unit cost data.

69. What kind of unit cost data is needed for external reporting and managerial decision making? External Reporting Managerial Decision Making A. standard costing variable costing B. variable costing full-absorption costing C. full-absorption costing variable costing D. normal costing full-absorption costing

70. Which focuses on increasing the excess of differential revenue over differential costs when the firm faces bottlenecks? A. Differential income analysis B. Throughput analysis C. Theory of bottlenecks D. Theory of constraints

71. Which of the following is an operation in which the work to be performed equals or exceed the available capacity? A. capacity inhibitor. B. throughput blocker. C. bottleneck. D. push-pull constraint.

72. The theory of constraints focuses on which of the following? A. throughput contribution. B. investments. C. other operating costs. D. All of the answers are correct.

73. The theory of constraintsfocuses on which of the following? A. sales dollars minus short-run variable costs (e.g., materials, energy, and piecework labor). B. the assets required for production and sales. C. all operating costs other than short-run variable costs. D. All of the answers are correct.

74. The theory of constraintsfocuses on all operating costs other than short-run variable costs. These costs are incurred to earn throughput contribution and include A. salaries and wages that are fixed costs. B. rent and utilities. C. depreciation. D. All of the answers are correct.

75. Which of the following is the objective of the theory of constraints? A. maximize throughput contribution while maximizing investments and operating costs. B. minimizing throughput contribution while minimizing investments and operating costs. C. minimizing throughput contribution while maximizing investments and operating costs. D. maximize throughput contribution while minimizing investments and operating costs.

76. The objective of the theory of constraintsis to throughput contribution investments and operating costs A. maximize maximize B. minimize minimize C. minimize maximize D. maximize minimize

77. What does the theory of constraintsassume? A. a short time horizon. B. a long time horizon. C. a short or long time horizon. D. None of the answers is correct.

78. Which of the following would be a means of dealing with a production bottleneck? A. Reduce the number of units produced by the machine or process constituting the bottleneck. B. Reduce the number of workers assigned to bottleneck machines or processes. C. Increase the number of workers assigned to bottleneck machines or processes. D. Reduce the number of defective units produced by the machine or process constituting the bottleneck.

79. Which of the following is/are a step in the theory of constraints? A. Recognize that the bottleneck resource determines the throughput contribution of the product. B. Search for and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on. C. Subordinate all non-bottleneck resources to the bottleneck resource and increase bottleneck efficiency and capacity. D. All of the answers are correct.

80. Using the theory of constraints,what is/are remedial action(s) that managers can take? A. Eliminate idle time on the bottleneck operation. B. Shift parts that do not have to be made on the bottleneck machine to non-bottleneck machines or to outside facilities. C. Increase the capacity of the bottleneck process. D. All of the answers are correct.

81. Which of the following is a valid assumption of the theory of constraints? A. few costs are variable--generally only materials, purchased parts, piecework labor, and energy to run machines. B. most direct labor costs are fixed. C. most overhead costs are fixed. D. All of the answers are correct.

82. The theory of constraints identifies bottlenecks and possible disruption that threatens throughput. When disruptions are hard to pinpoint or eliminate, managers may utilize which of the following techniques? A. quality control techniques from Total Quality Management. B. quantity control techniques from Total Quantity Management. C. price control techniques from Total Price Management. D. cost control techniques from Total Cost Management.

83. Which of the following statements is correct? A. The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. B. The theory of constraints decreases throughput contribution (sales dollars minus direct material costs). C. The theory of constraints maximizes investments. D. The theory of constraints manages production by letting non-constrained activities set the pace for the rest of operations.

84. The objectives of the theory of constraints include which of the following? A. minimizing investments and managing production by letting the bottleneck set the pace for the rest of operations. B. maximizing investments and managing production by letting the bottleneck set the pace for the rest of operations. C. maximizing investments and decreasing throughput contribution. D. maximizing investments and increasing throughput contribution.

85. The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. The objective is to do the following Throughput Contribution A. increase B. increase C. decrease D. decrease

Investments minimize maximize minimize maximize

86. What is throughput contribution? A. sales dollars minus direct materials costs. B. sales dollars minus direct materials and direct labor costs. C. sales dollars minus direct materials, direct labor, and overhead costs. D. sales dollars minus actual total direct and indirect costs.

87. The objective of the theory of constraints is to increase throughput contribution (sales dollars minus direct materials costs), minimize investments, and manage production by A. letting the bottleneck set the pace for the rest of operations. B. hiring more direct labor. C. increasing distribution channels. D. increasing production facilities.

88. Clear Sailing Lifeboats Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are

Direct materials Direct Labor Variable Overhead Fixed Overhead (based on production of 8,000 units per month) Annual salary of new supervisor

$3 per unit $3 per unit $2 per unit $2 per unit $12,000

Refer to Clear Sailing Lifeboats. Assuming other things stay the same, at what price per unit from the outside supplier would the company be indifferent (on economic grounds) to buying or making the components?

A. $9.50 B. $9.00 C. $8.50 D. $8.00

89. Clear Sailing Lifeboats Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are

Direct materials Direct Labor Variable Overhead Fixed Overhead (based on production of 8,000 units per month) Annual salary of new supervisor

$3 per unit $3 per unit $2 per unit $2 per unit $12,000

Refer to Clear Sailing Lifeboats. If the company chooses to make the component instead of buying it from an outside supplier, the changes in the company's net income per year would be a

A. $6,000 decrease. B. $6,000 increase. C. $8,400 decrease. D. $8,400 increase. 90. What stabilizes and improves processes to decrease variation, and is well suited to removing disruptions in the process? A. Total Quality Management B. Total Quantity Management C. Total Price Management D. Total Cost Management

91. A firm facing a make-or-buy decision must decide whether to meet its needs internally or to acquire goods or services from external sources. Whether to make or buy depends on which of the following factors? A. cost factors. B. dependability of suppliers. C. quality of purchased materials. D. All of the answers are correct.

92. A firm facing a make-or-buy decision must decide whether to meet its needs internally or to acquire goods or services from external sources. Buying from external sources is often called A. down-sizing. B. right-sizing. C. out-sourcing. D. in-sourcing.

93. Julianna LLC is facing a make-or-buy decision and must decide whether to meet its needs internally or to acquire goods or services from external sources. Julianna LLC adopted an activity-based costing system and found that its overhead costs were more than 50 percent of total product costs and the managers wanted to identify the activities that drove overhead costs. Based on the cost of activities, the management decided to outsource many of the activities that drove overhead costs. The expected result of this action would be that overhead costs decreased decreased increased increased cost of goods purchased from suppliers increased decreased increased decreased

A. B. C. D.

94. Which of the following is an example of a make-or-buy decision? A. Adding a product line B. Dropping a segment C. Subcontracting work in place of using the company's own employees D. Hiring skilled labor in place of unskilled labor

95. M Corporation makes automobile engines. The company's records show the following costs to manufacture part #308FD:
Direct Materials Direct Labor Variable Overhead Fixed Overhead $13 $15 $20 $10

Another manufacturer has offered to supply M Corporation with part #308FD for a cost of $50 per unit. M Corporation uses 1,000 units annually. If M Corporation accepts the offer, what will be the short-run impact on operating income?

A. Decrease in profits equal to $8,000. B. Decrease in profits equal to $2,000. C. Increase in profits equal to $8,000. D. Increase in profits equal to $2,000. 96. For the past 10 years, Husky Company has produced the small gas motors that fit into its main product line of weed cutting machines. As material costs have steadily increased, the Controller of Husky Company is reviewing the decision to continue to make the small motors and has identified the following facts:
1) 2) 3) 4) 5) The equipment used to manufacture the gas motors has a book value of $350,000. The space now occupied by the gas motor manufacturing department could be used to eliminate the need for storage space now being rented. Comparable units can be purchased from an outside supplier for $89.95. Five of the persons who work in the gas motor manufacturing department would be terminated and given eight weeks' severance pay. A $25,000 unsecured note is still outstanding on the equipment used in the manufacturing process.

Which of the items above are relevant to the decision that the controller has to make?

A. 1, 3, and 4 B. 2, 3, and 4 C. 2, 3, 4, and 5 D. 1, 2, 4, and 5 97. Which of the following qualitative factors favors the buy choice in a make or buy decision? A. Maintaining a long-run relationship with suppliers B. The utilization of idle capacity C. Quality control is critical. D. All of the answers are correct.

98. In deciding whether to manufacture a part or buy it from an outside vendor, which of the following represents a cost that is not relevant to the short-run decision? A. direct labor. B. variable overhead. C. fixed overhead that will be avoided if the part is bought from an outside vendor. D. fixed overhead that will continue even if the part is bought from an outside vendor.

99. BLUE Company BLUE Company needs 10,000 units of a certain part to be used in production. If BLUE buys the part from RED Company instead of making it, BLUE could not use the present facilities for another manufacturing activity. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:
Cost to BLUE to make the part: Direct materials Direct labor Variable overhead Fixed overhead applied Cost to buy the part from RED company $7 24 12 15 $58 $53

Refer to BLUE Company. In deciding whether to make or buy the part, BLUE' s total relevant cost to make the part is

A. $352,000. B. $490,000. C. $540,000. D. $580,000.

100. BLUE Company BLUE Company needs 10,000 units of a certain part to be used in production. If BLUE buys the part from RED Company instead of making it, BLUE could not use the present facilities for another manufacturing activity. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the situation presented:
Cost to BLUE to make the part: Direct materials Direct labor Variable overhead Fixed overhead applied Cost to buy the part from RED company $7 24 12 15 $58 $53

Refer to BLUE Company. Which alternative is more desirable for BLUE and by what amount?

A. Buy, $40,000 B. Make, $40,000 C. Buy, $50,000 D. Make, $50,000 101. The Knott Division of Wright Company produces rope. One-third of the Knott Division's output is sold to the Hammock Products division of Wright and the remainder is sold to outside customers. The Knott Division's estimated sales and standard cost data for the fiscal year ending Sept. 30 are as follows:

Sales Variable Costs Fixed Costs Gross Margin Unit Sales

Hammock Products $ 17,500 (10,000) (3,000) 4,500 10,000

Outside Customers $ 40,000 (20,000) (6,000) $ 14,000 20,000

The Knott Division has an opportunity to purchase 10,000 feet of identical quality rope from an outside supplier at a cost of $1.50 per unit on a continuing basis. Assume that the Knott Division cannot sell any additional product to outside customers. Should Wright allow its Knott Division to purchase the rope from the outside supplier, and why?

A. Yes, because buying the rope would save Wright Company $2,500 B. No, because making the rope would save Wright Company $2,500. C. Yes, because buying the rope would save Wright Company $5,000. D. No, because making the rope would save Wright Company $5,000 102. The use of total quality management and flexible manufacturing practices to reduce setup costs enhances a company's ability to use A. economic order quantity methods. B. just-in-time inventory methods. C. first-in, first-out inventory methods. D. last-in, last-out inventory methods.

103. Factors underlying make-or-buy decisions include non-quantitative factors, such as A. dependability of suppliers and the quality of purchased materials. B. dependability of suppliers and the quantity of purchased materials. C. dependability of employees and the quality of manufactured materials. D. dependability of employees and the quantity of purchased materials.

104. Why is differential analysis considered to be an extension of financial modeling which focuses on cash flows? A. Cash is the medium of exchange. B. Cash serves as a common, objective measure of the benefits of alternatives. C. Cash serves as a common, objective measure of the costs of alternatives. D. All of the answers are correct.

105. In the joint production process, the point at which the identifiable products emerge is called the A. joint processing point. B. decision point. C. go-no-go point. D. splitoff point.

106. During the joint production process, the costs incurred up to the splitoff point are known as which of the following? A. joint costs. B. sunk costs. C. fixed costs. D. lost costs.

107. During the joint production process, the costs incurred after the splitoff point are called A. additional processing costs. B. standard processing costs. C. fixed processing costs. D. normal processing costs.

108. Which of the following statements regarding joint cost allocation is not true? A. The sales value of the end products is the most common method used to allocate joint costs. B. Inventory cost and cost of goods sold computations for internal reporting purposes require joint cost allocation. C. Inventory cost and cost of goods sold computations for external reporting purposes require joint cost allocation. D. Joint cost allocation is unnecessary in deciding to sell or process further beyond the split-off point.

109. In producing joint products, which are the relevant costs for decisions to sell or process further? A. Costs incurred up to the splitoff point B. Costs incurred after the splitoff point C. Joint costs D. Sunk costs

110. When producing joint products, what are the relevant costs for a decision to sell or process further? A. Joint costs B. Costs incurred before the splitoff point C. Costs incurred at the splitoff point D. Costs incurred after the splitoff point.

111. Relevant costs for decisions to sell or process further include A. joint costs. B. additional processing costs. C. fixed costs. D. sunk costs.

112. ABC Company has three products that use common facilities. The relevant data concerning these three products follows:

Product Sales Variable costs Contribution Margin Fixed cost Operating loss

A $10,000 5,000 5,000 5,000 0

B $30,000 20,000 10,000 15,000 -$ 5,000

C $40,000 25,000 15,000 30,000 -$15,000

Total $80,000 50,000 30,000 50,000 -$20,000

Fixed costs are allocated common costs. If product line C is dropped, what will be the impact on operating profits?

A. Operating loss will decrease to ($15,000). B. Operating loss will decrease to ($5,000). C. Operating loss will increase to ($35,000). D. There would be no change in operating profits. 113. Ben's Foods has two sales offices: North and South. The company's records report the following information

Sales Direct Costs: Variable Fixed Allocated common costs

North $40,000 $15,000 $15,000 $20,000

South $50,000 $25,000 $10,000 $10,000

Management is considering dropping the North office. What will happen to operating income if North is eliminated?

A. Profit of $10,000 B. Profit of $5,000 C. Loss of $15,000 D. Company would be at break-even. 114. On which of the following factors should the decision to drop a product line should be based? A. the fact that the product line shows a net loss over several periods. B. the ability of the firm to eliminate some fixed costs as a result of dropping the product. C. whether the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost. D. whether the fixed costs that can be avoided by dropping the product line are greater than the contribution margin lost.

115. How is differential analysis used to determine when to add or drop parts of an operation? A. If the differential costs required to provide the product for sale exceeds the differential revenue from the sale of a product, then the product generates profits and the firm should continue its production. B. If the differential costs required to provide the product for sale exceeds the differential revenue from the sale of a product, then the product generates losses and the firm should continue its production. C. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits and the firm should continue its production. D. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits and the firm should discontinue its production.

116. When using differential analysis to determine when to add or drop parts of operations, if the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then A. the product generates losses and the firm should discontinue its production. B. the product generates losses and the firm should continue its production. C. the product generates profits and the firm should discontinue its production. D. the product generates profits and the firm should continue its production.

117. When using differential analysis to determine when to add or drop parts of operations, if the differential revenue from the sale of a product is less than the differential costs required to provide the product for sale, then A. the product generates losses and the firm should discontinue its production. B. the product generates losses and the firm should continue its production. C. the product generates profits and the firm should discontinue its production. D. the product generates profits and the firm should continue its production.

118. Which of the following is the term that represents the costs of preparing machinery for each production run? A. production costs. B. setup costs. C. discretionary costs. D. sunk costs.

119. Which of the following is the term that represents the costs of processing each purchase order? A. production costs. B. setup costs. C. order costs. D. sunk costs.

120. Which of the following is an objective of inventory management? A. minimize the sum of ordering and carrying costs. B. minimize ordering costs and maximize carrying costs. C. maximize the sum of ordering and carrying costs. D. maximize the ordering costs and minimize carrying costs.

121. Which of the following describes the cost of maintaining warehouse facilities? A. carrying costs. B. set-up costs. C. order costs. D. sunk costs.

122. Which of the following terms describes the optimal number of units to order or produce? A. economic order quantity. B. effective order quantity. C. efficient order quantity. D. elastic order quantity.

123. Which of the following is a method of managing production by which the firm attempts to produce each item only as needed for the next step in the production process? A. supply-push. B. just-in-time. C. demand-push. D. economic order quantity.

124. Just-in-time is A. a method of managing production by which the firm attempts to produce each item only as needed for the next step in the production process. B. a method of managing purchasing by which the firm attempts to time purchases so that items arrive just in time for sale. C. a practice that can reduce inventory levels to virtually zero. D. All of the answers are correct.

125. Just-in-time A. is a set of tools. B. adds non-value-added activities to the production process. C. seeks continuous improvement involving all employees. D. All of the answers are correct.

126. Just-in-time A. requires the acquisition of new tracking software. B. has the objective to eliminate all non-value-added activities and reduce costs. C. seeks to increase inventory levels to prevent stock-outs. D. All of the answers are correct.

127. Which of the following represents the performance measures used in a just-in-time system? A. inventory levels. B. materials, people, and machine failures. C. moving and storing. D. All of the answers are correct.

128. Just-in-time systems enable accountants to spend A. more time on inventory valuation for external reporting and less time obtaining data for managerial decisions. B. less time on inventory valuation for external reporting and more time obtaining data for managerial decisions. C. no time on inventory valuation for external reporting and more time obtaining data for managerial decisions. D. less time on inventory valuation for external reporting and no time obtaining data for managerial decisions.

129. Which of the following describes just-in-time inventory methods? A. JIT inventory is a method of managing purchasing only. B. JIT inventory is a method of managing production only C. JIT inventory is a method of sales only. D. JIT inventory is a method of managing purchasing, production, and sales.

130. With just-in-time inventory, what does a firm attempt to do? A. Produce each item only as needed for the next step in the production process. B. Time purchases so that items arrive just in time for production. C. Time purchases so that items arrive just in time for sale. D. All of the answers are correct.

131. In estimating order costs and carrying costs, only __________ costs matter. A. controllable B. differential C. fixed D. variable

132. Which of the following is a method of managing purchasing, production, and sales, by which the firm attempts to produce each item only as needed for the next step in the production process? A. Flexible manufacturing practices B. Just-in-time inventory C. Theory of constraints D. Total quality management

133. Just-in-time inventory is a method of managing purchasing, production, and sales, by which A. the firm attempts to produce each item only as needed for the next step in the production process. B. the firm attempts to time purchases so that items arrive just in time for sale or production. C. the firm attempts to produce each item only as needed for the next step in the production process, and the firm attempts to time purchases so that items arrive just in time for sale or production. D. None of the answers is correct.

134. Which of the following is a method of managing purchasing, production, and sales, by which the firm attempts to time purchases so that items arrive just in time for sale or production? A. total quality management. B. flexible manufacturing practices. C. just-in-time inventory. D. theory of constraints.

135. Which statement is true concerning flexible manufacturing systems? A. Although costs are saved, flexible manufacturing systems increase the amount of time it takes to make changeovers. B. These systems require that accountants spend an increased amount of time on inventory valuation for external reporting. C. These systems enhance a firms ability to utilize just-in-time. D. All of the answers are correct.

136. The optimal solution to a linear programming problem will always be which of the following? A. on the horizontal axis of the graph of a linear programming problem. B. on the vertical axis of the graph of a linear programming problem. C. on a corner of the feasible production area of the graph of a linear programming problem. D. at the origin of the graph of a linear programming problem.

137. The economic order quantity model is used to A. set the target cost. B. set the target profit. C. set the target sales price. D. derive the optimal number of orders or production runs.

138. Linear programming A. finds the product mix that will maximize profits given the constraints. B. provides opportunity costs of constraints. C. allows for sensitivity analysis. D. All of the answers are correct.

139. What is the objective of economic order quantity? A. minimize the sum of carrying costs and order costs for the period. B. maximize the sum of carrying costs and order costs for the period. C. minimize carrying costs and maximize order costs for the period. D. maximize carrying costs and minimize order costs for the period.

140. The economic order quantity is the square root of 2 times A. the demand for the period divided by the cost of carrying one unit in inventory for the period. B. order set up cost divided by the cost of carrying one unit in inventory for the period. C. the cost of carrying one unit in inventory for the period divided by the order set up cost. D. order set up cost times the demand for the period divided by the cost of carrying one unit in inventory for the period.

141. The optimal number of units to order or produce is the economic order quantity, which is the optimal trade-off between which of the following? A. controllable and non-controllable costs. B. fixed costs and variable costs. C. setup (or order) costs and carrying costs. D. sunk and opportunity costs.

142. What is the term that describes the optimal number units to order or produce to achieve the optimal trade-off between setup (or order) costs and carrying costs? A. total quality management. B. flexible manufacturing practices. C. just-in-time inventory. D. the economic order quantity.

143. How does linear programming optimize the use of scarce resources? A. by finding the product mix that will maximize profits given the constraints. B. by providing opportunity costs of constraints. C. by allowing for sensitivity analysis. D. All of the answers are correct.

144. Which of the following optimizes the use of scarce resources? A. Total quality management B. Linear programming C. Just-in-time inventory D. The economic order quantity

145. Which statement is true concerning linear programming? A. Linear programming will find the product mix that will maximize profits given the constraints. B. Linear programming does not provide opportunity costs of constraints. C. Linear programming does not allow for sensitivity analysis. D. Linear programming cannot find the product mix that will maximize profits given the constraints.

146. The economic order quantity model derives the optimal number of which of the following costs? A. fixed and variable costs. B. orders or production runs. C. direct materials and direct labor. D. direct materials and conversion costs.

147. Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expected operations for the year are

Sales (10,000 units @ $20) Manufacturing costs: Variable Fixed Marketing and administrative costs: Variable Fixed

$200,000 $8 per unit $40,000 $3 per unit $20,000

REQUIRED: a. What is the expected level of operating profits? b. Should the company accept a special order for 1,000 units at a selling price of $15 if variable marketing expenses associated with this special order would be $2 per unit? Calculate the incremental profits if the order is accepted. c. Suppose the company received a special order for 3,000 units at a selling price of $15 with no variable marketing expenses. Calculate the impact on operating profits.

a.

Sales Less: Variable costs Contribution margin Less: Fixed costs Operating profit

$200,000 110,000 90,000 60,000 $ 30,000

b.

Incremental sales Less: Incremental costs: Manufacturing Marketing Incremental profits

$15,000 $ 8,000 2,000

10,000 $ 5,000

c.

Since capacity is 12,000, 1,000 of the new 3,000 units would displace regular sales. New 3,000 units: Incremental sales Less: Incremental costs Increase in profits Lost 1,000 units regular sales: Revenue lost Less: Expenses eliminated Net decrease Net difference Thus, the company would be $12,000 better off. $20,000 11,000 $ 9,000 $12,000

$45,000 24,000 $21,000

148. The Star Company has the capacity to produce 5,000 units per year. Its predicted operations for the year are:

Sales 4,000 units @ $20 each Manufacturing costs: Variable Fixed Marketing and administrative costs: Variable Fixed

$ 80,000 $5 per unit $ 10,000 $1 per unit $ 8,000

REQUIRED: a. Prepare a projected income statement for the coming year. b. Should the company accept a special order for 500 units at a selling price of $8? There are no variable marketing and administrative costs for this order and regular sales will not be affected. What is the impact of this decision on profits? c. Suppose there was a one-time set-up fee of $1,000 for the order above; should the special order be accepted? Why?

a.

Sales Variable costs: Manufacturing ($5 4,000) Marketing ($1 4,000) Contribution margin Fixed costs Manufacturing Marketing Operating profit

$80,000 $20,000 4,000

24,000 $56,000

$10,000 8,000

18,000 $38,000

b. Since Star has capacity to sell 5,000 units, only the variable costs of manufacturing are relevant to this decision. Operating profits will increase by the units contribution margin $3($8-$5) times the 500 units sold, or $1,500. c. The incremental contribution margin is $500 after deducting the one-time set up fee of $1,000 (41,500-$1,000 = $500); the company is still better off.

149. What makes a cost relevant for decision making? A cost is relevant if it makes a difference to the decision. Managers must often choose among alternatives. Certain factors will remain constant regardless of which alternative is selected. These factors will not make a difference to the decision and are therefore not considered relevant. Relevant elements are those that will differ between alternatives and should be considered in the analysis.

150. Why aren't fixed costs relevant for most short-term decisions? In the short run, fixed costs usually do not change in total as activity level changes. Often they do not differ between alternatives. If a company decides to use its factory's idle capacity in the manufacturing process or rent it out, it will still pay the same insurance and property taxes. In the long run, a company can sell the factory and thus change the fixed capacity cost. When companies exceed the capacity for a specified relevant range, they often incur additional fixed costs.

151. Compare and contrast the terms relevant costs and non-relevant costs as used in decision making. Relevant costs are costs that are different across alternatives in a decision problem, while non-relevant costs are costs that are the same regardless of the alternatives selected. Therefore, relevant costs are the costs that must be considered in deciding which alternative is the best while non-relevant costs are those costs that need not be considered in decision making.

152. Explain the term incremental cost. Compare and contrast incremental cost to the term variable cost. Incremental costs are defined as the amount by which costs increase if one alternative is chosen instead of another. Incremental costs need not be variable costs. For example, if the decision involves alternative purchases with the same shipping costs, then variable shipping costs are not incremental costs. Conversely, if the decision entails expansion of production capacity that increases fixed manufacturing costs, then that increase in fixed costs is an incremental cost.

153. Are avoidable costs relevant in all situations where discontinuance of a product line or business segment decisions are made? Yes, avoidable costs are always relevant because they represent the costs that can be eliminated when a product line or a business segment is discontinued. As a result, these costs differ between the alternatives of continuing or discontinuing the product line or business segment.

154. How do the value chain and product life cycle influence long-run pricing decisions? Full costs are the total of all the costs incurred by the activities in the value chain. The product life cycle lasts from initial research and development through termination of customer support. Using full costs for pricing decisions can be justified in three circumstances: (1) when a firm enters into a long term contractual relationship to supply a product, (2) for development and production of customized products and contracts with the government, and (3) when managers initially set prices to cover full costs plus a profit and then adjust to reflect market conditions.

155. Explain how to base target costs on target prices. Target pricing is based on customers' perceived value for the product and the prices competitors charge. Target costs equal target prices minus target profits.

156. What is the difference between short-run and long-run pricing decisions? Short-run decisions include pricing for a special order with no long-term implications. Typically the time horizon is six months or less. Long-run decisions include pricing a main product in a major market.

157. Explain the differential principle and how to identify costs for differential analysis. Differential analysis is an extension of financial modeling. The relevant costs for differential analysis are the differential costs. The model focuses on cash flows, because cash is the medium of exchange and because cash serves as a common, objective measure of the benefits and costs of alternatives.

158. Explain why costs must be covered by prices. The differential approach to pricing presumes that the price must at least equal the differential cost of producing and selling the product. In the short run, this practice will result in a positive contribution to covering fixed costs and generating profit. In the long run, this practice will cover all costs because fixed and variable costs are differential in the long run.

159. Describe how to use differential analysis to measure customer profitability. Customer profitability is determined using differential analysis with the customer as the cost object. Customer costs generally fall under four categories: cost to acquire the customer, cost to provide goods and services, cost to maintain customers, and cost to retain customers.

160. Explain the relation between costs and prices. The three major influences on pricing decisions are customers, competitors, and costs. The differential approach to pricing presumes that the price must at least equal the differential cost of producing and selling the product. In the short run, this practice will result in a positive contribution to covering fixed costs and generating a profit. In the long run, this practice will cover all costs because both fixed and variable costs are differential in the long run. Short-run decisions include pricing for a special order with no long-term implications. Typically, the time horizon is six months or less. Long-run decisions include price a main product in a major market. Companies typically use full costs for pricing decisions in three circumstances: (1) when a firm enters into a long-term contractual relationship to supply a product; (2) for development and production of customized products and contracts with the government; and (3) when managers initially set prices to cover full costs plus a profit and then adjust to reflect market conditions.

161. Explain why businesses apply differential analysis to product choice decisions. Most firms can supply a number of goods and services, but manufacturing or distribution constraints limit what firms can produce. In the short run, capacity limitations require choices among alternative.

162. Explain the theory of constraints. The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. The objective is to increase throughput contribution (i.e. sales dollars minus direct materials cost), minimize investments, and manage production by letting the bottleneck set the pace for the rest of operations.

163. Identify the factors underlying make-or-buy decisions. Whether to make or buy depends on cost factors and on nonquantitative factors, such as dependability of suppliers and the quality of purchased materials.

164. Explain how to identify the costs of producing joint products and the relevant costs for decisions to sell or process further. The point at which the identifiable products emerge is the splitoff point. Costs incurred up to the splitoff point are joint costs. Additional processing costs--costs incurred after the splitoff point--are the relevant costs for decisions to sell or process further.

165. Explain the use of differential analysis to determine when to add or drop parts of operations. In the short run, capacity does not change. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits, and the firm should continue its production.

166. Identify the factors of inventory management decisions. The optimal number of units to order or produce is the economic order quantity, which is the optimal trade-off between setup (or order) costs and carrying costs. In estimating order costs and carrying costs, only differential costs matter. Just-in-time inventory is a method of managing purchasing, production, and sales, by which (a) the firm attempts to produce each item only as needed for the next step in the production process, or (b) the firm attempts to time purchases so that items arrive just in time for sale or production. The use of total quality management and flexible manufacturing practices to reduce setup costs enhances companies abilities to use just-in-time inventory.

167. Explain how linear programming optimizes the use of scarce resources. Linear programming (a) finds the product mix that will maximize profits given the constraints, (b) provides opportunity costs of constraints, and (c) allows for sensitivity analysis.

168. Identify the use of economic order quantity model. The economic order quantity model derives the optimal number of orders or production runs.

169. Waldo Mining Company currently is operating at less than 50% of practical capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000. Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals market rebounds and prices once again rise. Management has implemented a cost reduction program over the past year that has been successful in reducing costs to the point that suspension of operations appears to be the only viable alternative. Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month. REQUIRED: Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed? Some nonvariable costs will continue to be incurred despite the temporary closing of the mine. Key employees cannot be discharged since these employees will seek employment elsewhere and replacing them could be quite costly. A skeleton staff would need to be maintained for certain administrative functions. Additionally, the maintenance of building and equipment would need to continue to prevent damage that could be costly to repair. Taxes and insurance would continue to be paid during the shut-down period.

170. New Brands Company is currently operating at 80 percent capacity. Worried about the company's performance, the general manager reviewed the company's operating performance. (All fixed costs are allocated costs.)

Segment Sales Less: variable costs Contribution margin Less: fixed costs Operating profit (loss)

North 30 11 19 9 10

South 40 8 32 12 20

East 20 21 (1) 6 (7)

West 10 8 2 3 (1)

REQUIRED: a. What is the current operating profit for the company as a whole? b. If the manager eliminated the two unprofitable segments, what would be the new operating profit for the company as a whole? c. How can management maximize profits?

a.

b.

A p r o fi t o f $ 2 2. [ $ 1 0 + $ 2 0 + ( $ 7 ) + ( $ 1 )] R $ 51 e m ai ni n g c o nt ri b ut io n m ar gi n T 30 ot al fi x e d c o st s

N $21 e w p r o fi t

c.

Sell only the East segment, because it has a negative contribution margin. The remaining three segments will contribute a total of $53. Thus, after deducting fixed costs of $30, the resulting profit will be $23.

171. Given the following facts for the Histep Company:

Differential costs per order Annual requirement Inventory carrying costs Purchase cost per unit

$20 1,000 units $1.00 per unit per year $10

REQUIRED: a. Complete the following chart:

Average Annual Orders

Order Size

No. of Units in Inventory

Inventory Carrying Costs

Order Costs

Total Costs

2 4 5 8 10 b. Using trial and error, which order size should be used?

c.

Using the economic order quantity formula, what is the optimal number of units in each order?

a.

Average Annual Orders 2 4 5 8 10

Order Size 500 250 200 125 100

No. of Units in Inventory 250 125 100 63 50

Inventory Carrying Costs $250 $125 $100 $63 $50

Order Costs $40 $80 $100 $160 $200

Total Costs $290 $205 $200 $223 $250

b. c.

From the above chart, 5 orders of 200 units each minimize total costs. EOQ = Square Root of [(2)(20)(1000/1)] = 200 units or 5 orders

172. The theory of constraints focuses on three factors; list and discuss these three factors.

1) 2) 3)

Throughput contribution, which is sales dollars minus short-run variable costs. Investments, which are the assets required for production and sales. Other operating costs, which are all operating costs other than short-run variable costs. These costs are incurred to earn throughput contribution, and include salaries and wages that are fixed costs, rent, utilities, and depreciation.

173. The objective of the theory of constraints is to maximize throughput contribution while minimizing investments and operating costs. The theory of constraints assumes a short-run time horizon. How is this accomplished?

1) 2) 3) 4) 5)

Recognize that the bottleneck resource determines throughput contribution of the plant as a whole. Search for and find the bottleneck resource by identifying resources with large quantities of inventory waiting to be worked on. Subordinate all non-bottleneck resources to the bottleneck resource. The needs of the bottleneck resource determine the production schedule of non-bottleneck resources. Increase bottleneck efficiency and capacity. The intent is to increase throughput contribution minus the differential costs of taking such actions. Repeat steps (1) through (4) for new bottlenecks.

174. What are the costs of producing joint products and the relevant costs for decisions to sell or process further? The point at which the identifiable products emerge is the splitoff point. Costs incurred up to the splitoff point are joint costs. Additional processing costs - costs incurred after the splitoff point - are the relevant costs for decisions to sell or process further.

175. What is the theory of constraints and how is it applied? The theory of constraints focuses on revenue and cost management when dealing with bottlenecks. The objective is to increase throughput contribution (sales dollars minus direct material costs), minimize investments, and manage production by letting the bottleneck set the pace for the rest of operations.

176. How is differential analysis used to determine when to add or drop parts of an operation? In the short-run, capacity does not change. If the differential revenue from the sale of a product exceeds the differential costs required to provide the product for sale, then the product generates profits and the firm should continue its production.

177. How is linear programming used to optimize the use of scarce resources? Linear programming (a) finds the product mix that will maximize profits given the constraints, (b) provides opportunity costs of constraints, and (c) allows for sensitivity analysis.

178. Target costing and pricing. Mega Products makes valves for a variety of oil extraction equipment. Mega Products sells the valves to companies that manufacture and sell pumps. The companys market research department has discovered a market for valves that is similar in automated manufacturing equipment in another industry. The market research department indicates that they could sell to these new outlets for $250. Assume Mega Products desires an operating profit of 20 percent of sales. Required: What is the highest acceptable manufacturing cost for which Mega Products would produce the valves? (Mega Products; target costing and pricing.) Price (20% X Price) = Highest acceptable costs $250 $50 = $200. The highest acceptable manufacturing costs for which Mega Products would be willing to produce the valves is $200.

179. Make or buy. Towson, Inc., produces semiconductors of which part no. 200 is a subassembly. Towson, Inc., currently produces part no. 200 in its own shop. The Baltic Company offers to supply it at a cost of $205 per 500 units. An analysis of the costs Towson incurs producing part no. 200 reveals the following information:

Direct (Variable) Material Direct (Variable) Labor Other Variable Costs Fixed Costs(a) Total (a) Fixed overhead comprises largely depreciation on general-purpose equipment and factory buildings.

Cost per 500 Units $ 70 80 20 40 $210

Required: Management of Towson, Inc., needs your advice in answering the following questions: a. Should Towson, Inc., accept the offer from Baltic if Towsons plant is operating well below capacity? b. Should the offer be accepted if Baltic reduces the price to $170 per 500 units? c. Suppose Towson can find other profitable uses for the facilities that it now uses in turning out part no. 200. How would that fact affect the price Towson is willing to pay Baltic?

(Towson, Inc.; make or buy.)

Direct Material Direct Labor Other Variable Costs Total

Variable Cost per 500 Units $ 70 80 20 $170

a. No, since the $205 price is greater than the incremental (variable) cost of $170. b. The company is indifferent. The $170 price is the same as the incremental cost of $170. c. Other alternative profitable uses, if significant enough, would make the offer from Baltic more attractive.

180. Customer profitability analysis. TMBanks management is evaluating the profitability of providing special Christmas Club accounts. The companys financial analysts have developed the following cost information:

Cost to Acquire New Christmas Club Accounts, Including Advertising and Account Setup Costs Cost to Process Transactions and Service These Accounts

$100,000 per year $50 per account per year

On average, each account generates $75 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $100,000 per year cost to acquire accounts includes $10,000 of advertising that TMBank would have done with or without the new accounts. The remainder of the $100,000 costs are differential. Further, you learn that $5 of the $50 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 3,500 new Christmas Club accounts each year. Required: Should TMBank continue to offer these promotional accounts?

(TMBank; customer profitability analysis) Differential revenue from new accounts = $75 X 3,500 = $262,500. Differential costs of new accounts: Acquisition costs = $100,000 $10,000 costs that are not differential = $90,000 Transaction processing costs = ($50 $5 non-differential costs) X 3,500 = $157,500 Differential operating income = $262,500 $90,000 $157,500 = $15,000. The accounts increase the banks operating income, which is a reason to keep the promotional accounts. Management should also consider the likely positive effect of attracting these individuals as long term customers of the bank, which makes the offer even more attractive.

181. Inventory management. Here are facts about inventory costs for Tops Shoes, a retailer:

Differential Costs per Order Total Units Purchased per Year Differential Carrying Costs per Unit of Inventory

$100 50,000 Units $5 per Unit

Required: Prepare a table like Exhibit 7.14 in the text. Find the costs of ordering and carrying inventory for each of the following number of annual orders: 40 orders, 50 orders, 60 orders.

(Tops Shoes; inventory management.)

Annual Order 40 50 60

Order Size in Units (a) Average Number of Units in Inventory 1,250 625 1,000 500 833.33 416.67

Inventory Carrying Costs (b) $ 3,125 2,500 2,083

Order Costs (c) $ 4,000 5,000 6,000

Total Costs $ 7,125 7,500 8,083

(a) 50,000 units/number of orders. (b) Average units in inventory X $5 (c) Number of orders X $100.

182. Inventory management. Here are facts about inventory costs for Winston Wines, a retailer:

Differential Costs per Order Total Units Purchased per Year Differential Carrying Costs per Unit of Inventory

$100 60,000 Units $8 per Unit

Required: Prepare a table like Exhibit 7.14 in the text. Find the costs of ordering and carrying inventory for each of the following number of annual orders: 20 orders, 30 orders, 40 orders.

(Winston Wines; inventory management.)

Annual Order 20 30 40

Order Size in Units (a) Average Number of Units in Inventory 3,000 1,500 2,000 1,000 1,500 750

Inventory Carrying Costs (b) $ 12,000 8,000 6,000

Order Costs (c) $ 2,000 3,000 4,000

Total Costs $14,000 11,000 10,000

(a) 60,000 units/number of orders. (b) Average units in inventory X $8 (c) Number of orders X $100.

183. Customer profitability analysis. ChoiceBanks management is evaluating the profitability of providing special checking accounts to new businesses that start in its town. The companys financial analysts have developed the following cost information:

Cost to Acquire New Commercial Accounts, Including Advertising and Account $200,000 per year Setup Costs Cost to Process Transactions and Service These Accounts $150 per account per year

On average, each account generates $180 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $200,000 per year cost to acquire accounts includes $30,000 of advertising that ChoiceBank would have done with or without the new accounts. The remainder of the $200,000 costs are differential. Further, you learn that $10 of the $150 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 7,000 new business commercial accounts each year. Required: Should ChoiceBank continue to offer these promotional new business accounts?

(ChoiceBank; customer profitability analysis) Differential revenue from new accounts = $180 X 7,000 = $1,260,000. Differential costs of new accounts: Acquisition costs = $200,000 $30,000 costs that are not differential = $170,000 Transaction processing costs = ($150 $10 non-differential costs) X 7,000 = $980,000 Differential operating income = $1,260,000 $170,000 $980,000 = $110,000. The accounts increase the banks operating income, which is a reason to keep the promotional new business accounts. Management should also consider the likely positive effect of attracting these businesses as long term customers of the bank, which makes the offer to new businesses even more attractive.

184. Dropping a product line. Timepiece Products, a clock manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last years operations:

Machine Time per Unit Selling Price per Unit Less Variable Costs per Unit Contribution Margin

Manual 0.4 Hour $20 10 $10

Electric 2.5 Hours $30 14 $16

Quartz 5.0 Hours $50 28 $22

Required: Which line should Timepiece Products drop? (Hint: Compute the contribution per machine hour because machine time is the constraint.)

(Timepiece Products; dropping a product line.)

Machine Time per Unit Contribution Margin Contribution Margin per Machine Hour

Manual 0.4 hr $10.00 $25.00 (a)

Electric 2.5 hr $16.00 $ 6.40(b)

Quartz 5.0 hr $22.00 $ 4.40 (c)

(a) $25 = $10/0.4 hours. (b) $6.40 = $16/2.5 hours. (c) $4.40 = $22/5 hours. Timepiece Products should drop the Quartz line; it has the smallest contribution margin per constrained resource.

185. Dropping a product line. Sparkle Products, a Christmas ornament manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last years operations:

Machine Time per Unit Selling Price per Unit Less Variable Costs per Unit Contribution Margin

Red 0.4 Hour $22 10 $12

Green 2.0 Hours $29 14 $15

Blue 5.0 Hours $50 30 $20

Required: Which line should Sparkle Products drop? (Hint: Compute the contribution per machine hour because machine time is the constraint.)

(Sparkle Products; dropping a product line.)

Machine Time per Unit Contribution Margin Contribution Margin per Machine Hour

Red 0.4 hr $12.00 $30.00 (a)

Green 2.0 hr $15.00 $ 7.50(b)

Blue 5.0 hr $20.00 $ 4.00 (c)

(a) $30 = $12/0.4 hours. (b) $7.50 = $15/2.0 hours. (c) $4.00 = $20/5 hours. Sparkle Products should drop the Blue line; it has the smallest contribution margin per constrained resource.

186. Product mix decision. The Jackson Company has one machine on which it can produce either of two products, Y or Z. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Jackson can sell all output at current prices. Product Y requires one hour of machine time per unit of output and Product Z requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products Y and Z.

Selling Price Materials Labor Allocated Portion of Fixed Costs Total Cost per Unit Gross Margin per Unit

Product Y (per unit) $30 $4 1 14 $19 $11

Product Z (per unit) $55 $6 3 26 $35 $20

Selling costs are the same whether Jackson produces Product Y or Z, or both; you may ignore them. Required: Should Jackson Company plan to produce Product Y, Product Z, or some mixture of both? Why?

(Jackson Company; product mix decision.) Produce Product Y only, because its contribution per machine hour is greater.

Selling Price per Unit Variable Cost per Unit of Materials and Labor* Contribution per Unit to Overhead Machine Hours Required per Unit Contribution per Hour Required

Product Y $ 30 (5) $ 25 1 $ 25

Product Z $ 55 (9) $ 46 2 $ 23

*Fixed costs are not differential and therefore excluded.

187. Product mix decision. The Gulf Shores Company has one machine on which it can produce either of two products, S or T. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Gulf Shores can sell all output at current prices. Product S requires one hour of machine time per unit of output and Product T requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products S and T.

Selling Price Materials Labor Allocated Portion of Fixed Costs Total Cost per Unit Gross Margin per Unit

Product S (per unit) $40 $3 1 12 $16 $24

Product T (per unit) $50 $5 3 22 $30 $20

Selling costs are the same whether Gulf Shores produces Product S or T, or both; you may ignore them. Required: Should Gulf Shores Company plan to produce Product S, Product T, or some mixture of both? Why?

(Gulf Shores Company; product mix decision.) Produce Product S only, because its contribution per machine hour is greater.

Selling Price per Unit Variable Cost per Unit of Materials and Labor* Contribution per Unit to Overhead Machine Hours Required per Unit Contribution per Hour Required

Product S $ 40 (4) $ 36 1 $ 36

Product T $ 50 (8) $ 42 2 $ 21

*Fixed costs are not differential and therefore excluded.

Chapter 8--Capital Expenditure Decisions


Student: ___________________________________________________________________________ 1. Which of the following involves deciding which long-term investments to undertake and how to finance them? A. Operational planning. B. Capital budgeting. C. Investment planning. D. Continuous budgeting.

2. What is the process by which a firm considering acquiring a new plant or new equipment must decide whether to make the investment, then decide how to raise the funds required for the investment? A. zero-based budgeting. B. capital budgeting. C. annual budgeting. D. management by objectives.

3. In making long-term decisions about investing and financing, a firm should do which of the following? A. decide whether to make the investment, then decide how to raise the funds required for the investment. B. decide how to raise the funds required for the investment, then decide whether to make the investment. C. decide how to raise the funds required for the investment at the same time as deciding whether to make the investment. D. None of the above.

4. What does the term capitalmean in the context of making capital expenditure decisions? A. long-term assets. B. the funds with which a firm acquires assets. C. the source of funds typically reported as long-term liabilities and owners equity. D. None of the above.

5. What does the term capital budgetingmean in the context of making capital expenditure decisions? A. the process of choosing assets. B. the process of allocating the funds among assets. C. the process of acquiring the funds to finance the business. D. None of the above.

6. Which of the following is an assumption of capital budgeting? A. The firm can raise new funds at the same opportunity costs as the opportunity cost of the funds it already has on hand. B. The firm can raise new funds at the 30-year Federal funds rate. C. The firm can raise new funds at the prime interest rate. D. The firm can raise new funds at the same interest rate as the mean of the interest rates of the funds it already has on hand.

7. What is the process by which an organization decides on its major programs and the approximate resources to devote to them? A. capital budgeting. B. strategic planning. C. program planning and budgeting. D. zero-based budgeting.

8. Organizational policies, procedures, and performance measures should support accurate estimations, and should consider the effect these factors have on planners when evaluating which of the following? A. capital investment projects. B. raw material purchases. C. hiring temporary labor. D. indirect material purchases.

9. Which statement is true concerning environmental investments such as installing pollution control devices? A. These investments may provide many social benefits, not leading to quantifiable cash flows for the company. B. These investments may provide cash flow benefits by eliminating fines, legal costs, and cleanups. C. These investments are never undertaken unless required by Federal regulations. D. Both a and b.

10. Which of the following is a capital investment decision method that in evaluating investments involving cash flows over time where there is a significant time difference between cash payment and receipt? A. zero-based budgeting B. linear programming. C. discounted cash flow. D. program planning and review.

11. In making capital budgeting decisions, the discounted cash flow method aids in evaluating investments involving cash flows over time where there is a significant time difference between cash payment and receipt. Analysts use which two discounted cash flow methods? A. the future value method and the internal rate of return method. B. the net present value method and the external rate of return method. C. the net present value method and the internal rate of return method. D. the future value method and the external rate of return method.

12. Which interest rate is used by analysts when computing the present value of future cash flows? A. prime interest rate B. Federal funds rate C. discount rate D. real rate

13. The appropriate discount rate that analysts use in computing the present value of future cash flows is comprised of which of the following? A. an increase reflecting the inflation expected to occur over the life of the project. B. a risk factor reflecting the riskiness of the project C. a pure rate of interest reflecting the productive capability of capital assets D. all of the above.

14. Which term describes the interest rate used in computing the present value of future cash flows? A. applicable treasury rate B. discount rate C. income tax rate D. borrowing rate.

15. Which of the following best identifies the reason for using probabilities in the capital-budget decision? A. Uncertainty. B. Cost of capital. C. Time value of money. D. Projects with unequal lives.

16. Competing investment projects where accepting one project eliminates the possibility of taking the remaining projects is referred to as A. common projects. B. mutually exclusive projects. C. joint projects. D. opportunity costs.

17. When is the discount rate used? A. When determining the applicable treasury rate. B. When computing the present value of future cash flows. C. To reduce the price of an investment. D. When determining the future value of the firms cash inflows and outflows.

18. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of an increase reflecting the inflation expected to occur over the life of the project. Thus, A. the higher the expected inflation, the higher should be the discount rate. B. the higher the expected inflation, the lower should be the discount rate. C. the lower the expected inflation, the higher should be the discount rate. D. all of the above.

19. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a risk factor reflecting the riskiness of the project. Thus, A. the greater a projects risk, the higher the discount rate. B. the Federal government has the lowest probability of default, so government bodies usually have the lowest risk premiums. C. a different discount rate would be used to invest a companys funds in a high-risk research and development project rather than low-risk bonds. D. all of the above.

20. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate increased to reflect expected inflation. What is this pure rate called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

21. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate and a premium for the risk of the investment, but no increase to reflect expected inflation. What is this rate called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

22. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate, a premium for the risk of the investment, an increase to reflect expected inflation. What is this rate is called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

23. Which of the following is used to compute the present value of future cash flows when evaluating investments involving cash flows over time where time elapses between cash payment and receipt? A. prime rate plus 1 point. B. United States Federal Reserve Interest Rate. C. firm's cost of capital. D. short-term United States Treasury Bill rate.

24. What is the appropriate decision to make it the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal? A. accept the alternative. B. reject the alternative. C. find a better alternative. D. decrease the firm's cost of capital.

25. If the firm must choose one from a set of mutually exclusive alternatives with the same life span, which alternative should be selected? A. Select the alternative with the largest net present value of cash flows. B. Select the alternative with the smallest net present value of cash flows. C. Select the alternative with the largest net present value of cash inflows. D. Select the alternative with the smallest net present value of cash outflows.

26. The cash flows associated with an investment project include which of the following? A. initial cash flows B. periodic cash flows C. terminal cash flows. D. all of the above.

27. What would the initial cash flows associated with an investment project include? A. asset, freight and installation costs. B. cash proceeds from disposing of existing assets made redundant or unnecessary by the new project. C. income tax effect of gain(loss) on disposal of existing assets. D. all of the above.

28. What would the periodic cash flows associated with an investment project include? A. receipts from sales. B. opportunity costs of undertaking this particular project. C. expenditures for fixed and variable production costs. D. all of the above.

29. What would the periodic cash flows associated with an investment project include? A. savings for fixed and variable production costs B. selling, general, and administrative expenditures and savings in selling, general, and administrative expenditures C. income tax effects resulting from other periodic cash flows D. all of the above.

30. Which of the following would not be included as part of the periodic cash outflows associated with an investment project? A. savings for fixed and variable production costs B. selling, general, and administrative expenditures C. opportunity costs of undertaking this particular project. D. expenditures for fixed and variable production costs.

31. Which of the following would not be included as part of the periodic cash inflows associated with an investment project? A. savings for fixed and variable production costs B. savings in selling, general, and administrative expenditures C. receipts from sales D. opportunity costs of undertaking this particular project.

32. The periodic cash flows associated with an investment project include which of the following? A. savings in taxes caused by deductibility of depreciation on tax return. B. income tax effect of gain(loss) on disposal of existing assets. C. asset and freight costs. D. all of the above.

33. The periodic cash outflows associated with an investment project do not include which of the following? A. savings in taxes caused by deductibility of depreciation on tax return. B. expenditures for fixed production costs. C. expenditures for variable production costs. D. selling, general, and administrative expenditures.

34. The terminal cash flows associated with an investment project include which of the following? A. income tax effects resulting from periodic cash flows. B. loss in tax savings from lost depreciation. C. tax loss on disposal of equipment. D. all of the above.

35. Which of the following are steps needed for using the net present value method for making long-term decisions using discounted cash flows? A. estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. B. discount the future cash flows to the present using the projects discount rate. C. accept or reject the proposed project, or select one from a set of mutually exclusive projects. D. all of the above.

36. Which of the following would not be considered a periodic cash flow? A. Receipts from sales. B. Expenditures for heat, light, and electricity. C. Income taxes paid on taxable income. D. Initial lump-sum investment in a project.

37. If the net present value of a proposed project is positive, then the actual rate of return A. is higher than the cost of capital. B. is lower than the cost of capital. C. is equal to the cost of capital. D. is negative.

38. Because the cost of capital includes a premium reflecting inflation expected to occur over the life of the asset, what should decision-makers do? A. Ignore anticipated inflation on cash flows. B. Consider inflation-adjusted receipts but not expenditures. C. Consider inflation adjusted expenditures but not receipts. D. Consider inflation-adjusted receipts and expenditures.

39. Project A has an expected cash flow of $500,000 at the end of year 5. Project B has an expected cash flow of $100,000 to be received at the end of each year for the next five years. What can be said of the net present value of project A compared to project B? A. They are the same because both cash flows total $500,000 over the lives of the projects. B. Project A is preferred because of the largest lump-sum payment in year 5. C. Project B is preferred because of the periodic payments made consistently throughout the years and are made earlier. D. The both have the same internal rate of return and either should be accepted.

40. A company purchased an asset at a cost of $80,000. Annual operating cash flows are expected to be $30,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. What is the net present value if the cost of capital is 12 percent? (Ignore income taxes.) A. $40,000. B. $24,400. C. $11,120. D. $5,650.

41. A not-for-profit company purchased an asset at a cost of $60,000. Annual operating cash flows are expected to be $20,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. Ignore income taxes. What is the net present value if the cost of capital is 10 percent? A. $(1,960.) B. $3,397. C. $12,400. D. $23,400.

42. The steps of the net present value method for making long-term decisions include A. estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. B. requiring the use of the applicable treasury rate as the discount rate in computing the present value of future cash flows. C. if the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal, reject the alternative. D. ignore depreciation because it is not a cash flow and does not affects the after-tax cash flow.

43. Which of the following is a likely errors in the calculation of net present value? A. the amount of cash flows B. the timing of cash flows C. the discount rate. D. all of the above

44. Which errors will likely have the largest effect on the net present value of changes in assumptions and estimates? A. Errors in predicting the amounts of future cash flows. B. Errors in predicting the timing of future cash flows. C. Errors in predicting the discount rate. D. Errors in sensitivity analysis.

45. The calculation of the net present value of a proposed project does not require estimates of which of the following? A. the amount of future cash flows. B. the timing of future cash flows. C. the cost of capital rate. D. the amount of sunk costs already incurred.

46. A planned factory expansion project has an estimated initial cost of $500,000. Using a discount rate of 20 percent, the present value of the future cost savings from the expansion is $520,000. To yield exactly the 20 percent time-adjusted rate of return, the actual investment expenditure should not exceed the $500,000 estimate by more than A. $160,000. B. $20,000. C. $1,075. D. $43,000.

47. Which statement is true concerning depreciation? A. Depreciation is not a cash flow and does not affect the tax cash flow. B. Depreciation is not a cash flow and does affect the tax cash flow. C. Depreciation is a cash flow and does not affect the tax cash flow. D. Depreciation is a cash flow and does affect the tax cash flow.

48. Which statement is true concerning depreciation? A. Depreciation affects the tax cash flow because it is a deductible expense that affects taxable income. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is affected by income tax laws which specify the allowable methods. D. all of the above.

49. Which statement is true concerning depreciation? A. Depreciation does not affect after-tax cash flow. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is not affected by income tax laws which specify the allowable methods. D. Depreciation is a method used in financial accounting to allocate the cost of an asset over its useful life, but has no application for managerial accounting purposes.

50. Which statement is true concerning depreciation? A. Depreciation does not affect taxable income. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is never relevant for decision making. D. Depreciation is never affected by income tax laws.

51. How would income tax laws affect investment decisions? A. Through their effect on the discount rate allowed. B. Through their effect on the type of investments allowed. C. Through their effect on the internal rate of return allowed. D. Through their effect on the type of depreciation method allowed.

52. Which statement is true concerning depreciation charges? A. Depreciation charges directly affects cash flows. B. Depreciation charges directly affect the after-tax cash flow. C. Depreciation charges can be deducted from a firms tax return. D. all of the above.

53. A firm will depreciate a computer costing $10,000 over five years using the straight-line methods for financial reporting. For tax purposes, the company will use an accelerated method as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 .20 .32 .192 .115 .115 .058

Assuming a tax rate of 40 percent, what is the relevant cash flow for present value analysis associated with the tax savings related to depreciation for Year 2?

A. $1,280. B. $1,667. C. $1,920. D. $3,200.

54. When is the only time an investment analysis needs working capital? A. when the firm must let cash sit idle as a condition of undertaking an investment. B. whenever a capital expenditure decision is made. C. when a firm makes cash payments D. when a firm must show cash received from sales when it collects the cash.

55. In which area will analysts likely err when making capital investment decisions? A. predicting or estimating amounts. B. the timing of cash flows C. the discount rate. D. all of the above.

56. In which area will analysts will likely err when making capital investment decisions? A. the amount of future cash flows B. the timing of cash flows C. the discount rate. D. all of the above.

57. Which of the following is a useful feature of spreadsheet programs? A. Spreadsheet programs reduce the errors in predicting the amounts of future cash flows. B. Spreadsheet programs reduce the errors in predicting the timing of future cash flows. C. Spreadsheet programs reduce the errors in predicting the discount rate. D. Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and estimates.

58. At the end of a five-year life, a company will dispose of an asset and recognize a gain of $6,000. If the company's cost of capital is 15 percent and its tax rate is 30 percent, what is the present value of the future cash flow? A. $14,078. B. $6,000. C. $2,087. D. $895.

59. Which of the following statements is correct regarding capital investments? A. Capital investments should be funded out of excess cash reserves. B. Capital investments should have a positive internal rate of return. C. Capital investments should achieve short-term objectives. D. Capital investments should implement a company's strategy.

60. For the internal rate of return to rank projects the same way as the net present value rule, which condition must exist? A. The cutoff rate used for the internal rate equals the cost of capital. B. Projects are mutually exclusive. C. Projects have different lives. D. There must be more than one internal rate of return.

61. Which of the following is the discount rate that equates the net present value of a series of cash flows to zero? A. investment rate of return. B. external rate of return. C. internal rate of return. D. international rate of return.

62. Which of the following is the discount rate that discounts the future cash flows to a present value just equal to the initial investment? A. investment rate of return. B. external rate of return. C. internal rate of return. D. international rate of return.

63. Which of the following can be calculated using built-in functions in spreadsheet programs? A. external rate of return. B. internal rate of return. C. investment rate of return. D. international rate of return.

64. When using the internal rate of return to evaluate investment alternatives, what rate would an analyst need to specify? A. cutoff rate. B. Federal funds rate. C. prime interest rate. D. time-adjusted rate.

65. When using the internal rate of return to evaluate investment alternatives, which rate would analysts specify? A. hurdle rate. B. Federal funds rate. C. prime interest rate. D. time-adjusted rate.

66. The Information Technology Club, Inc. is considering an investment that requires $20,000 and promises to return $28,090 in 3 years. The company's income tax rate is 40 percent. What is the approximate internal rate of return? A. 8 percent. B. 10 percent. C. 12 percent. D. 15 percent.

67. A project requires an initial investment of $43,000 and has the following expected stream of cash flows:

Year 1 Year 2

$20,000 $30,000

The internal rate of return for the project is closest to

A. 0 percent. B. 10 percent. C. 15 percent. D. 20 percent. 68. What is true concerning the internal rate of return (IRR) method? A. The IRR method determines the discount rate that equates the net present value of the series to the initial investment. B. The IRR method determines the discount rate that equates the net present value of the series to hurdle rate. C. The IRR method determines the discount rate that equates the net present value of the series to cut-off rate. D. The IRR method determines the discount rate that equates the net present value of the series to zero.

69. When using the internal rate of return to evaluate investment alternatives, analysts specify which of the following? A. applicable federal rate. B. cut-off rate. C. risk-free rate. D. prime rate.

70. The decision to accept or reject an investment proposal that computes the investments net present value, using the organizations adjusted cost of capital as the discount rate and undertakes the investment if its net present value is positive, or rejects the investment if its net present value is negative is called the A. net present value method. B. future value method. C. internal rate of return method. D. external rate of return method.

71. The decision to accept or reject an investment proposal can be made using either the internal rate of return method or the net present value method under most circumstances. The following is/are circumstance(s) that may arise where the two methods need not give the same answer and the net present value methods answer is always the correct one. A. mutually exclusive projects. B. projects with different lifetimes. C. projects with intermixing of inflows and outflows. D. all of the above are possible circumstances.

72. Managers are often correct that the company would benefit from advanced manufacturing technology. However, the present value of future cash flows analysis usually results in a negative net present value for the investment because of the A. hurdle rate being set too high and there is a bias toward incremental projects. B. uncertainty about operating cash flows. C. exclusion of benefits that are difficult to quantify. D. all of the above.

73. Managers are often correct that the company would benefit from advanced manufacturing technology. However, the present value of future cash flows analysis usually results in a negative net present value for the investment because of the exclusion of benefits that are difficult to quantify such as A. greater flexibility in the production process. B. shorter cycle times and lead times. C. reduction of non-value-added costs. D. all of the above.

74. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis is A. required by generally accepted accounting principles. B. easy. C. a difficult problem. D. based on quantifiable benefits, only.

75. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis results in rejection of the proposal because the present value of future cash flows are negative. What is/are possible reason(s) for adopting the proposal, anyway? A. to inject new technology into the companys manufacturing operations B. improved quality, greater flexibility, and lower inventories that lead to long-term cash flows. C. intangible benefits in addition to quantifiable benefits should be considered. D. all of the above.

76. What is a general type of long-term capital investment that companies make? A. replacement and minor improvements B. training and development of employees C. advertising campaigns D. all of the above

77. What should a firm do to justify or reject investments in advanced manufacturing systems? A. only uses discounted cash flow analysis. B. only use perfect estimates of tangible costs and benefits. C. establish a high discount or cut-off rate D. make a judgement that recognizes both quantifiable and nonquantifiable benefits.

78. Justification of investments in advanced manufacturing systems is a(n) A. easy problem. B. moderately-easy problem. C. moderately-difficult problem. D. difficult problem.

79. Systematic feedback to planners based on audits creates an environment in which planners will find less temptation to A. deflate their estimates of the benefits associated with their pet projects. B. inflate their estimates of the benefits associated with their pet projects. C. inflate their estimates of the costs associated with their pet projects. D. inflate their estimates of the prestige associated with their pet projects.

80. Which of the following is a behavioral issue that influences capital investment project planners objectivity when making estimates? A. desire to implement a project. B. performance evaluation measures. C. organizational policies and procedures. D. all of the above.

81. Audits that compare the estimates made in the capital budgeting process with the actual results A. identify what estimates were wrong. B. can serve as the basis to identify and reward good planners. C. create an environment in which planners will not be tempted to inflate their estimates of the benefits associated with the project to get it approved. D. all of the above.

82. What is true of audits of the capital investment process? A. Audits of the capital investment process compare the estimates made in the capital budgeting process with the actual results. B. Audits of the capital investment process should never be conducted because of the effect on employee morale. C. Audits of the capital investment process should never be used to identify and reward good planners D. Audits of the capital investment process create an environment in which planners will be tempted to inflate their estimates of the benefits associated with the project to get it approved.

83. What should a firm do to reduce the temptation for planners to inflate their estimates of the benefits associated with the project to get it approved? A. conduct regular capital investment post-audits. B. fire all managers who miss their cost or benefit estimates by more than 10 percent. C. recognize that the capital budgeting process is based on subjective estimates and that managers cannot control the actual project implementation. D. promote project managers that have the largest project(s) or number of employees.

84. Which of the following is not a capital expenditure decision? A. Purchasing a new piece of equipment B. Building a new factory C. Purchasing a computer system D. Issuing common stock

85. The XYZ Company is evaluating a capital budgeting proposal for the current year. The initial investment would be $50,000. It would be depreciated on a straight-line basis over five years with no salvage value. The before-tax annual cash inflow due to this investment is $5,000, and the income tax rate is 40 percent paid in the same year as incurred. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end. What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?

86. Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.

Initial cost Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5

Project P $200,000 $ 93,000 93,000 93,000 0 0

Project Q $235,000 $ 90,000 85,000 75,000 55,000 50,000

Project R $190,000 $ 45,000 55,000 65,000 70,000 75,000

Project S $210,000 $ 40,000 50,000 60,000 65,000 75,000

Net present value Internal rate of return Excess present value index

$23,370 18.7% 1.12

$29,827 17.6% 1.13

$27,233 17.2% 1.14

$(7,854) 10.6% 0.95

Refer to Mercken Industries. Which project(s) will the company choose?

87. Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.

Initial cost Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5

Project P $200,000 $ 93,000 93,000 93,000 0 0

Project Q $235,000 $ 90,000 85,000 75,000 55,000 50,000

Project R $190,000 $ 45,000 55,000 65,000 70,000 75,000

Project S $210,000 $ 40,000 50,000 60,000 65,000 75,000

Net present value Internal rate of return Excess present value index

$23,370 18.7% 1.12

$29,827 17.6% 1.13

$27,233 17.2% 1.14

$(7,854) 10.6% 0.95

Refer to Mercken Industries. If Merken can only accept one project, which will the company choose?

88. Yipann Corporation is reviewing an investment proposal. The initial costs as well as other related data for each year are presented in the schedule below. The cash flows are all assumed to take place at the end of the year. All salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investment's life. Investment Proposal

Year 0 1 2 3 4 5

Initial Cost and Book Value $105,000 70,000 42,000 21,000 7,000 0

Annual Net After-Tax Cash Flows $0 50,000 45,000 40,000 35,000 30,000

Annual Net Income $0 15,000 17,000 19,000 21,000 23,000

Yipann uses a 24 percent after-tax target rate of return for new investment proposals. The discount figures for a 24 percent rate of return are given below: Present Value of $1.00 Received at the End of Period 1 2 3 4 5 6 7 .81 .65 .52 .42 .34 .28 .22 Present Value of $1.00 Received at the End of Each Period .81 1.46 1.98 2.40 2.74 3.02 3.24

What is the net present value of the investment proposal?

89. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 10 percent?

90. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 8 percent?

91. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 6 percent?

92. Johnson Enterprises has three possible projects. Each project requires the same initial investment of $1,000,000. The cash flows are as follows:

Year 1 2 3 4

Project X $1,250,000 1,250,000 1,250,000 1,250,000

Project Y $ 0 0 0 $5,000,000

Project Z $ 500,000 2,000,000 2,000,000 500,000

Ignoring taxes, compute the net present value of each project at a 15 percent cost of capital. Which project should be chosen? Be sure to show your supporting calculations.

93. Crown Corporation Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one of the company's employees, for $5,000. Refer to Crown Corporation. If Crown offers to accept a $1,000 down payment and set up a note receivable for Bob Parsons that calls for four $1,000 payments at the end of each of the next 4 years and Crown uses a 6 percent discount rate, what is the present value of the note?

94. Crown Corporation Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one of the company's employees, for $5,000. Refer to Crown Corporation. What would the present value of the note be if Parsons agreed to the immediate down payment of $1,000 but would like the note for $4,000 to be payable in full at the end of the fourth year? The increased risk associated with the terms of this note changes the discount rate to 8 percent.

95. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 20 percent. Should the project be accepted or rejected?

96. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 12 percent?

97. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Should the company accept the project if the cost of capital is 12 percent? Explain.

98. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the old machine?

99. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the new machine?

100. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of salvage value of the old machine if it is replaced now?

101. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. Would you advise the organization to replace the machine?

102. Latway Company is considering opening a new sales territory. Management expects the initial investment to be $150,000 and subsequent investments of $100,000 and $50,000 at the end of the first and second years. Net cash flow from the sales territory is expected to yield after-tax cash inflow for 5 more years: $75,000 for the first two years and $60,000 for the remaining years. The company's cost of capital is 12 percent. Calculate the net present value of this project.

103. The Nova Company is considering replacing a machine that will cost $240,000. It expects to realize cost savings of $70,000 a year before taxes for each of the next five years. The company will use an accelerated method of depreciation as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

.20 .32 .192 .115 .115 .058

At the end of five years, the company expects the machine will have no salvage value. The company has a tax rate of 45 percent and has determined that 12 percent is the appropriate discount rate to use. Prepare an analysis showing the net present value. Indicate what salvage value is necessary of the old machine in order to justify the purchase of the new machine.

104. What is the role of capital expenditure decisions in the strategic planning process?

105. What behavioral issues are involved in capital budgeting?

106. Why does the capital investment process require audits?

107. Explain the problem of just using cash flow analysis in justifying or rejecting an investment in advanced manufacturing systems.

108. Explain the application of the internal rate of return method of assessing investment alternatives.

109. Describe the steps of the net present value method for making long-term decisions using discounted cash flows. Analyze the effect of income taxes on cash flows.

110. Discuss the advantages of using spreadsheets including sensitivity analysis.

111. What is the reasoning behind the separation of the investing and financing aspects of making long-term decisions?

112. Describe the steps of the net present value method for making long-term decisions using discounted cash flows, and explain the effect of income taxes on cash flows.

113. How does depreciation affect investment decisions?

114. Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting.

115. Describe the internal rate of return method of assessing investment alternatives.

116. Explain why analysts will need more than cash flow analysis to justify or reject an investment.

117. Explain how you might analyze a capital budgeting decision where the cash flow data are nominal (including expected inflation of, say, 4 percent per year) but the quoted cost of capital of 12 percent per year is real (excluding anticipated inflation).

118. Explain how you might analyze a capital budgeting decision where the cash flow data are nominal (including expected inflation of, say, 5 percent per year) but the quoted cost of capital of 11 percent per year is real (excluding anticipated inflation).

119. Island Grills considering purchasing a new machine for $1 million at the end of Year 0 to be put into operation at the beginning of Year 1. The new machine will save $250,000, before taxes, per year from the cash outflows generated by using the old machine. For tax purposes, Island will depreciate the new machine in the following amounts: $100,000 in Year 1, $300,000 in Year 2, and $200,000 per year thereafter until fully depreciated or sold. The new machine will have no salvage value at the end of Year 5. Island expects the new machine to have a market value of $400,000 at the end of three years. If Island acquires the new machine at the end of Year 0, it can sell the old one for $200,000 at that time. The old machine has a tax basis of $300,000 at the end of Year 0. If Island keeps the old machine, the company will depreciate it for tax purposes in the amount of $100,000 per year for three years, when it will have no market value. Island pays taxes at the rate of 40 percent of taxable income and uses a cost of capital of 12 percent in evaluating this possible acquisition. Island has sufficient otherwise-taxable income in Year 0 to save income taxes for each dollar of loss it may incur if it sells the old machine at the end of Year 0. Required: a. Compute the net present value of cash flows from each of the alternatives facing Island Grills. b. Make a recommendation to Island Grills. c. Assume that the cash flows described in the problem for Years 2 through 5 are real, not nominal, amounts, but the 12 percent cost of capital includes an allowance for inflation of 6 percent. Describe how this will affect your analysis. You need not perform new computations.

120. An investment that costs $79,100 will reduce operating costs by $14,000 per year for 10 years. Required: Determine the internal rate of return of the investment (ignoring taxes). Should the investment be undertaken if the required rate of return is 18 percent?

121. An investment that costs $50,000 will return $22,000 per year for five years. Required: Determine the net present value of the investment if the required rate of return is 14 percent (ignoring taxes). Should the investment be undertaken?

122. Jackson Company is considering the investment in a computer system. The company estimates that it will require an initial outlay of $1,200,000. Other cash flows will be as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 ($600,000) 150,000 620,000 725,000 800,000

Required: Assuming the company limits its analysis to five years, should the company consider this investment if the required rate of return is 12 percent?

123. Rainer Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the projects net present value? Based on this analysis, should the company proceed with the project?

124. Falcon Companys most recent capital expenditure project will require an initial investment of $600,000 and is expected to generate the following cash flows: Year 1 $100,000 Year 2 $250,000 Year 3 $250,000 Year 4 $200,000 Year 5 $100,000 Required: If the required rate of return is 20% and taxes are ignored, what is the projects net present value?

125. Berringer Company is considering an investment that will generate cash revenues of $100,000 per year for 8 years, and have cash expenses of $70,000 per year for 8 years. The cost of the asset is $80,000, and it will be depreciated using straight-line depreciation over its 8 year life. Berringer pays income taxes at a rate of 30%. The cost of capital is 12% Required: a. b. Prepare an analysis showing the annual after tax cash flow associated with this asset. Compute the net present value of this investment using the cash flow you computed in a above.

126. Wilcox Company is considering an investment that will generate cash revenues of $120,000 per year for 8 years, and have cash expenses of $60,000 per year for 8 years. The cost of the asset is $120,000, and it will be depreciated using straight-line depreciation over its 8 year life. Berringer pays income taxes at a rate of 30%. The cost of capital is 12% Required: a. b. Prepare an analysis showing the annual after tax cash flow associated with this asset. Compute the net present value of this investment using the cash flow you computed in a above.

Chapter 8--Capital Expenditure Decisions Key

1. Which of the following involves deciding which long-term investments to undertake and how to finance them? A. Operational planning. B. Capital budgeting. C. Investment planning. D. Continuous budgeting.

2. What is the process by which a firm considering acquiring a new plant or new equipment must decide whether to make the investment, then decide how to raise the funds required for the investment? A. zero-based budgeting. B. capital budgeting. C. annual budgeting. D. management by objectives.

3. In making long-term decisions about investing and financing, a firm should do which of the following? A. decide whether to make the investment, then decide how to raise the funds required for the investment. B. decide how to raise the funds required for the investment, then decide whether to make the investment. C. decide how to raise the funds required for the investment at the same time as deciding whether to make the investment. D. None of the above.

4. What does the term capitalmean in the context of making capital expenditure decisions? A. long-term assets. B. the funds with which a firm acquires assets. C. the source of funds typically reported as long-term liabilities and owners equity. D. None of the above.

5. What does the term capital budgetingmean in the context of making capital expenditure decisions? A. the process of choosing assets. B. the process of allocating the funds among assets. C. the process of acquiring the funds to finance the business. D. None of the above.

6. Which of the following is an assumption of capital budgeting? A. The firm can raise new funds at the same opportunity costs as the opportunity cost of the funds it already has on hand. B. The firm can raise new funds at the 30-year Federal funds rate. C. The firm can raise new funds at the prime interest rate. D. The firm can raise new funds at the same interest rate as the mean of the interest rates of the funds it already has on hand.

7. What is the process by which an organization decides on its major programs and the approximate resources to devote to them? A. capital budgeting. B. strategic planning. C. program planning and budgeting. D. zero-based budgeting.

8. Organizational policies, procedures, and performance measures should support accurate estimations, and should consider the effect these factors have on planners when evaluating which of the following? A. capital investment projects. B. raw material purchases. C. hiring temporary labor. D. indirect material purchases.

9. Which statement is true concerning environmental investments such as installing pollution control devices? A. These investments may provide many social benefits, not leading to quantifiable cash flows for the company. B. These investments may provide cash flow benefits by eliminating fines, legal costs, and cleanups. C. These investments are never undertaken unless required by Federal regulations. D. Both a and b.

10. Which of the following is a capital investment decision method that in evaluating investments involving cash flows over time where there is a significant time difference between cash payment and receipt? A. zero-based budgeting B. linear programming. C. discounted cash flow. D. program planning and review.

11. In making capital budgeting decisions, the discounted cash flow method aids in evaluating investments involving cash flows over time where there is a significant time difference between cash payment and receipt. Analysts use which two discounted cash flow methods? A. the future value method and the internal rate of return method. B. the net present value method and the external rate of return method. C. the net present value method and the internal rate of return method. D. the future value method and the external rate of return method.

12. Which interest rate is used by analysts when computing the present value of future cash flows? A. prime interest rate B. Federal funds rate C. discount rate D. real rate

13. The appropriate discount rate that analysts use in computing the present value of future cash flows is comprised of which of the following? A. an increase reflecting the inflation expected to occur over the life of the project. B. a risk factor reflecting the riskiness of the project C. a pure rate of interest reflecting the productive capability of capital assets D. all of the above.

14. Which term describes the interest rate used in computing the present value of future cash flows? A. applicable treasury rate B. discount rate C. income tax rate D. borrowing rate.

15. Which of the following best identifies the reason for using probabilities in the capital-budget decision? A. Uncertainty. B. Cost of capital. C. Time value of money. D. Projects with unequal lives.

16. Competing investment projects where accepting one project eliminates the possibility of taking the remaining projects is referred to as A. common projects. B. mutually exclusive projects. C. joint projects. D. opportunity costs.

17. When is the discount rate used? A. When determining the applicable treasury rate. B. When computing the present value of future cash flows. C. To reduce the price of an investment. D. When determining the future value of the firms cash inflows and outflows.

18. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of an increase reflecting the inflation expected to occur over the life of the project. Thus, A. the higher the expected inflation, the higher should be the discount rate. B. the higher the expected inflation, the lower should be the discount rate. C. the lower the expected inflation, the higher should be the discount rate. D. all of the above.

19. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a risk factor reflecting the riskiness of the project. Thus, A. the greater a projects risk, the higher the discount rate. B. the Federal government has the lowest probability of default, so government bodies usually have the lowest risk premiums. C. a different discount rate would be used to invest a companys funds in a high-risk research and development project rather than low-risk bonds. D. all of the above.

20. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate increased to reflect expected inflation. What is this pure rate called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

21. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate and a premium for the risk of the investment, but no increase to reflect expected inflation. What is this rate called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

22. The appropriate discount rate that analysts use in computing the present value of future cash flows is composed of a pure interest rate, a premium for the risk of the investment, an increase to reflect expected inflation. What is this rate is called? A. risk-free rate. B. real interest rate. C. nominal interest rate. D. none of the above.

23. Which of the following is used to compute the present value of future cash flows when evaluating investments involving cash flows over time where time elapses between cash payment and receipt? A. prime rate plus 1 point. B. United States Federal Reserve Interest Rate. C. firm's cost of capital. D. short-term United States Treasury Bill rate.

24. What is the appropriate decision to make it the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal? A. accept the alternative. B. reject the alternative. C. find a better alternative. D. decrease the firm's cost of capital.

25. If the firm must choose one from a set of mutually exclusive alternatives with the same life span, which alternative should be selected? A. Select the alternative with the largest net present value of cash flows. B. Select the alternative with the smallest net present value of cash flows. C. Select the alternative with the largest net present value of cash inflows. D. Select the alternative with the smallest net present value of cash outflows.

26. The cash flows associated with an investment project include which of the following? A. initial cash flows B. periodic cash flows C. terminal cash flows. D. all of the above.

27. What would the initial cash flows associated with an investment project include? A. asset, freight and installation costs. B. cash proceeds from disposing of existing assets made redundant or unnecessary by the new project. C. income tax effect of gain(loss) on disposal of existing assets. D. all of the above.

28. What would the periodic cash flows associated with an investment project include? A. receipts from sales. B. opportunity costs of undertaking this particular project. C. expenditures for fixed and variable production costs. D. all of the above.

29. What would the periodic cash flows associated with an investment project include? A. savings for fixed and variable production costs B. selling, general, and administrative expenditures and savings in selling, general, and administrative expenditures C. income tax effects resulting from other periodic cash flows D. all of the above.

30. Which of the following would not be included as part of the periodic cash outflows associated with an investment project? A. savings for fixed and variable production costs B. selling, general, and administrative expenditures C. opportunity costs of undertaking this particular project. D. expenditures for fixed and variable production costs.

31. Which of the following would not be included as part of the periodic cash inflows associated with an investment project? A. savings for fixed and variable production costs B. savings in selling, general, and administrative expenditures C. receipts from sales D. opportunity costs of undertaking this particular project.

32. The periodic cash flows associated with an investment project include which of the following? A. savings in taxes caused by deductibility of depreciation on tax return. B. income tax effect of gain(loss) on disposal of existing assets. C. asset and freight costs. D. all of the above.

33. The periodic cash outflows associated with an investment project do not include which of the following? A. savings in taxes caused by deductibility of depreciation on tax return. B. expenditures for fixed production costs. C. expenditures for variable production costs. D. selling, general, and administrative expenditures.

34. The terminal cash flows associated with an investment project include which of the following? A. income tax effects resulting from periodic cash flows. B. loss in tax savings from lost depreciation. C. tax loss on disposal of equipment. D. all of the above.

35. Which of the following are steps needed for using the net present value method for making long-term decisions using discounted cash flows? A. estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. B. discount the future cash flows to the present using the projects discount rate. C. accept or reject the proposed project, or select one from a set of mutually exclusive projects. D. all of the above.

36. Which of the following would not be considered a periodic cash flow? A. Receipts from sales. B. Expenditures for heat, light, and electricity. C. Income taxes paid on taxable income. D. Initial lump-sum investment in a project.

37. If the net present value of a proposed project is positive, then the actual rate of return A. is higher than the cost of capital. B. is lower than the cost of capital. C. is equal to the cost of capital. D. is negative.

38. Because the cost of capital includes a premium reflecting inflation expected to occur over the life of the asset, what should decision-makers do? A. Ignore anticipated inflation on cash flows. B. Consider inflation-adjusted receipts but not expenditures. C. Consider inflation adjusted expenditures but not receipts. D. Consider inflation-adjusted receipts and expenditures.

39. Project A has an expected cash flow of $500,000 at the end of year 5. Project B has an expected cash flow of $100,000 to be received at the end of each year for the next five years. What can be said of the net present value of project A compared to project B? A. They are the same because both cash flows total $500,000 over the lives of the projects. B. Project A is preferred because of the largest lump-sum payment in year 5. C. Project B is preferred because of the periodic payments made consistently throughout the years and are made earlier. D. The both have the same internal rate of return and either should be accepted.

40. A company purchased an asset at a cost of $80,000. Annual operating cash flows are expected to be $30,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. What is the net present value if the cost of capital is 12 percent? (Ignore income taxes.) A. $40,000. B. $24,400. C. $11,120. D. $5,650.

41. A not-for-profit company purchased an asset at a cost of $60,000. Annual operating cash flows are expected to be $20,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. Ignore income taxes. What is the net present value if the cost of capital is 10 percent? A. $(1,960.) B. $3,397. C. $12,400. D. $23,400.

42. The steps of the net present value method for making long-term decisions include A. estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. B. requiring the use of the applicable treasury rate as the discount rate in computing the present value of future cash flows. C. if the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal, reject the alternative. D. ignore depreciation because it is not a cash flow and does not affects the after-tax cash flow.

43. Which of the following is a likely errors in the calculation of net present value? A. the amount of cash flows B. the timing of cash flows C. the discount rate. D. all of the above

44. Which errors will likely have the largest effect on the net present value of changes in assumptions and estimates? A. Errors in predicting the amounts of future cash flows. B. Errors in predicting the timing of future cash flows. C. Errors in predicting the discount rate. D. Errors in sensitivity analysis.

45. The calculation of the net present value of a proposed project does not require estimates of which of the following? A. the amount of future cash flows. B. the timing of future cash flows. C. the cost of capital rate. D. the amount of sunk costs already incurred.

46. A planned factory expansion project has an estimated initial cost of $500,000. Using a discount rate of 20 percent, the present value of the future cost savings from the expansion is $520,000. To yield exactly the 20 percent time-adjusted rate of return, the actual investment expenditure should not exceed the $500,000 estimate by more than A. $160,000. B. $20,000. C. $1,075. D. $43,000.

47. Which statement is true concerning depreciation? A. Depreciation is not a cash flow and does not affect the tax cash flow. B. Depreciation is not a cash flow and does affect the tax cash flow. C. Depreciation is a cash flow and does not affect the tax cash flow. D. Depreciation is a cash flow and does affect the tax cash flow.

48. Which statement is true concerning depreciation? A. Depreciation affects the tax cash flow because it is a deductible expense that affects taxable income. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is affected by income tax laws which specify the allowable methods. D. all of the above.

49. Which statement is true concerning depreciation? A. Depreciation does not affect after-tax cash flow. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is not affected by income tax laws which specify the allowable methods. D. Depreciation is a method used in financial accounting to allocate the cost of an asset over its useful life, but has no application for managerial accounting purposes.

50. Which statement is true concerning depreciation? A. Depreciation does not affect taxable income. B. Depreciation should be considered in the cash flow analysis. C. Depreciation is never relevant for decision making. D. Depreciation is never affected by income tax laws.

51. How would income tax laws affect investment decisions? A. Through their effect on the discount rate allowed. B. Through their effect on the type of investments allowed. C. Through their effect on the internal rate of return allowed. D. Through their effect on the type of depreciation method allowed.

52. Which statement is true concerning depreciation charges? A. Depreciation charges directly affects cash flows. B. Depreciation charges directly affect the after-tax cash flow. C. Depreciation charges can be deducted from a firms tax return. D. all of the above.

53. A firm will depreciate a computer costing $10,000 over five years using the straight-line methods for financial reporting. For tax purposes, the company will use an accelerated method as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 .20 .32 .192 .115 .115 .058

Assuming a tax rate of 40 percent, what is the relevant cash flow for present value analysis associated with the tax savings related to depreciation for Year 2?

A. $1,280. B. $1,667. C. $1,920. D. $3,200.

54. When is the only time an investment analysis needs working capital? A. when the firm must let cash sit idle as a condition of undertaking an investment. B. whenever a capital expenditure decision is made. C. when a firm makes cash payments D. when a firm must show cash received from sales when it collects the cash.

55. In which area will analysts likely err when making capital investment decisions? A. predicting or estimating amounts. B. the timing of cash flows C. the discount rate. D. all of the above.

56. In which area will analysts will likely err when making capital investment decisions? A. the amount of future cash flows B. the timing of cash flows C. the discount rate. D. all of the above.

57. Which of the following is a useful feature of spreadsheet programs? A. Spreadsheet programs reduce the errors in predicting the amounts of future cash flows. B. Spreadsheet programs reduce the errors in predicting the timing of future cash flows. C. Spreadsheet programs reduce the errors in predicting the discount rate. D. Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and estimates.

58. At the end of a five-year life, a company will dispose of an asset and recognize a gain of $6,000. If the company's cost of capital is 15 percent and its tax rate is 30 percent, what is the present value of the future cash flow? A. $14,078. B. $6,000. C. $2,087. D. $895.

59. Which of the following statements is correct regarding capital investments? A. Capital investments should be funded out of excess cash reserves. B. Capital investments should have a positive internal rate of return. C. Capital investments should achieve short-term objectives. D. Capital investments should implement a company's strategy.

60. For the internal rate of return to rank projects the same way as the net present value rule, which condition must exist? A. The cutoff rate used for the internal rate equals the cost of capital. B. Projects are mutually exclusive. C. Projects have different lives. D. There must be more than one internal rate of return.

61. Which of the following is the discount rate that equates the net present value of a series of cash flows to zero? A. investment rate of return. B. external rate of return. C. internal rate of return. D. international rate of return.

62. Which of the following is the discount rate that discounts the future cash flows to a present value just equal to the initial investment? A. investment rate of return. B. external rate of return. C. internal rate of return. D. international rate of return.

63. Which of the following can be calculated using built-in functions in spreadsheet programs? A. external rate of return. B. internal rate of return. C. investment rate of return. D. international rate of return.

64. When using the internal rate of return to evaluate investment alternatives, what rate would an analyst need to specify? A. cutoff rate. B. Federal funds rate. C. prime interest rate. D. time-adjusted rate.

65. When using the internal rate of return to evaluate investment alternatives, which rate would analysts specify? A. hurdle rate. B. Federal funds rate. C. prime interest rate. D. time-adjusted rate.

66. The Information Technology Club, Inc. is considering an investment that requires $20,000 and promises to return $28,090 in 3 years. The company's income tax rate is 40 percent. What is the approximate internal rate of return? A. 8 percent. B. 10 percent. C. 12 percent. D. 15 percent.

67. A project requires an initial investment of $43,000 and has the following expected stream of cash flows:

Year 1 Year 2

$20,000 $30,000

The internal rate of return for the project is closest to

A. 0 percent. B. 10 percent. C. 15 percent. D. 20 percent. 68. What is true concerning the internal rate of return (IRR) method? A. The IRR method determines the discount rate that equates the net present value of the series to the initial investment. B. The IRR method determines the discount rate that equates the net present value of the series to hurdle rate. C. The IRR method determines the discount rate that equates the net present value of the series to cut-off rate. D. The IRR method determines the discount rate that equates the net present value of the series to zero.

69. When using the internal rate of return to evaluate investment alternatives, analysts specify which of the following? A. applicable federal rate. B. cut-off rate. C. risk-free rate. D. prime rate.

70. The decision to accept or reject an investment proposal that computes the investments net present value, using the organizations adjusted cost of capital as the discount rate and undertakes the investment if its net present value is positive, or rejects the investment if its net present value is negative is called the A. net present value method. B. future value method. C. internal rate of return method. D. external rate of return method.

71. The decision to accept or reject an investment proposal can be made using either the internal rate of return method or the net present value method under most circumstances. The following is/are circumstance(s) that may arise where the two methods need not give the same answer and the net present value methods answer is always the correct one. A. mutually exclusive projects. B. projects with different lifetimes. C. projects with intermixing of inflows and outflows. D. all of the above are possible circumstances.

72. Managers are often correct that the company would benefit from advanced manufacturing technology. However, the present value of future cash flows analysis usually results in a negative net present value for the investment because of the A. hurdle rate being set too high and there is a bias toward incremental projects. B. uncertainty about operating cash flows. C. exclusion of benefits that are difficult to quantify. D. all of the above.

73. Managers are often correct that the company would benefit from advanced manufacturing technology. However, the present value of future cash flows analysis usually results in a negative net present value for the investment because of the exclusion of benefits that are difficult to quantify such as A. greater flexibility in the production process. B. shorter cycle times and lead times. C. reduction of non-value-added costs. D. all of the above.

74. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis is A. required by generally accepted accounting principles. B. easy. C. a difficult problem. D. based on quantifiable benefits, only.

75. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis results in rejection of the proposal because the present value of future cash flows are negative. What is/are possible reason(s) for adopting the proposal, anyway? A. to inject new technology into the companys manufacturing operations B. improved quality, greater flexibility, and lower inventories that lead to long-term cash flows. C. intangible benefits in addition to quantifiable benefits should be considered. D. all of the above.

76. What is a general type of long-term capital investment that companies make? A. replacement and minor improvements B. training and development of employees C. advertising campaigns D. all of the above

77. What should a firm do to justify or reject investments in advanced manufacturing systems? A. only uses discounted cash flow analysis. B. only use perfect estimates of tangible costs and benefits. C. establish a high discount or cut-off rate D. make a judgement that recognizes both quantifiable and nonquantifiable benefits.

78. Justification of investments in advanced manufacturing systems is a(n) A. easy problem. B. moderately-easy problem. C. moderately-difficult problem. D. difficult problem.

79. Systematic feedback to planners based on audits creates an environment in which planners will find less temptation to A. deflate their estimates of the benefits associated with their pet projects. B. inflate their estimates of the benefits associated with their pet projects. C. inflate their estimates of the costs associated with their pet projects. D. inflate their estimates of the prestige associated with their pet projects.

80. Which of the following is a behavioral issue that influences capital investment project planners objectivity when making estimates? A. desire to implement a project. B. performance evaluation measures. C. organizational policies and procedures. D. all of the above.

81. Audits that compare the estimates made in the capital budgeting process with the actual results A. identify what estimates were wrong. B. can serve as the basis to identify and reward good planners. C. create an environment in which planners will not be tempted to inflate their estimates of the benefits associated with the project to get it approved. D. all of the above.

82. What is true of audits of the capital investment process? A. Audits of the capital investment process compare the estimates made in the capital budgeting process with the actual results. B. Audits of the capital investment process should never be conducted because of the effect on employee morale. C. Audits of the capital investment process should never be used to identify and reward good planners D. Audits of the capital investment process create an environment in which planners will be tempted to inflate their estimates of the benefits associated with the project to get it approved.

83. What should a firm do to reduce the temptation for planners to inflate their estimates of the benefits associated with the project to get it approved? A. conduct regular capital investment post-audits. B. fire all managers who miss their cost or benefit estimates by more than 10 percent. C. recognize that the capital budgeting process is based on subjective estimates and that managers cannot control the actual project implementation. D. promote project managers that have the largest project(s) or number of employees.

84. Which of the following is not a capital expenditure decision? A. Purchasing a new piece of equipment B. Building a new factory C. Purchasing a computer system D. Issuing common stock

85. The XYZ Company is evaluating a capital budgeting proposal for the current year. The initial investment would be $50,000. It would be depreciated on a straight-line basis over five years with no salvage value. The before-tax annual cash inflow due to this investment is $5,000, and the income tax rate is 40 percent paid in the same year as incurred. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end. What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?

After-tax cash flow Factor Present value

$13,000 3.352 $43,576

Since the investment is $50,000, the net present value is negative. The project should be rejected.

86. Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.

Initial cost Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5

Project P $200,000 $ 93,000 93,000 93,000 0 0

Project Q $235,000 $ 90,000 85,000 75,000 55,000 50,000

Project R $190,000 $ 45,000 55,000 65,000 70,000 75,000

Project S $210,000 $ 40,000 50,000 60,000 65,000 75,000

Net present value Internal rate of return Excess present value index

$23,370 18.7% 1.12

$29,827 17.6% 1.13

$27,233 17.2% 1.14

$(7,854) 10.6% 0.95

Refer to Mercken Industries. Which project(s) will the company choose?

Only two of the projects can be selected because three would require more than $450,000 of capital. Project S can immediately be dismissed because it has a negative net present value (NPV). Using the NPV and the profitability index methods, the best investments appear to be Q and R. The internal rate of return (IRR) method indicates that P is preferable to R. However, it assumes a reinvestment of funds during years 4 and 5 at the IRR (18 percent). Given that reinvestment will be at the rate of at most 12 percent, the IRR decision criterion appears to be unsound. Thus, projects Q and R should be selected.

87. Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.

Initial cost Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5

Project P $200,000 $ 93,000 93,000 93,000 0 0

Project Q $235,000 $ 90,000 85,000 75,000 55,000 50,000

Project R $190,000 $ 45,000 55,000 65,000 70,000 75,000

Project S $210,000 $ 40,000 50,000 60,000 65,000 75,000

Net present value Internal rate of return Excess present value index

$23,370 18.7% 1.12

$29,827 17.6% 1.13

$27,233 17.2% 1.14

$(7,854) 10.6% 0.95

Refer to Mercken Industries. If Merken can only accept one project, which will the company choose?

Project Q because it has the highest internal rate of return. Because unused funds cannot be invested at a rate greater than 12 percent, the company should select the investment with the highest net present value. Project Q is preferable to Project R because its return on the incremental $45,000 invested ($235,000 cost of Q - $190,000 cost of R) is greater than 12 percent.

88. Yipann Corporation is reviewing an investment proposal. The initial costs as well as other related data for each year are presented in the schedule below. The cash flows are all assumed to take place at the end of the year. All salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investment's life. Investment Proposal

Year 0 1 2 3 4 5

Initial Cost and Book Value $105,000 70,000 42,000 21,000 7,000 0

Annual Net After-Tax Cash Flows $0 50,000 45,000 40,000 35,000 30,000

Annual Net Income $0 15,000 17,000 19,000 21,000 23,000

Yipann uses a 24 percent after-tax target rate of return for new investment proposals. The discount figures for a 24 percent rate of return are given below: Present Value of $1.00 Received at the End of Period 1 2 3 4 5 6 7 .81 .65 .52 .42 .34 .28 .22 Present Value of $1.00 Received at the End of Each Period .81 1.46 1.98 2.40 2.74 3.02 3.24

What is the net present value of the investment proposal?

$10,450 calculated as follows: $50,000 .81 = $45,000 .65 = $40,000 .52 = $35,000 .42 = $30,000 .34 = Total Less investment

$ 40,500 $ 29,250 $ 20,800 $ 14,700 $ 10,200 $115,450 105,000 $ 10,450

89. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 10 percent? No, the net present value is -80 ((-20,000) + (8,000 2.49)).

90. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 8 percent? Yes, the net present value is +640 ((-20,000) + (8,000 2.58)).

91. Use this information to answer the following questions: An investment of $20,000 today will yield $8,000 a year at the end of the next three years. Refer to the above information. Will the project be accepted at a cost of capital of 6 percent? Yes, the net present value is +1360 ((20,000) + (8,000 2.67)).

92. Johnson Enterprises has three possible projects. Each project requires the same initial investment of $1,000,000. The cash flows are as follows:

Year 1 2 3 4

Project X $1,250,000 1,250,000 1,250,000 1,250,000

Project Y $ 0 0 0 $5,000,000

Project Z $ 500,000 2,000,000 2,000,000 500,000

Ignoring taxes, compute the net present value of each project at a 15 percent cost of capital. Which project should be chosen? Be sure to show your supporting calculations.

Project X, net present value is $2,562,500 (-$1,000,000 + ($1,250,000 2.85)). Project Y, net present value is $1,850,000 (-$1,000,000 + ($5,000,000 .57)). Project Z, net present value is $2,560,000.
500,000 .87 = 2,000,000 .76 = 2,000,000 .66 = 500,000 .57 = Total Investment Net Present Value $435,000 1,520,000 1,320,000 285,000 $3,560,000 -$1,000,000 $2,560,000

Project X is superior because it has the greatest net present value.

93. Crown Corporation Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one of the company's employees, for $5,000. Refer to Crown Corporation. If Crown offers to accept a $1,000 down payment and set up a note receivable for Bob Parsons that calls for four $1,000 payments at the end of each of the next 4 years and Crown uses a 6 percent discount rate, what is the present value of the note? Given a discount rate of 6 percent, the appropriate present value is $3,465 ($1,000 payment 3.465).

94. Crown Corporation Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one of the company's employees, for $5,000. Refer to Crown Corporation. What would the present value of the note be if Parsons agreed to the immediate down payment of $1,000 but would like the note for $4,000 to be payable in full at the end of the fourth year? The increased risk associated with the terms of this note changes the discount rate to 8 percent. $2,940 (.735 $4,000)

95. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 20 percent. Should the project be accepted or rejected?

$150,000 .833 = $130,000 .694 = $180,000 .579 = $150,000 .482 = Present value Less investment Net present value

$124,950 90,220 104,220 72,300 $391,690 400,000 $ (8,310)

Since NPV is negative, the investment should be rejected.

96. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 12 percent?

$150,000 .893 = $130,000 .797 = $180,000 .712 = $150,000 .636 = Present value Less Investment Net Present Value

$133,950 103,610 128,160 95,400 $461,120 400,000 $ 61,120

97. Eastchester Products Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate the following cash inflows for the next 4 years:

Year 1 2 3 4

Cash Inflow at End of Year $150,000 $130,000 $180,000 $150,000

Refer to Eastchester Products. Should the company accept the project if the cost of capital is 12 percent? Explain.

Present value Less investment NPV

$461,120 400,000 $ 61,120

Since the NPV is positive, the investment should be accepted.

98. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the old machine? $4,000 3.791 = $15,164.

99. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the new machine? $2,000 3.791 = $7,582.

100. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. What is the present value of salvage value of the old machine if it is replaced now? As given, $1,500.

101. Feed the Hungry Foundation Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine. Refer to Feed the Hungry Foundation. Would you advise the organization to replace the machine? Net cash outflow associated with keeping: Net cash outflow associated with replacing:
Cash operating costs Initial cash outlay Salvage value - old Net cash outflow - replacing $ 7,582 10,000 -1,500 $16,082

$15,164

Since the net cash outflow of keeping is less than replacing, the Foundation should keep the machine.

102. Latway Company is considering opening a new sales territory. Management expects the initial investment to be $150,000 and subsequent investments of $100,000 and $50,000 at the end of the first and second years. Net cash flow from the sales territory is expected to yield after-tax cash inflow for 5 more years: $75,000 for the first two years and $60,000 for the remaining years. The company's cost of capital is 12 percent. Calculate the net present value of this project.

Initial investment End of year 1 End of year 2 Present value of cash outflows

$150,000 100,000 50,000

1.000 .893 .797

$150,000 89,300 39,850 $279,150

Cash inflows: Year 1 & 2 Year 3 Year 4 Year 5 Present value of cash inflows

$75,000 60,000 60,000 60,000

1.690 .712 .636 .567

$126,750 42,720 38,160 34,020 $241,650

Net present value

($241,650 - 279,150)

($37,500)

103. The Nova Company is considering replacing a machine that will cost $240,000. It expects to realize cost savings of $70,000 a year before taxes for each of the next five years. The company will use an accelerated method of depreciation as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

.20 .32 .192 .115 .115 .058

At the end of five years, the company expects the machine will have no salvage value. The company has a tax rate of 45 percent and has determined that 12 percent is the appropriate discount rate to use. Prepare an analysis showing the net present value. Indicate what salvage value is necessary of the old machine in order to justify the purchase of the new machine.

Cash Savings $70,000 70,000 70,000 70,000 70,000

Tax Deprec $48,000 76,800 46,080 27,600 27,600 13,920 Present

Taxable Income $22,000 - 6,800 23,920 42,400 42,400 -13,920 value

Tax $9,900 -3,060 10,764 19,080 19,080 -6,264

Cash Flow $60,100 73,060 59,236 50,920 50,920 -6,264

Discount Factor .893 .797 .712 .636 .567 .507

Present Value $53,669 58,229 42,176 32,385 28,872 3,176 $218,507

The net present value is $218,507 - $240,000 = ($21,493). Thus, the salvage value of the old machine must be at least $21,493 after tax in order to justify the investment.

104. What is the role of capital expenditure decisions in the strategic planning process? Strategic planning provides the context for capital investments. For capital investments to make sense, they must implement a company's strategy.

105. What behavioral issues are involved in capital budgeting? Planners cannot help but be influenced by their environment. Factors such as desire to implement a project and performance evaluation measures may influence their objectivity in making estimates. Therefore, it is important that organizational policies, procedures, and performance measures support accurate estimations, and that the effect these factors have on planners be considered when evaluating capital investment projects.

106. Why does the capital investment process require audits? Comparing the estimates made in the capital budgeting process with the actual results provides several advantages. Audits identify what estimates were wrong. Managers can use audits to identify and reward good planners. Audits create an environment in which planners will not be tempted to inflate their estimates of the benefits associated with the project to get it approved.

107. Explain the problem of just using cash flow analysis in justifying or rejecting an investment in advanced manufacturing systems. Justification of investments in advanced manufacturing systems is a difficult problem. Discounted cash flow analysis is the appropriate method for analyzing investments in advanced manufacturing systems, but implementing the analysis presents a challenge. Managers should strive to make the best possible estimates of costs and benefits and ultimately make a judgement that recognizes the nonquantifiable benefits as well.

108. Explain the application of the internal rate of return method of assessing investment alternatives. The internal rate of return (IRR) method, sometimes called the time-adjusted rate of return method, of a series of cash flows is the discount rate that equates the net present value of the series to zero. The calculation of the internal rate can be done with many calculators or with the use of a spreadsheet. When using the internal rate of return to evaluate investment alternatives, analysts specify a cut-off rate.

109. Describe the steps of the net present value method for making long-term decisions using discounted cash flows. Analyze the effect of income taxes on cash flows. Discounted cash flow methods aid in evaluating investments involving cash flows over time where there is a time difference between cash payment and receipt. Estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. The discount rate is the interest rate used in computing the present value of future cash flows. If the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal, except the alternative. Although depreciation is not a cash flow, it affects the tax cash flow because it is a deductible expense that affects taxable income, and should be considered in the cash flow analysis. Income tax laws affect investment decisions through their effect on the type of depreciation method allowed.

110. Discuss the advantages of using spreadsheets including sensitivity analysis. Some error is likely in the amount predicted or estimated for the amount or timing of cash flows or the discount rate. Errors in predicting the amounts of future cash flows will likely have the largest impact of the three items. In general, if a project appears marginally desirable for a given discount rate, it will ordinarily not be grossly undesirable for slightly higher rates. A useful feature of spreadsheet programs is that they help the user see the effect on the net present value of changes in assumptions and estimates.

111. What is the reasoning behind the separation of the investing and financing aspects of making long-term decisions? Capital budgeting involves deciding which long-term, or capital, investments to undertake and how to finance them. A firm considering acquiring a new plant or new equipment must first decide whether to make the investment then decide how to raise the funds required for the investment.

112. Describe the steps of the net present value method for making long-term decisions using discounted cash flows, and explain the effect of income taxes on cash flows. Discounted cash flow (DCF) methods aid in evaluating investments involving cash flows over time where time elapses between cash payment and receipt. Estimate the amounts of future cash inflows and future cash outflows in each period for each alternative under consideration. Use for the discount rate-that is, the interest rate used in computing the present value of future cash flows-the firm's cost of capital. If the present value of the future cash inflows exceeds the present value of the future cash outflows for a proposal, accept the alternative.

113. How does depreciation affect investment decisions? Although depreciation charges do not directly affect cash flows, the indirectly affect the after-tax cash flow because firms can deduct depreciation expenses on their tax returns, reducing cash outflow for taxes. Hence, the analyst should consider depreciation in any after-tax cash flow analysis. Income tax laws affect investment decisions through their effect on the type of depreciation method allowed.

114. Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting. Analysts will likely err in predicting or estimating amounts, or the timing of cash flows, or the discount rate. Errors in predicting the amounts of future cash flows will likely have the largest impact of the three items. In general, if a project appears marginally desirable for a given discount rate, it will ordinarily not be grossly undesirable for slightly higher rates. Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and estimates.

115. Describe the internal rate of return method of assessing investment alternatives. The internal rate of return (IRR), sometimes called the time-adjusted rate of return, of a series of cash flows is the discount rate that equates the net present value of the series to zero. Spreadsheet programs have built-in functions to calculate the internal rate of return. When using the internal rate of return to evaluate investment alternatives, analysts specify a cutoff rate.

116. Explain why analysts will need more than cash flow analysis to justify or reject an investment. Justification of investments in advanced manufacturing systems is a difficult problem. Discounted cash flow analysis is the appropriate method for analyzing such an investment, but implementing the analysis presents a challenge. Managers should strive to make the best possible estimates of costs and benefits and ultimately make a judgment that recognizes the nonquantifiable benefits as well.

117. Explain how you might analyze a capital budgeting decision where the cash flow data are nominal (including expected inflation of, say, 4 percent per year) but the quoted cost of capital of 12 percent per year is real (excluding anticipated inflation). Increase the quoted cost of capital from 12 percent to 16.5 [= (1.12 X 1.04) 1] percent per year.

118. Explain how you might analyze a capital budgeting decision where the cash flow data are nominal (including expected inflation of, say, 5 percent per year) but the quoted cost of capital of 11 percent per year is real (excluding anticipated inflation). Increase the quoted cost of capital from 11 percent to 16.6 [= (1.11 X 1.05) 1] percent per year.

119. Island Grills considering purchasing a new machine for $1 million at the end of Year 0 to be put into operation at the beginning of Year 1. The new machine will save $250,000, before taxes, per year from the cash outflows generated by using the old machine. For tax purposes, Island will depreciate the new machine in the following amounts: $100,000 in Year 1, $300,000 in Year 2, and $200,000 per year thereafter until fully depreciated or sold. The new machine will have no salvage value at the end of Year 5. Island expects the new machine to have a market value of $400,000 at the end of three years. If Island acquires the new machine at the end of Year 0, it can sell the old one for $200,000 at that time. The old machine has a tax basis of $300,000 at the end of Year 0. If Island keeps the old machine, the company will depreciate it for tax purposes in the amount of $100,000 per year for three years, when it will have no market value. Island pays taxes at the rate of 40 percent of taxable income and uses a cost of capital of 12 percent in evaluating this possible acquisition. Island has sufficient otherwise-taxable income in Year 0 to save income taxes for each dollar of loss it may incur if it sells the old machine at the end of Year 0. Required: a. Compute the net present value of cash flows from each of the alternatives facing Island Grills. b. Make a recommendation to Island Grills. c. Assume that the cash flows described in the problem for Years 2 through 5 are real, not nominal, amounts, but the 12 percent cost of capital includes an allowance for inflation of 6 percent. Describe how this will affect your analysis. You need not perform new computations. a. Analysis of Alternatives 1. First alternative is to use the old machinery for three more years, disposing of it at the end of Year 3.

Cash Flow Item Income Taxes Saved because of Depreciation of $100,000 each Year Sum of Above End of Year 0 Present Value Factor at 12 Percent Present Value Factor X Cash Flow Present Value at End of Year 0

End of Year 0

1 $40,000

2 $40,000

3 $40,000

$0 1.00000 $0 $96,073

$40,000 0.89286 $35,714

$40,000 0.79719 $31,888

$40,000 0.71178 $28,471

2. Second alternative is to acquire the new machinery and sell the old machinery at the end of Year 0.

Cash Flow Item Investment in New Machinery Sell Old Machinery Taxes Saved at 40 Percent Caused by Loss (= $300,000 $200,000) on Sale of Old Machinery Operating Cash Flows (Savings of Outflows). Income Taxes on Above at 40 Percent Income Taxes Saved because of Depreciation each Year Cash Proceeds of Disposal of New Machine at End of Year 3 No Gain or Loss on Disposal; Hence Taxes Paid on Gain/Loss at Disposal Sum of Above End of Year 0 Present Value Factor at 12 Percent Present Value Factor X Cash Flow Present Value at End of Year 0

End of Year 0 $ (1,000,000) 200,000 40,000

$250,000 (100,000) 40,000

$250,000 (100,000) 120,000

$ 250,000 (100,000) 80,000

400,000

$ (760,000) 1.00000

$ 190,000 0.89286

$ 270,000 0.79719

$ 630,000 0.71178

$ (760,000) $ 73,305

$169,643

$215,241

$ 448,421

b. Recommendation: Use old machinery, do not buy new machinery. c. If the 12-percent figure includes an allowance for inflation, but the cash flows used in the second alternative do not, then we should reduce the discount rate used in the second alternative to remove the inflation component of 6 percent. The correct rate to use is 5.66 percent [= (1.12/1.06) 1]. If we reduce the discount rate to 5.66 percent, then the net present value of the second alternative increases to $185,267 and the new equipment becomes worthwhile.

120. An investment that costs $79,100 will reduce operating costs by $14,000 per year for 10 years. Required: Determine the internal rate of return of the investment (ignoring taxes). Should the investment be undertaken if the required rate of return is 18 percent? The investment should not be undertaken because the internal rate of return of 12% is less than the required rate of 18%. Initial outlay $79,100 Annuity amount 14,000 Outlay annuity amount = PV of annuity factor 5.6500 Internal rate of return 12%

121. An investment that costs $50,000 will return $22,000 per year for five years. Required: Determine the net present value of the investment if the required rate of return is 14 percent (ignoring taxes). Should the investment be undertaken? The net present value is positive so the project should be undertaken.

Cash Flow ($50,000) 22,000

PV Factor 1.0000 3.4331

Total ($50,000) 75,528.20 $25,528.20

122. Jackson Company is considering the investment in a computer system. The company estimates that it will require an initial outlay of $1,200,000. Other cash flows will be as follows:
Year 1 Year 2 Year 3 Year 4 Year 5 ($600,000) 150,000 620,000 725,000 800,000

Required: Assuming the company limits its analysis to five years, should the company consider this investment if the required rate of return is 12 percent?

The NPV is approximately zero with a required rate of return of 7 percent. Thus, the IRR is approximately 7%. Given that the required rate of return is 12%, the company should not consider the investment in the computer system unless significant nonquantifiable factors prevail. PV at 7%
Cash Flow $(1,200,000) (600,000) 150,000 620,000 725,000 800,000 PV Factor 1.0000 0.9346 0.8734 0.8163 0.7629 0.7130 Total $(1,200,000) (560,760) 131,010 506,106 553,103 570,400 $ (141)

123. Rainer Company is considering a project that will require an initial investment of $750,000 and will return $200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the projects net present value? Based on this analysis, should the company proceed with the project?

($200,000 * 3.8897) - $750,000 = $27,940 Yes, since the net present value is greater than zero, the company should proceed with the project. 124. Falcon Companys most recent capital expenditure project will require an initial investment of $600,000 and is expected to generate the following cash flows: Year 1 $100,000 Year 2 $250,000 Year 3 $250,000 Year 4 $200,000 Year 5 $100,000 Required: If the required rate of return is 20% and taxes are ignored, what is the projects net present value?

Cash Flow $(600,000) 100,000 250,000 250,000 200,000 100,000

PV Factor 1.0000 0.8333 0.6944 0.5787 0.4823 0.4019 Net present value

Total $(600,000) 83,330 173,600 144,675 96,460 40,190 $ (61,745)

125. Berringer Company is considering an investment that will generate cash revenues of $100,000 per year for 8 years, and have cash expenses of $70,000 per year for 8 years. The cost of the asset is $80,000, and it will be depreciated using straight-line depreciation over its 8 year life. Berringer pays income taxes at a rate of 30%. The cost of capital is 12% Required: a. b. a.
Cash Revenues Less: Cash Expenses Less: Depreciation Income before tax Less: Taxes Net Income + Depreciation Cash Flow $ 100,000 70,000 10,000 20,000 6,000 $ 14,000 10,000 $24,000

Prepare an analysis showing the annual after tax cash flow associated with this asset. Compute the net present value of this investment using the cash flow you computed in a above.

b.

($80,000) + [24,000 X 4.9676] = $39,222

126. Wilcox Company is considering an investment that will generate cash revenues of $120,000 per year for 8 years, and have cash expenses of $60,000 per year for 8 years. The cost of the asset is $120,000, and it will be depreciated using straight-line depreciation over its 8 year life. Berringer pays income taxes at a rate of 30%. The cost of capital is 12% Required: a. b. a.
Cash Revenues Less: Cash Expenses Less: Depreciation Income before tax Less: Taxes Net Income + Depreciation Cash Flow $ 120,000 60,000 15,000 45,000 13,500 $ 31,500 15,000 $46,500

Prepare an analysis showing the annual after tax cash flow associated with this asset. Compute the net present value of this investment using the cash flow you computed in a above.

b.

($120,000) + [46,500 X 4.9676] = $110,993

Chapter 9--Profit Planning and Budgeting


Student: ___________________________________________________________________________ 1. What is a short-term operating budget? A. managements quantitative action plan for the coming year. B. shareholders quantitative action plan for the coming year. C. investment bankers quantitative action plan for the coming year.s quantitative action plan for the coming year. D. employees quantitative action plan for the coming year.

2. Which of the following statements is true concerning the operating budget? A. The operating budget is a formal short-run plan of action. B. The operating budget identifies capital projects. C. The operating budget states the strategy for achieving organizational goals. D. all of the above.

3. Which of the following is included in an organizational plan? A. organizational goals. B. the strategic long-range profit plan. C. the master budget or tactical short-range profit plan. D. all of the above.

4. Which of the following describe the broad objectives management establishes and company employees work to achieve? A. organizational goals. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

5. Which of the following represent the specific, detailed steps required to achieve the goals of an organization including cost control and market share? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

6. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for the next year? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. none of the above.

7. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for the next year? A. master budget. B. tactical short-range profit plan C. static budget D. all of the above.

8. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for a series of years? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

9. What is the income statement portion of the master budget known as? A. profit plan. B. tactical short-range profit plan. C. static budget. D. all of the above.

10. Which of the following statements is true concerning budgeting? A. Budgeting is a dynamic process that ties together goals, plans, decision making, and employee performance evaluation B. Budgeting is required by generally accepted accounting principles. C. Budgeting is a static process that ties together goals, plans, decision making, and employee performance evaluation D. none of the above.

11. What is the continuous process of measuring products, services, or activities against competitors performance? A. benchmarking. B. competitive analysis. C. performance evaluation D. none of the above.

12. Which of the following terms describes the use of input from lower-management and middle-management employees in developing budgets? A. benchmarking. B. participative budgeting. C. bottom-up budgeting. D. motivational budgeting.

13. Which of the following terms describes a method of yielding information for developing budgets that employees know but managers do not? A. benchmarking. B. participative budgeting. C. bottom-up budgeting. D. motivational budgeting.

14. Which of the following is not a benefit of participative or grassroots budgeting? A. The process of participative budgeting can be time consuming. B. Participating budgeting enhances employee motivation and acceptance of goals. C. Participative budgeting provides information that enables employees to associate rewards and penalties with performance. D. Participative budgeting yields information that employees know but managers do not know.

15. What is the cultural impact on budgeting? A. Lower-level managers in Mexico, Singapore, and Hong Kong are more likely to accept top-down budgets. B. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to not accept top-down budgets. C. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to want to participate in budgeting, D. all of the above

16. What is the cultural impact on budgeting? A. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are less willing to accept the fact that top managers are more powerful than they. B. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to not accept top-down budgets. C. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to want to participate in budgeting, D. all of the above

17. Observers of Japanese industry report that Japanese managers and owners have created team orientation or esprit de corps with considerable A. goal congruence B. employee individualism C. self-actualization D. all of the above

18. Goal congruence occurs if members of an organization have incentives to perform in whos interest? A. the firms interest. B. their own economic interest. C. the national interest. D. all of the above

19. The master budget for governmental organizations differs from that of public companies because the budget for governmental organizations provides the A. organizations authority to produce and sell goods. B. organizations authority to produce and provide services. C. legal authorization for expenditures. D. all of the above

20. Many companies have streamlined the budget process, developed business plans, and allowed analysts to be proactive in monitoring results by A. using hundreds of spreadsheets B. compiling and verifying data from multiple sources C. implementing a web-based enterprise-wide budgeting solution D. adopting a two-year budgeting cycle.

21. Who often encounter ethical dilemmas in the budgeting process because they are involved in the creation of the budget, and their performances are subsequently evaluated by comparing the budget to actual results? A. customers B. advertising firms C. shareholders D. managers

22. How can budgets motivate people to perform because? A. Budgets are mandated by the Department of Labor and included in labor union contracts. B. Budgets are authorized by generally accepted accounting principles. C. Budgets are required by the Securities and Exchange Commission. D. Budgets are standards or targets for people to achieve.

23. Which of the following would be a responsibility of a manager in a cost centers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

24. A manufacturing division of a company would most likely be evaluated as a(n) A. cost center. B. investment center. C. revenue center. D. asset center.

25. Which of the following departments is likely to be an investment center? A. Machining department B. Food products division C. Personnel department D. Accounting department

26. Which of the following departments would not be classified as a profit center? A. Hardware department B. Mens shoes department C. Accounting department D. Automotive department

27. Which of the following are not controlled by a manager of a profit center? A. Revenues B. Costs C. Investments D. Profits

28. Which of the following departments would not be a cost center? A. advertising department B. city police department C. building and grounds department D. sales department

29. Based on the types of costs incurred, what are the two categories of cost centers? A. engineered cost centers and discretionary cost centers. B. direct cost centers and indirect cost centers. C. sunk cost centers and opportunity cost centers. D. short-term cost centers and long-term cost centers.

30. What cost centers have input-output relationships sufficiently well established so that a particular set of inputs will provide a predictable and measurable set of outputs? A. engineered cost centers. B. direct cost centers. C. opportunity cost centers. D. discretionary cost centers.

31. What cost centers do not have input-output relationships sufficiently well established so that a particular set of inputs will provide a predictable and measurable set of outputs? A. engineered cost centers. B. direct cost centers. C. opportunity cost centers. D. discretionary cost centers.

32. Which of the following costs are the responsibility of revenue center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

33. Which of the following costs are the responsibility of profit center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

34. Which of the following costs are the responsibility of investment center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

35. Who are responsible for (1) costs in cost centers, (2) revenues in revenue centers, (3) both costs and revenues in profit centers, and (4) revenues, costs, and assets in an investment center? A. Shareholders. B. Employees. C. Managers. D. Vendors.

36. Which of the following statements is true regarding the master budget? A. The master budget is a blueprint of the planned operations of a firm for a period. B. The master budget begins with the production budget. C. The master budget does not require a sales forecast. D. all of the above.

37. Which of the following statements is true concerning the flexible budget? A. The flexible budget shows the expected relation between costs and volume. B. The flexible budget has a fixed cost component which is expected to be incurred regardless of the level of activity. C. The flexible budget has a variable cost per unit of activity component where variable costs change in total as the level of activity changes. D. all of the above.

38. For an organizational unit to be considered a responsibility center, what must be true? A. The unit must be separable and identifiable. B. The unit must lack financial measures of performance. C. The unit must lack control over an activity. D. all of the above.

39. For which types of operations do firms design operational planning and control systems? A. manufacturing operations only. B. marketing and manufacturing operations only. C. manufacturing and other activities but not marketing. D. manufacturing, marketing, and other activities.

40. An investment center's performance is most likely to be affected by which of the following? A. an increase is sales volume. B. a decrease in expenses. C. an increase in interest rates. D. all of the above.

41. What is the primary difference between a fixed budget and a flexible budget? A. A fixed budget includes only fixed costs, while a flexible budget includes only variable costs. B. A fixed budget is concerned only with future acquisitions of fixed assets, while a flexible budget is concerned with expenses, which vary with sales. C. A fixed budget cannot be changed after the period begins, while a flexible budget can be changed after the period begins. D. A fixed budget is a plan for a single level of sales (or other measure of activity), while a flexible budget consists of several plans, one for each of several levels of sales (or other measure of activity).

42. When production levels are expected to increase within a relevant range, and a flexible budget is used, what effects would be anticipated with respect to each of the following? Fixed Costs Per Unit A. Decrease B. Decrease C. No Change D. No Change Variable Costs Per Unit Increase No Change No Change Increase

43. Which statements is correct concerning a flexible budget? A. A flexible budget is not appropriate when costs and expenses are affected by fluctuations in volume limits. B. A flexible budget is appropriate for any relevant level of activity. C. A flexible budget is appropriate for control of factory overhead but not for control of direct materials and direct labor. D. A flexible budget is appropriate for control of direct materials and direct labor but not for control of factory overhead.

44. A flexible budget is appropriate for a which of the following types of costs? Direct-Labor Budget A. No B. No C. Yes D. Yes Marketing Budget No Yes No Yes

45. If a company wishes to establish a factory overhead budget system in which estimated costs can be derived directly from estimates of activity levels, which type of budget should it prepare? A. zero-based budget. B. flexible budget. C. discretionary budget. D. fixed budget.

46. Julia Electronics LLC is preparing a flexible budget for the coming year and the following maximum capacity estimates for the furniture division are available

Direct labor hours Variable factory overhead Fixed factory overhead

60,000 $150,000 $240,000

Assume that Julia Electronics LLC 's normal capacity is 80% of maximum capacity. What would be the total factory overhead rate, based on direct labor hours, in a flexible budget at normal capacity?

A. $6.00. B. $6.50. C. $7.50. D. $8.13. 47. In what type of responsibility centers are the managers responsible for costs, only? A. Cost. B. Revenue. C. Profit. D. Investment.

48. In what type of responsibility centers are the managers responsible for revenues, only? A. Cost B. Revenue C. Profit D. Investment

49. In what type of responsibility centers are the managers responsible for revenues, costs, and assets? A. Cost. B. Revenue. C. Profit. D. Investment.

50. If direct labor cost is variable, then it is considered to be which type of cost in the cost hierarchy? A. product-level cost. B. facility-level cost. C. unit-level cost. D. all of the above.

51. If direct labor cost is fixed, then it is considered to be which type of cost in the cost hierarchy? A. product-level cost. B. facility-level cost. C. unit-level cost. D. either a or b

52. Marketing costs include expenditures for salaries, advertising, and sales office costs would be classified as which of the following type of activity? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

53. Marketing costs include expenditures for sales commissions (2% of sales dollars) and shipping costs (20 cents per unit) are variable marketing costs and considered to be which of the following? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

54. Central corporate administrative costs are fixed and considered to be which of the following? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

55. Jones Corporation estimates manufacturing costs as follows for the coming year:

Direct Materials Direct Labor Manufacturing Overhead Variable Fixed

$15 per unit $10 per unit $ 5 per unit $150,000 for the year

If 25,000 units are produced, what is the total manufacturing costs?

A. $275,000 B. $300,000 C. $775,000 D. $900,000 56. When is the master budget prepared? A. before the budget period begins. B. after the budget period begins, but before it ends. C. about half way through the budget period begins. D. at the end or after the budget period ends.

57. When is the flexible budget is prepared? A. before the budget period begins. B. after the budget period begins, but before it ends. C. about half way through the budget period begins. D. after the budget period ends.

58. What is often the most difficult aspect of budgeting? A. forecasting sales because it involves considerable subjectivity. B. forecasting sales because it involves considerable objectivity. C. forecasting production requirements because it involves considerable subjectivity. D. forecasting production requirements because it involves considerable objectivity.

59. To reduce subjectivity in the budgeting process and gather as much information as possible, management often uses which of the following method(s)? A. asking sales staff and/or market researchers for an estimate of the future periods sales. B. using the Delphi technique and trend analysis. C. entering past sales data into a regression model to obtain a statistical estimate of factors affecting sales (econometric model). D. all of the above.

60. To reduce subjectivity in the budgeting process and gather as much information as possible, management often enters past sales data into which of the following regression models to obtain a statistical estimate of factors affecting sales? A. econometric model. B. input-output model. C. Delphi model D. none of the above.

61. In determining the Production Budget, what is the formula for computing the quantity of each product to be produced? A. Units to Be Produced = Number of Units to Be Sold + Desired Units in Ending Inventory - Units in Beginning Inventory B. Number of Units to Be Sold = Units to Be Produced + Desired Units in Ending Inventory - Units in Beginning Inventory C. Units to Be Produced = Number of Units to Be Sold + Units in Beginning Inventory - Desired Units in Ending Inventory D. none of the above.

62. If management desires finished goods inventory to decrease over the period, what can be said about the relationship between units produced and units sold? A. Units produced > units sold. B. Units produced < units sold. C. Units produced = units sold. D. Nothing can be said without more information.

63. Marshall Company's sales budget shows the following projections for the year ending December 31

Quarter First Second Third Fourth Total

Units 60,000 80,000 45,000 55,000 240,000

Inventory at December 31 of the prior year was budgeted at 18,000 units. The quantity of finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales. How much should the production budget show for units to be produced during the first quarter?

A. 24,000. B. 48,000. C. 66,000. D. 72,000.

64. Lydia Company projects the following sales in units for the third quarter of the year:
Month June July August Units to be Sold 10,000 15,000 7,500

If the company wishes to maintain an inventory balance of 5,000 units and has 2,500 units on hand at the end of June, how many units will need to be produced in July?

A. 10,000 B. 12,500 C. 15,000 D. 17,500 65. Which statement is true concerning direct materials? A. are materials traceable to individual units produced. B. costs are almost always variable. C. costs are almost always fixed. D. a and b

66. Which statement is true concerning direct labor? A. is work traceable directly to particular units of production. B. uses estimates which allow for normal, periodic rest periods, yet motivates employees to perform efficiently. C. could be fixed, if the firm is a high-tech company having only a few workers, or variable D. all of the above.

67. Which statement is true concerning variable manufacturing overhead costs? A. Variable manufacturing costs vary with units produced. B. Variable manufacturing costs such as indirect labor and supplies are considered to be batch-level activities. C. Variable manufacturing costs such as power are considered to be a true variable cost. D. all of the above

68. Variable manufacturing overhead costs such as power are considered to be which of the following? A. a semivariable, or mixed, cost having both variable and fixed components. B. a variable cost with variable components, only. C. a fixed cost with fixed components, only. D. all of the above

69. Which of the following statements is true concerning the variable component of power cost? A. This cost would be categorized as a unit level activity. B. This cost would be categorized as a cost which varies in total with the unit level of output. C. This cost would be categorized as a facility-related cost. D. both a and b

70. Which of the following statements is true concerning the fixed component of power cost? A. This would be categorized as a unit level activity. B. This is a cost that would be incurred regardless of the level of output. C. This would be categorized as a facility-related cost. D. both b and c

71. Manufacturing Overhead costs such as maintenance, rent, insurance, and depreciation should be categorized as which of the following? A. fixed overhead costs and facility-level activities. B. variable overhead costs and facility-level activities. C. fixed overhead costs and product-level activities. D. variable overhead costs and product-level activities.

72. Which of the following statements is correct regarding marketing travel costs? A. Marketing travel costs are incurred for customer-related activities. B. Marketing travel costs are fixed in the long-term. C. Marketing travel costs are variable in the short-term. D. both a and b

73. Which cost can be cut for a period of time because their reduction presents no serious short-term threats to production and marketing? A. discretionary costs. B. committed costs. C. sunk costs. D. opportunity costs.

74. In profit planning and budgeting, which statement is true concerning a favorable variance? A. A favorable variance would increase operating profit, holding all other things constant. B. A favorable variance is always positive (good), holding all other things constant. C. A favorable variance would decrease operating profit, holding all other things constant. D. A favorable variance is always negative (bad), holding all other things constant.

75. In profit planning and budgeting, which statement is true concerning an unfavorable variance? A. An unfavorable variance would decrease operating profit, holding all other things constant. B. An unfavorable variance is always negative (bad), holding all other things constant. C. both a and b D. none of the above.

76. Which of the following describes the difference in operating profits from the flexible budget to the master budget results from the difference between budgeted sales volume and actual sales volume? A. the margin of safety. B. a profit-volume variance. C. a sales volume variance. D. a differential volume variance.

77. Which of the following is not a component of a comprehensive master budget? A. budgeted income statement, B. budgeted balance sheet. C. budgeted retained earnings statement. D. budgeted statement of cash flows.

78. Planning capital expenditures involves which of the following? A. making the capital budget decision. B. identifying opportunities for capital expenditures. C. identifying alternative options. D. all of the above.

79. In using the budget for performance evaluation, accountants compare actual results achieved with budgets to derive A. variances. B. delta(s). C. flexible budgets. D. master budgets.

80. What forms the basis for analyzing the differences between planned and actual results? A. comparing actual results achieved with the master budget, only. B. comparing actual results with the flexible and master budgets. C. comparing actual results with the normal or average budget for the industry. D. comparing actual results achieved with the actual results of the prior years.

81. What is the final component of a comprehensive master budget? A. budgeted balance sheet. B. budgeted income statement. C. budgeted statement of cash flows. D. budgeted retained earnings statement.

82. A new managerial application for budgeting focuses on how multinational corporations exchange budget data electronically through the World Wide Web by using A. the world wide web budget data exchange interface technology. B. the Internet. C. e-commerce. D. the international budget information and data exchange transactions.

83. A comprehensive master budget does not include individual schedules for which of the following budgets? A. materials purchase budget. B. capital budget. C. work-in-process budget. D. cash outlays budget.

84. A comprehensive master budget includes individual schedules for which of the following budgets? A. a materials purchase budget. B. a capital budget. C. a cash outlays budget. D. all of the above.

85. Why are incentive compensation plans often criticized? A. managers may take actions to improve short-run performance only. B. managers may take actions to improve long-run performance only. C. stock options affect market prices. D. they are ineffective in motivating managers.

86. An incentive plan model for accurate reporting should not have which of the following components? A. it relates rewards positively to forecasted sales. B. it provides incentives for the sales manager to increase sales beyond the forecast. C. it penalizes the sales manager when sales are less than forecasted. D. it penalizes the sales manager when sales are more than forecasted.

87. An incentive plan model for accurate reporting should have which of the following component(s)? A. it relates rewards positively to forecasted sales. B. it provides incentives for the sales manager to decrease sales beyond the forecast. C. it penalizes the sales manager when sales are more than forecasted. D. none of the above

88. An incentive model for accurate reporting having three components (1) it relates rewards to positively forecasted sales, (2) it provides incentives to increase sales beyond the forecast, and (3) it penalizes when sales fall lower than forecasted, should be developed for the firm's A. chief executive officer B. chief financial officer C. budget director D. sales manager

89. Donut, Inc. had 10,000 pounds of flour on hand at the beginning of the year. The company plans to produce 100,000 boxes of donuts during the year. Each box of donuts takes half a pound of flour. The company wants 8,000 pounds of flour on hand at the end of the year. How many pounds of flour must be purchased during the year?

90. Charles Company had 14,000 units of switch plates on hand at the end of its previous year. The company has a policy of maintaining 10 percent of the current year's requirements in ending inventory. During the current year, Charles used 150,000 units of switch plates. How many units did Charles purchase during the current year?

91. Pete's Toys, Inc. sold 200,000 games at $10 each last year. The company anticipates that volume will increase by 25 percent. In addition, the new price for the game will increase by 20 percent. What are the expected sales revenues for the coming year?

92. A chemical company manufactures an ointment. Sales for the next year are estimated at 100,000 units. The beginning finished goods inventory contains 20,000 units. The target for each year's ending inventory is 15,000 units. How many units will be scheduled for production this year?

93. The budget formula for manufacturing costs is $13,500 + $6.00 per unit per unit produced. The budget formula for marketing and administrative costs is $10,000 + $8.00 per unit sold. If 10,000 units are expected to be produced, but only 8,000 units are expected to be sold, what are the total budgeted expenses for the period?

94. A marketing company expects to incur fixed expenses of $50,000 per month and variable costs of $4.00 per sales call and $2.00 per telephone call. During the month the sales force made 100 sales calls and 500 telephone calls. Actual costs incurred included $52,000 for fixed costs and $1,200 for variable costs. Compute the flexible budget variance.

95. The Wholesome Company had an unfavorable sales price variance of $100. The budgeted selling price was $10 per unit, and the number of units sold was 50. What was the actual selling price?

96. Julianna Company Julianna Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 20X1 through June 30, 20X2.

Raw material* Work-in-process Finished goods

June 1, 20X1 40,000 10,000 80,000

June 30, 20X2 50,000 10,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product. Refer to Julianna Company. If Julianna plans to sell 480,000 units during the 20X1-20X2 fiscal year, what is the number of units it would have to manufacture during the year?

97. Julianna Company Julianna Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 20X1 through June 30, 20X2.

Raw material* Work-in-process Finished goods

June 1, 20X1 40,000 10,000 80,000

June 30, 20X2 50,000 10,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product. Refer to Julianna Company. If Julianna were to manufacture 500,000 finished units during the 20X1-20X2 fiscal year, what is the number of units of raw material Julianna needs to purchase?

98. Baxter Corporation's master budget calls for the production of 5,000 units of product monthly. The master budget includes indirect labor of $144,000 annually; Baxter considers indirect labor to be a variable cost. During the month of April, 4,500 units of product were produced, and indirect labor costs of $10,100 were incurred. What would be the budget variance for indirect labor utilizing flexible budgeting?

99. Able Company Able Company expects to begin the coming year with 12,000 units of product X in the inventory of finished goods. It expects to sell 130,000 units of the product and end the year with 15,800 units in finished goods inventory. Five pounds of material A go into each unit of product X. The company expects to have 2,000 pounds of material A on hand at the beginning of the coming year and wished to end the year with 3,400 pounds in inventory. Refer to Able Company. Calculate the number of units of product X that the company must manufacture in carrying out these plans.

100. Able Company Able Company expects to begin the coming year with 12,000 units of product X in the inventory of finished goods. It expects to sell 130,000 units of the product and end the year with 15,800 units in finished goods inventory. Five pounds of material A go into each unit of product X. The company expects to have 2,000 pounds of material A on hand at the beginning of the coming year and wished to end the year with 3,400 pounds in inventory. Refer to Able Company. Calculate the number of pounds of material A the company must purchase during the year.

101. Responsibility accounting is widely used by many companies.

(A) (B) (C)

Define responsibility accounting. Discuss the advantages a company attains through the use of responsibility accounting. Describe how the use of responsibility accounting is advantageous to the managers of the company.

102. Alma Mater College The Admissions Department of Alma Mater College plans to hold several "open house" parties during the year. All the refreshment costs will be charged to the department. However, the party creates extra work for the Maintenance Department. The maintenance crew must work overtime and the maintenance supervisor is complaining about cost overruns in the Maintenance Department. Refer to the Alma Mater College. Who should be responsible for the overtime costs of the maintenance workers?

103. Alma Mater College The Admissions Department of Alma Mater College plans to hold several "open house" parties during the year. All the refreshment costs will be charged to the department. However, the party creates extra work for the Maintenance Department. The maintenance crew must work overtime and the maintenance supervisor is complaining about cost overruns in the Maintenance Department. Refer to the Alma Mater College. How can the accounting system be changed so that the concept of responsibility accounting is achieved?

104. Walk-In Health Center The Walk-In Health Center sets targets for every responsibility center to achieve a 10 percent increase over last year in the number of patients treated. Refer to the Walk-In Health Center. What is the problem with this performance measure?

105. Walk-In Health Center The Walk-In Health Center sets targets for every responsibility center to achieve a 10 percent increase over last year in the number of patients treated. Refer to the Walk-In Health Center. How would you improve the performance evaluation of the system?

106. Each year, the Benezra Company begins its budgeting process in September. Managers are asked to provide sales forecasts by product line. The president of the company, wishing to provide an incentive to improve performance, always increases the forecast by 40 percent. Discuss the impact of the president's actions on the sales force as well as the production personnel.

107. Incentive compatible compensation schemes often create many opportunities as well as problems. Identify two negative outcomes of incentive compensation systems, and suggest how companies can overcome them.

108. Discuss the meaning of the terms "favorable" and "unfavorable" with regards to variances. How does each type of variance affect operating profits? Do the terms refer to good or bad variances? Give an example of each with the effect on profits and the interpretation of the meaning of the term.

109. How is a budget a tool for planning and performance evaluation?

110. Compare the four types of responsibility centers.

111. How is the budget used for performance evaluation?

112. Describe a comprehensive master budget.

113. Describe an incentive model for accurate reporting.

114. Explain the difference between a flexible budget and master budget.

115. Describe ethical dilemmas in budgeting.

116. Describe the master budget.

117. Solving for budgeted manufacturing costs. Calvin Company expects to sell 10 million cases of paper towels during the current year. Budgeted costs per case are $24 for direct materials, $18 for direct labor, and $6 (all variable) for manufacturing overhead. Calvin began the period with 80,000 cases of finished goods on hand and wants to end the period with 20,000 cases of finished goods on hand. Required: Compute the budgeted manufacturing costs of the Calvin Company for the current period. Assume no beginning or ending inventory of work-in-process.

118. Solving for budgeted manufacturing costs. Cooke Company expects to sell 5 million cases of paper towels during the current year. Budgeted costs per case are $20 for direct materials, $16 for direct labor, and $4 (all variable) for manufacturing overhead. Cooke began the period with 50,000 cases of finished goods on hand and wants to end the period with 30,000 cases of finished goods on hand. Required: Compute the budgeted manufacturing costs of the Cooke Company for the current period. Assume no beginning or ending inventory of work-in-process.

119. Solving for cash payments (Appendix 9.1). Florida Corporation purchases raw materials on account from various suppliers. It normally pays for 60 percent of these in the month purchased, 30 percent in the first month after purchase, and the remaining 10 percent in the second month after purchase. Raw materials purchases during the last five months of the year are expected to be

August September October November. December

$1,500,000 800,000 1,150,000 1,950,000 750,000

Required: Compute the expected amount of cash payments to suppliers for the months of October, November, and December.

120. Solving for cash payments (Appendix 9.1). Arkansas Corporation purchases raw materials on account from various suppliers. It normally pays for 70 percent of these in the month purchased, 20 percent in the first month after purchase, and the remaining 10 percent in the second month after purchase. Raw materials purchases during the last five months of the year are expected to be

August September October November. December

$1,000,000 900,000 1,250,000 1,750,000 950,000

Required: Compute the expected amount of cash payments to suppliers for the months of October, November, and December.

121. Sales volume variance analysis. Ralston Company prepared a budget last period with budgeted sales of 55,000 units at a price of $75 each. Variable costs were budgeted to be $10 per unit. Fixed costs were budgeted to be $2,000,000 for the period. During the period, actual sales totaled 58,000 units. Required: Prepare a variance report to show the difference between the master budget and the flexible budget.

122. Sales volume variance analysis. Crank Company prepared a budget last period with budgeted sales of 56,000 units at a price of $70 each. Variable costs were budgeted to be $10 per unit. Fixed costs were budgeted to be $2,100,000 for the period. During the period, actual sales totaled 60,000 units. Required: Prepare a variance report to show the difference between the master budget and the flexible budget.

123. Flexible budgeting-manufacturing costs. As a result of studying past cost behavior and adjusting for expected price increases in the future, Gavin Company estimates that its manufacturing costs will be as follows:

Direct Materials Direct Labor Manufacturing Overhead: Variable Fixed

$10.00 per Unit $6.00 per Unit $3.00 per Unit $100,000 per Period

Required: Gavin uses these estimates for planning and control purposes. a. Gavin expects to produce 20,000 units during the next period. Prepare a schedule of the expected manufacturing costs. b. Suppose that Gavin produces only 16,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 16,000-unit level of activity. c. Suppose that Gavin produces 25,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 25,000-unit level of activity.

124. Flexible budgeting-manufacturing costs. As a result of studying past cost behavior and adjusting for expected price increases in the future, Goldman Company estimates that its manufacturing costs will be as follows:

Direct Materials Direct Labor Manufacturing Overhead: Variable Fixed

$12.00 per Unit $7.00 per Unit $4.00 per Unit $130,000 per Period

Required: Goldman uses these estimates for planning and control purposes. a. Goldman expects to produce 25,000 units during the next period. Prepare a schedule of the expected manufacturing costs. b. Suppose that Goldman produces only 18,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 18,000-unit level of activity. c. Suppose that Goldman produces 28,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 28,000-unit level of activity.

125. Estimating flexible selling expense budget and computing sales volume variance. Miami Products estimates that it will incur the following selling expenses next period:

Salaries (fixed) Commissions (0.05 of sales revenue) Travel (0.03 of sales revenue) Advertising (fixed). Sales Office Costs ($4,000 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold). Total Selling Expenses

$ 20,000 17,875 10,725 50,000 7,250 6,500 $112,350

Required: a. Derive the cost equation for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Miami sells 50,000 units during the period. Budgeted sales totaled 65,000 units at a budgeted sales price of $5.50 per unit. Prepare a variance report to show the difference between the master budget and the flexible budget.

126. Estimating flexible selling expense budget and computing sales volume variance. Florence Products estimates that it will incur the following selling expenses next period:

Salaries (fixed) Commissions (0.06 of sales revenue) Travel (0.02 of sales revenue) Advertising (fixed). Sales Office Costs ($6,000 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold). Total Selling Expenses

$ 25,000 24,750 8,250 45,000 9,750 7,500 $120,250

Required: a. Derive the cost equation for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Florence sells 62,000 units during the period. Budgeted sales totaled 75,000 units at a budgeted sales price of $5.50 per unit. Prepare a variance report to show the difference between the master budget and the flexible budget.

Chapter 9--Profit Planning and Budgeting Key

1. What is a short-term operating budget? A. managements quantitative action plan for the coming year. B. shareholders quantitative action plan for the coming year. C. investment bankers quantitative action plan for the coming year.s quantitative action plan for the coming year. D. employees quantitative action plan for the coming year.

2. Which of the following statements is true concerning the operating budget? A. The operating budget is a formal short-run plan of action. B. The operating budget identifies capital projects. C. The operating budget states the strategy for achieving organizational goals. D. all of the above.

3. Which of the following is included in an organizational plan? A. organizational goals. B. the strategic long-range profit plan. C. the master budget or tactical short-range profit plan. D. all of the above.

4. Which of the following describe the broad objectives management establishes and company employees work to achieve? A. organizational goals. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

5. Which of the following represent the specific, detailed steps required to achieve the goals of an organization including cost control and market share? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

6. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for the next year? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. none of the above.

7. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for the next year? A. master budget. B. tactical short-range profit plan C. static budget D. all of the above.

8. Which of the following represents a general framework for guiding managements operating decisions containing projected activity levels for a series of years? A. organizational goals implementation plan. B. strategic long-range profit plan. C. master budget. D. tactical short-range profit plan.

9. What is the income statement portion of the master budget known as? A. profit plan. B. tactical short-range profit plan. C. static budget. D. all of the above.

10. Which of the following statements is true concerning budgeting? A. Budgeting is a dynamic process that ties together goals, plans, decision making, and employee performance evaluation B. Budgeting is required by generally accepted accounting principles. C. Budgeting is a static process that ties together goals, plans, decision making, and employee performance evaluation D. none of the above.

11. What is the continuous process of measuring products, services, or activities against competitors performance? A. benchmarking. B. competitive analysis. C. performance evaluation D. none of the above.

12. Which of the following terms describes the use of input from lower-management and middle-management employees in developing budgets? A. benchmarking. B. participative budgeting. C. bottom-up budgeting. D. motivational budgeting.

13. Which of the following terms describes a method of yielding information for developing budgets that employees know but managers do not? A. benchmarking. B. participative budgeting. C. bottom-up budgeting. D. motivational budgeting.

14. Which of the following is not a benefit of participative or grassroots budgeting? A. The process of participative budgeting can be time consuming. B. Participating budgeting enhances employee motivation and acceptance of goals. C. Participative budgeting provides information that enables employees to associate rewards and penalties with performance. D. Participative budgeting yields information that employees know but managers do not know.

15. What is the cultural impact on budgeting? A. Lower-level managers in Mexico, Singapore, and Hong Kong are more likely to accept top-down budgets. B. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to not accept top-down budgets. C. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to want to participate in budgeting, D. all of the above

16. What is the cultural impact on budgeting? A. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are less willing to accept the fact that top managers are more powerful than they. B. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to not accept top-down budgets. C. Lower-level managers in Germany, the United Kingdom, the United States, New Zealand, Canada, and Australia are more likely to want to participate in budgeting, D. all of the above

17. Observers of Japanese industry report that Japanese managers and owners have created team orientation or esprit de corps with considerable A. goal congruence B. employee individualism C. self-actualization D. all of the above

18. Goal congruence occurs if members of an organization have incentives to perform in whos interest? A. the firms interest. B. their own economic interest. C. the national interest. D. all of the above

19. The master budget for governmental organizations differs from that of public companies because the budget for governmental organizations provides the A. organizations authority to produce and sell goods. B. organizations authority to produce and provide services. C. legal authorization for expenditures. D. all of the above

20. Many companies have streamlined the budget process, developed business plans, and allowed analysts to be proactive in monitoring results by A. using hundreds of spreadsheets B. compiling and verifying data from multiple sources C. implementing a web-based enterprise-wide budgeting solution D. adopting a two-year budgeting cycle.

21. Who often encounter ethical dilemmas in the budgeting process because they are involved in the creation of the budget, and their performances are subsequently evaluated by comparing the budget to actual results? A. customers B. advertising firms C. shareholders D. managers

22. How can budgets motivate people to perform because? A. Budgets are mandated by the Department of Labor and included in labor union contracts. B. Budgets are authorized by generally accepted accounting principles. C. Budgets are required by the Securities and Exchange Commission. D. Budgets are standards or targets for people to achieve.

23. Which of the following would be a responsibility of a manager in a cost centers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

24. A manufacturing division of a company would most likely be evaluated as a(n) A. cost center. B. investment center. C. revenue center. D. asset center.

25. Which of the following departments is likely to be an investment center? A. Machining department B. Food products division C. Personnel department D. Accounting department

26. Which of the following departments would not be classified as a profit center? A. Hardware department B. Mens shoes department C. Accounting department D. Automotive department

27. Which of the following are not controlled by a manager of a profit center? A. Revenues B. Costs C. Investments D. Profits

28. Which of the following departments would not be a cost center? A. advertising department B. city police department C. building and grounds department D. sales department

29. Based on the types of costs incurred, what are the two categories of cost centers? A. engineered cost centers and discretionary cost centers. B. direct cost centers and indirect cost centers. C. sunk cost centers and opportunity cost centers. D. short-term cost centers and long-term cost centers.

30. What cost centers have input-output relationships sufficiently well established so that a particular set of inputs will provide a predictable and measurable set of outputs? A. engineered cost centers. B. direct cost centers. C. opportunity cost centers. D. discretionary cost centers.

31. What cost centers do not have input-output relationships sufficiently well established so that a particular set of inputs will provide a predictable and measurable set of outputs? A. engineered cost centers. B. direct cost centers. C. opportunity cost centers. D. discretionary cost centers.

32. Which of the following costs are the responsibility of revenue center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

33. Which of the following costs are the responsibility of profit center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

34. Which of the following costs are the responsibility of investment center managers? A. costs only. B. revenues only. C. both costs and revenues. D. revenues, costs, and assets.

35. Who are responsible for (1) costs in cost centers, (2) revenues in revenue centers, (3) both costs and revenues in profit centers, and (4) revenues, costs, and assets in an investment center? A. Shareholders. B. Employees. C. Managers. D. Vendors.

36. Which of the following statements is true regarding the master budget? A. The master budget is a blueprint of the planned operations of a firm for a period. B. The master budget begins with the production budget. C. The master budget does not require a sales forecast. D. all of the above.

37. Which of the following statements is true concerning the flexible budget? A. The flexible budget shows the expected relation between costs and volume. B. The flexible budget has a fixed cost component which is expected to be incurred regardless of the level of activity. C. The flexible budget has a variable cost per unit of activity component where variable costs change in total as the level of activity changes. D. all of the above.

38. For an organizational unit to be considered a responsibility center, what must be true? A. The unit must be separable and identifiable. B. The unit must lack financial measures of performance. C. The unit must lack control over an activity. D. all of the above.

39. For which types of operations do firms design operational planning and control systems? A. manufacturing operations only. B. marketing and manufacturing operations only. C. manufacturing and other activities but not marketing. D. manufacturing, marketing, and other activities.

40. An investment center's performance is most likely to be affected by which of the following? A. an increase is sales volume. B. a decrease in expenses. C. an increase in interest rates. D. all of the above.

41. What is the primary difference between a fixed budget and a flexible budget? A. A fixed budget includes only fixed costs, while a flexible budget includes only variable costs. B. A fixed budget is concerned only with future acquisitions of fixed assets, while a flexible budget is concerned with expenses, which vary with sales. C. A fixed budget cannot be changed after the period begins, while a flexible budget can be changed after the period begins. D. A fixed budget is a plan for a single level of sales (or other measure of activity), while a flexible budget consists of several plans, one for each of several levels of sales (or other measure of activity).

42. When production levels are expected to increase within a relevant range, and a flexible budget is used, what effects would be anticipated with respect to each of the following? Fixed Costs Per Unit A. Decrease B. Decrease C. No Change D. No Change Variable Costs Per Unit Increase No Change No Change Increase

43. Which statements is correct concerning a flexible budget? A. A flexible budget is not appropriate when costs and expenses are affected by fluctuations in volume limits. B. A flexible budget is appropriate for any relevant level of activity. C. A flexible budget is appropriate for control of factory overhead but not for control of direct materials and direct labor. D. A flexible budget is appropriate for control of direct materials and direct labor but not for control of factory overhead.

44. A flexible budget is appropriate for a which of the following types of costs? Direct-Labor Budget A. No B. No C. Yes D. Yes Marketing Budget No Yes No Yes

45. If a company wishes to establish a factory overhead budget system in which estimated costs can be derived directly from estimates of activity levels, which type of budget should it prepare? A. zero-based budget. B. flexible budget. C. discretionary budget. D. fixed budget.

46. Julia Electronics LLC is preparing a flexible budget for the coming year and the following maximum capacity estimates for the furniture division are available

Direct labor hours Variable factory overhead Fixed factory overhead

60,000 $150,000 $240,000

Assume that Julia Electronics LLC 's normal capacity is 80% of maximum capacity. What would be the total factory overhead rate, based on direct labor hours, in a flexible budget at normal capacity?

A. $6.00. B. $6.50. C. $7.50. D. $8.13. 47. In what type of responsibility centers are the managers responsible for costs, only? A. Cost. B. Revenue. C. Profit. D. Investment.

48. In what type of responsibility centers are the managers responsible for revenues, only? A. Cost B. Revenue C. Profit D. Investment

49. In what type of responsibility centers are the managers responsible for revenues, costs, and assets? A. Cost. B. Revenue. C. Profit. D. Investment.

50. If direct labor cost is variable, then it is considered to be which type of cost in the cost hierarchy? A. product-level cost. B. facility-level cost. C. unit-level cost. D. all of the above.

51. If direct labor cost is fixed, then it is considered to be which type of cost in the cost hierarchy? A. product-level cost. B. facility-level cost. C. unit-level cost. D. either a or b

52. Marketing costs include expenditures for salaries, advertising, and sales office costs would be classified as which of the following type of activity? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

53. Marketing costs include expenditures for sales commissions (2% of sales dollars) and shipping costs (20 cents per unit) are variable marketing costs and considered to be which of the following? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

54. Central corporate administrative costs are fixed and considered to be which of the following? A. customer-level activities. B. facility-level activities. C. product-level activities. D. unit-level activities.

55. Jones Corporation estimates manufacturing costs as follows for the coming year:

Direct Materials Direct Labor Manufacturing Overhead Variable Fixed

$15 per unit $10 per unit $ 5 per unit $150,000 for the year

If 25,000 units are produced, what is the total manufacturing costs?

A. $275,000 B. $300,000 C. $775,000 D. $900,000 56. When is the master budget prepared? A. before the budget period begins. B. after the budget period begins, but before it ends. C. about half way through the budget period begins. D. at the end or after the budget period ends.

57. When is the flexible budget is prepared? A. before the budget period begins. B. after the budget period begins, but before it ends. C. about half way through the budget period begins. D. after the budget period ends.

58. What is often the most difficult aspect of budgeting? A. forecasting sales because it involves considerable subjectivity. B. forecasting sales because it involves considerable objectivity. C. forecasting production requirements because it involves considerable subjectivity. D. forecasting production requirements because it involves considerable objectivity.

59. To reduce subjectivity in the budgeting process and gather as much information as possible, management often uses which of the following method(s)? A. asking sales staff and/or market researchers for an estimate of the future periods sales. B. using the Delphi technique and trend analysis. C. entering past sales data into a regression model to obtain a statistical estimate of factors affecting sales (econometric model). D. all of the above.

60. To reduce subjectivity in the budgeting process and gather as much information as possible, management often enters past sales data into which of the following regression models to obtain a statistical estimate of factors affecting sales? A. econometric model. B. input-output model. C. Delphi model D. none of the above.

61. In determining the Production Budget, what is the formula for computing the quantity of each product to be produced? A. Units to Be Produced = Number of Units to Be Sold + Desired Units in Ending Inventory - Units in Beginning Inventory B. Number of Units to Be Sold = Units to Be Produced + Desired Units in Ending Inventory - Units in Beginning Inventory C. Units to Be Produced = Number of Units to Be Sold + Units in Beginning Inventory - Desired Units in Ending Inventory D. none of the above.

62. If management desires finished goods inventory to decrease over the period, what can be said about the relationship between units produced and units sold? A. Units produced > units sold. B. Units produced < units sold. C. Units produced = units sold. D. Nothing can be said without more information.

63. Marshall Company's sales budget shows the following projections for the year ending December 31

Quarter First Second Third Fourth Total

Units 60,000 80,000 45,000 55,000 240,000

Inventory at December 31 of the prior year was budgeted at 18,000 units. The quantity of finished goods inventory at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales. How much should the production budget show for units to be produced during the first quarter?

A. 24,000. B. 48,000. C. 66,000. D. 72,000.

64. Lydia Company projects the following sales in units for the third quarter of the year:
Month June July August Units to be Sold 10,000 15,000 7,500

If the company wishes to maintain an inventory balance of 5,000 units and has 2,500 units on hand at the end of June, how many units will need to be produced in July?

A. 10,000 B. 12,500 C. 15,000 D. 17,500 65. Which statement is true concerning direct materials? A. are materials traceable to individual units produced. B. costs are almost always variable. C. costs are almost always fixed. D. a and b

66. Which statement is true concerning direct labor? A. is work traceable directly to particular units of production. B. uses estimates which allow for normal, periodic rest periods, yet motivates employees to perform efficiently. C. could be fixed, if the firm is a high-tech company having only a few workers, or variable D. all of the above.

67. Which statement is true concerning variable manufacturing overhead costs? A. Variable manufacturing costs vary with units produced. B. Variable manufacturing costs such as indirect labor and supplies are considered to be batch-level activities. C. Variable manufacturing costs such as power are considered to be a true variable cost. D. all of the above

68. Variable manufacturing overhead costs such as power are considered to be which of the following? A. a semivariable, or mixed, cost having both variable and fixed components. B. a variable cost with variable components, only. C. a fixed cost with fixed components, only. D. all of the above

69. Which of the following statements is true concerning the variable component of power cost? A. This cost would be categorized as a unit level activity. B. This cost would be categorized as a cost which varies in total with the unit level of output. C. This cost would be categorized as a facility-related cost. D. both a and b

70. Which of the following statements is true concerning the fixed component of power cost? A. This would be categorized as a unit level activity. B. This is a cost that would be incurred regardless of the level of output. C. This would be categorized as a facility-related cost. D. both b and c

71. Manufacturing Overhead costs such as maintenance, rent, insurance, and depreciation should be categorized as which of the following? A. fixed overhead costs and facility-level activities. B. variable overhead costs and facility-level activities. C. fixed overhead costs and product-level activities. D. variable overhead costs and product-level activities.

72. Which of the following statements is correct regarding marketing travel costs? A. Marketing travel costs are incurred for customer-related activities. B. Marketing travel costs are fixed in the long-term. C. Marketing travel costs are variable in the short-term. D. both a and b

73. Which cost can be cut for a period of time because their reduction presents no serious short-term threats to production and marketing? A. discretionary costs. B. committed costs. C. sunk costs. D. opportunity costs.

74. In profit planning and budgeting, which statement is true concerning a favorable variance? A. A favorable variance would increase operating profit, holding all other things constant. B. A favorable variance is always positive (good), holding all other things constant. C. A favorable variance would decrease operating profit, holding all other things constant. D. A favorable variance is always negative (bad), holding all other things constant.

75. In profit planning and budgeting, which statement is true concerning an unfavorable variance? A. An unfavorable variance would decrease operating profit, holding all other things constant. B. An unfavorable variance is always negative (bad), holding all other things constant. C. both a and b D. none of the above.

76. Which of the following describes the difference in operating profits from the flexible budget to the master budget results from the difference between budgeted sales volume and actual sales volume? A. the margin of safety. B. a profit-volume variance. C. a sales volume variance. D. a differential volume variance.

77. Which of the following is not a component of a comprehensive master budget? A. budgeted income statement, B. budgeted balance sheet. C. budgeted retained earnings statement. D. budgeted statement of cash flows.

78. Planning capital expenditures involves which of the following? A. making the capital budget decision. B. identifying opportunities for capital expenditures. C. identifying alternative options. D. all of the above.

79. In using the budget for performance evaluation, accountants compare actual results achieved with budgets to derive A. variances. B. delta(s). C. flexible budgets. D. master budgets.

80. What forms the basis for analyzing the differences between planned and actual results? A. comparing actual results achieved with the master budget, only. B. comparing actual results with the flexible and master budgets. C. comparing actual results with the normal or average budget for the industry. D. comparing actual results achieved with the actual results of the prior years.

81. What is the final component of a comprehensive master budget? A. budgeted balance sheet. B. budgeted income statement. C. budgeted statement of cash flows. D. budgeted retained earnings statement.

82. A new managerial application for budgeting focuses on how multinational corporations exchange budget data electronically through the World Wide Web by using A. the world wide web budget data exchange interface technology. B. the Internet. C. e-commerce. D. the international budget information and data exchange transactions.

83. A comprehensive master budget does not include individual schedules for which of the following budgets? A. materials purchase budget. B. capital budget. C. work-in-process budget. D. cash outlays budget.

84. A comprehensive master budget includes individual schedules for which of the following budgets? A. a materials purchase budget. B. a capital budget. C. a cash outlays budget. D. all of the above.

85. Why are incentive compensation plans often criticized? A. managers may take actions to improve short-run performance only. B. managers may take actions to improve long-run performance only. C. stock options affect market prices. D. they are ineffective in motivating managers.

86. An incentive plan model for accurate reporting should not have which of the following components? A. it relates rewards positively to forecasted sales. B. it provides incentives for the sales manager to increase sales beyond the forecast. C. it penalizes the sales manager when sales are less than forecasted. D. it penalizes the sales manager when sales are more than forecasted.

87. An incentive plan model for accurate reporting should have which of the following component(s)? A. it relates rewards positively to forecasted sales. B. it provides incentives for the sales manager to decrease sales beyond the forecast. C. it penalizes the sales manager when sales are more than forecasted. D. none of the above

88. An incentive model for accurate reporting having three components (1) it relates rewards to positively forecasted sales, (2) it provides incentives to increase sales beyond the forecast, and (3) it penalizes when sales fall lower than forecasted, should be developed for the firm's A. chief executive officer B. chief financial officer C. budget director D. sales manager

89. Donut, Inc. had 10,000 pounds of flour on hand at the beginning of the year. The company plans to produce 100,000 boxes of donuts during the year. Each box of donuts takes half a pound of flour. The company wants 8,000 pounds of flour on hand at the end of the year. How many pounds of flour must be purchased during the year?

Units needed (100,000/2) Units on hand Units for ending inventory Units to be produced

50,000 -10,000 +8,000 48,000

90. Charles Company had 14,000 units of switch plates on hand at the end of its previous year. The company has a policy of maintaining 10 percent of the current year's requirements in ending inventory. During the current year, Charles used 150,000 units of switch plates. How many units did Charles purchase during the current year?

Units used Ending inventory requirement Beginning inventory Units purchased

150,000 +15,000 -14,000 151,000

91. Pete's Toys, Inc. sold 200,000 games at $10 each last year. The company anticipates that volume will increase by 25 percent. In addition, the new price for the game will increase by 20 percent. What are the expected sales revenues for the coming year? $3,000,000 = ($10 1.20)(200,000 1.25)

92. A chemical company manufactures an ointment. Sales for the next year are estimated at 100,000 units. The beginning finished goods inventory contains 20,000 units. The target for each year's ending inventory is 15,000 units. How many units will be scheduled for production this year?

Units needed Units on hand Units for ending inventory Units to be produced

100,000 -20,000 +15,000 95,000

93. The budget formula for manufacturing costs is $13,500 + $6.00 per unit per unit produced. The budget formula for marketing and administrative costs is $10,000 + $8.00 per unit sold. If 10,000 units are expected to be produced, but only 8,000 units are expected to be sold, what are the total budgeted expenses for the period? Manufacturing costs:

Fixed Variable ($6 10,000 units) Marketing Fixed Variable ($8 8,000 units) Total costs expected

$ 13,500 60,000 10,000 64,000 $147,500

94. A marketing company expects to incur fixed expenses of $50,000 per month and variable costs of $4.00 per sales call and $2.00 per telephone call. During the month the sales force made 100 sales calls and 500 telephone calls. Actual costs incurred included $52,000 for fixed costs and $1,200 for variable costs. Compute the flexible budget variance.

Actual fixed costs Actual variable costs Total actual costs Flexible budget - fixed Flexible budget - variable Sales call ($4 100) Telephone calls ($2 500) Flexible budget

$52,000 $ 1,200 $53,200 $50,000 400 1,000 $51,400

Difference between actual & flexible budget $1,800 U (53,200-51,400)

95. The Wholesome Company had an unfavorable sales price variance of $100. The budgeted selling price was $10 per unit, and the number of units sold was 50. What was the actual selling price? Sales price variance/units sold = $100/50 =$ 2 per unit

Budgeted selling price Less unfavorable sales price variance Actual selling price

$10 2 $8

96. Julianna Company Julianna Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 20X1 through June 30, 20X2.

Raw material* Work-in-process Finished goods

June 1, 20X1 40,000 10,000 80,000

June 30, 20X2 50,000 10,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product. Refer to Julianna Company. If Julianna plans to sell 480,000 units during the 20X1-20X2 fiscal year, what is the number of units it would have to manufacture during the year?

The company needs 480,000 units of finished goods to sell plus 50,000 units for the ending inventory, or a total of 530,000 units. Beginning inventory is 80,000 units. Therefore, only 450,000 units (530,000 - 80,000) need to be manufactured this year.

97. Julianna Company Julianna Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 20X1 through June 30, 20X2.

Raw material* Work-in-process Finished goods

June 1, 20X1 40,000 10,000 80,000

June 30, 20X2 50,000 10,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product. Refer to Julianna Company. If Julianna were to manufacture 500,000 finished units during the 20X1-20X2 fiscal year, what is the number of units of raw material Julianna needs to purchase?

Since each unit of finished goods requires two units of raw materials, 1,000,000 units (500,000 2) of raw materials are needed for production. Since 50,000 are required for the ending inventory, the total needed is 1,050,000 units. Given that 40,000 are in beginning inventory, only 1,010,000 will have to be purchased.

98. Baxter Corporation's master budget calls for the production of 5,000 units of product monthly. The master budget includes indirect labor of $144,000 annually; Baxter considers indirect labor to be a variable cost. During the month of April, 4,500 units of product were produced, and indirect labor costs of $10,100 were incurred. What would be the budget variance for indirect labor utilizing flexible budgeting? The $144,000 annual amount equals $12,000 per month. Since volume is expected to be 5,000 units per month, and the $12,000 is considered a variable cost, budgeted cost per unit is $2.40 ($12,000/5,000 units). If 4,500 units are produced, the total variable costs should be $10,800 (4,500 units $2.40). Subtracting the $10,100 of actual costs from the budgeted figure results in a favorable variance of $700.

99. Able Company Able Company expects to begin the coming year with 12,000 units of product X in the inventory of finished goods. It expects to sell 130,000 units of the product and end the year with 15,800 units in finished goods inventory. Five pounds of material A go into each unit of product X. The company expects to have 2,000 pounds of material A on hand at the beginning of the coming year and wished to end the year with 3,400 pounds in inventory. Refer to Able Company. Calculate the number of units of product X that the company must manufacture in carrying out these plans.

Expected sales Target ending inventory Units needed Beginning inventory Units to be manufactured

130,000 + 15,800 145,800 - 12,000 133,800

100. Able Company Able Company expects to begin the coming year with 12,000 units of product X in the inventory of finished goods. It expects to sell 130,000 units of the product and end the year with 15,800 units in finished goods inventory. Five pounds of material A go into each unit of product X. The company expects to have 2,000 pounds of material A on hand at the beginning of the coming year and wished to end the year with 3,400 pounds in inventory. Refer to Able Company. Calculate the number of pounds of material A the company must purchase during the year. Pounds per unit = 5

Total pounds needed Target ending inventory Units needed Beginning inventory Units to be purchased

(133,800 5)

669,000 + 3,400 672,400 - 2,000 670,400

101. Responsibility accounting is widely used by many companies.

(A) (B) (C)

Define responsibility accounting. Discuss the advantages a company attains through the use of responsibility accounting. Describe how the use of responsibility accounting is advantageous to the managers of the company.

(A)

(B)

(C)

Responsibility accounting is a system that recognizes various decision or responsibility centers throughout an organization and reflects the plans and actions of each of these centers by assigning responsibility for particular revenues and costs (as well as assets and liabilities where pertinent) to the individual managers primarily responsible for making decisions about these revenues and costs. Costs are classified into controllable and non-controllable categories with the responsibility center only charged with costs under its control. The advantages a company attains through the use of responsibility accounting include the following: Participation in the planning process enhances the acceptance and achievability of the guidelines established by the company. Responsibility plans provide clear guidelines to managers for day-to-day decisions and frees management from daily operations. More involvement will lead to better decision making. The use of responsibility accounting is advantageous to the managers in the following ways: Responsibility accounting facilitates delegation of decision making and, therefore, managers are afforded greater freedom of action without daily supervision. This results in greater job satisfaction and higher motivation to improve job performance. Managers are aware of the basis of their performance evaluations.

102. Alma Mater College The Admissions Department of Alma Mater College plans to hold several "open house" parties during the year. All the refreshment costs will be charged to the department. However, the party creates extra work for the Maintenance Department. The maintenance crew must work overtime and the maintenance supervisor is complaining about cost overruns in the Maintenance Department. Refer to the Alma Mater College. Who should be responsible for the overtime costs of the maintenance workers? The department that is responsible for incurring the cost is Admissions because they have control over the decision to host an open house.

103. Alma Mater College The Admissions Department of Alma Mater College plans to hold several "open house" parties during the year. All the refreshment costs will be charged to the department. However, the party creates extra work for the Maintenance Department. The maintenance crew must work overtime and the maintenance supervisor is complaining about cost overruns in the Maintenance Department. Refer to the Alma Mater College. How can the accounting system be changed so that the concept of responsibility accounting is achieved? The costs of the Maintenance Department for hours specifically related to the open house could be charged directly to the Admissions Department.

104. Walk-In Health Center The Walk-In Health Center sets targets for every responsibility center to achieve a 10 percent increase over last year in the number of patients treated. Refer to the Walk-In Health Center. What is the problem with this performance measure? Employees of the health center have little control over the demand for its services. Performance measures should focus on those elements that employees can control.

105. Walk-In Health Center The Walk-In Health Center sets targets for every responsibility center to achieve a 10 percent increase over last year in the number of patients treated. Refer to the Walk-In Health Center. How would you improve the performance evaluation of the system? Employees have control over response time, patient satisfaction, and variable costs. Performance measures should focus on these elements.

106. Each year, the Benezra Company begins its budgeting process in September. Managers are asked to provide sales forecasts by product line. The president of the company, wishing to provide an incentive to improve performance, always increases the forecast by 40 percent. Discuss the impact of the president's actions on the sales force as well as the production personnel. The sales force is unlikely to be motivated by unrealistic standards. In addition, production will create inventory that cannot be sold at normal profit margins. The president's action is likely to cause friction between the sales people and the production workers.

107. Incentive compatible compensation schemes often create many opportunities as well as problems. Identify two negative outcomes of incentive compensation systems, and suggest how companies can overcome them. Two negative outcomes of incentive compatible compensation schemes have been: (1) managers are rewarded for improving short-run performance and not actions that benefit the organization in the long run, and (2) managers may feel pressure to manipulate accounting data in order to put their performance in the most favorable light. To overcome these criticisms, incentive compensation schemes must induce individual behavior compatible with increasing the firm's wealth. To accomplish this objective, long-run measures of performance must be included in the bonus formula.

108. Discuss the meaning of the terms "favorable" and "unfavorable" with regards to variances. How does each type of variance affect operating profits? Do the terms refer to good or bad variances? Give an example of each with the effect on profits and the interpretation of the meaning of the term. The terms favorable and unfavorable describe the impact of the variance on the budgeted operating profits. A favorable variance means that the variance would increase operating profits. An unfavorable variance would decrease operating profits, holding all things constant. The terms are not used in a normative sense. A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad. The labels favorable and unfavorable do not automatically indicate good or bad conditions. A favorable variance implies that actual profits are higher than budgeted, all other things being ignored: conversely, an unfavorable variance implies that actual profits are lower than budgeted, all other things being ignored.

109. How is a budget a tool for planning and performance evaluation? A budget is an estimate of financial statements prepared before the actual transactions occur. Budgets are generally developed for a particular expected level of activity. Budgets also provide estimates of expected performance and serve as standards for evaluating performance.

110. Compare the four types of responsibility centers. Managers are responsible for (1) costs in cost centers, (2) revenues in revenue centers, (3) both costs and revenues in profit centers, and (4) revenues, costs, and assets in an investment center.

111. How is the budget used for performance evaluation? Accountants compare actual results achieved with budgets to derive variances for performance evaluation. Comparison of actual results with the flexible and master budgets ties the results of the planning process with flexible budgeting, and forms the basis for analyzing the differences between planned and actual results.

112. Describe a comprehensive master budget. A comprehensive master budget includes individual schedules for a materials purchase budget, a capital budget, a cash outlays budget, a receivables and collections budget, and a cash budget, all of which support the budgeted income and retained earnings statement. Finally the budgeted balance sheet is developed.

113. Describe an incentive model for accurate reporting. The incentive plan has three components: (1) it relates rewards positively to forecasted sales, (2) it provides incentives for the sales manager to increase sales beyond the forecast, and (3) it penalizes the sales manager when sales are less than forecasted.

114. Explain the difference between a flexible budget and master budget. The master budget is based on estimated sales and production volume and is prepared before the budget period begins. The flexible budget is based on actual sales and production volume and is prepared after the budget period ends. The difference in operating profits from the flexible budget to the master budget is called a sales volume variance, and results from the difference between budgeted sales volume and actual sales volume.

115. Describe ethical dilemmas in budgeting. Managers and employees often encounter ethical dilemmas in the budgeting process because they are involved in the creation of the budget, and their performances are subsequently evaluated by comparing the budget to actual results.

116. Describe the master budget. The master budget is a complex blueprint of the planned operations of a firm for a period. It begins with the sales budget, then adds the production budget, the budgeted income statement and finishes with the budgeted balance sheet.

117. Solving for budgeted manufacturing costs. Calvin Company expects to sell 10 million cases of paper towels during the current year. Budgeted costs per case are $24 for direct materials, $18 for direct labor, and $6 (all variable) for manufacturing overhead. Calvin began the period with 80,000 cases of finished goods on hand and wants to end the period with 20,000 cases of finished goods on hand. Required: Compute the budgeted manufacturing costs of the Calvin Company for the current period. Assume no beginning or ending inventory of work-in-process. (Calvin Company; solving for budgeted manufacturing costs.)

Budgeted Sales Plus Ending Inventory Total Units Needed Less Beginning Inventory Units to Be Produced Costs to Be Incurred: Direct Materials (9,940,000 Units X $24 per Unit) Direct Labor (9,940,000 Units X $18 per Unit) Overhead (9,940,000 Units X $6 per Unit) Total Budgeted Costs

10,000,000 Units 20,000 10,020,000 (80,000) 9,940,000

$ 238,560,000 178,920,000 59,640,000 $ 477,120,000

118. Solving for budgeted manufacturing costs. Cooke Company expects to sell 5 million cases of paper towels during the current year. Budgeted costs per case are $20 for direct materials, $16 for direct labor, and $4 (all variable) for manufacturing overhead. Cooke began the period with 50,000 cases of finished goods on hand and wants to end the period with 30,000 cases of finished goods on hand. Required: Compute the budgeted manufacturing costs of the Cooke Company for the current period. Assume no beginning or ending inventory of work-in-process. (Cooke Company; solving for budgeted manufacturing costs.)

Budgeted Sales Plus Ending Inventory Total Units Needed Less Beginning Inventory Units to Be Produced Costs to Be Incurred: Direct Materials (4,980,000 Units X $20 per Unit) Direct Labor (4,980,000 Units X $16 per Unit) Overhead (4,980,000 Units X $4 per Unit) Total Budgeted Costs

5,000,000 Units 30,000 5030,000 (50,000) 4,980,000

$ 99,600,000 31,680,000 19,920,000 $ 151,200,000

119. Solving for cash payments (Appendix 9.1). Florida Corporation purchases raw materials on account from various suppliers. It normally pays for 60 percent of these in the month purchased, 30 percent in the first month after purchase, and the remaining 10 percent in the second month after purchase. Raw materials purchases during the last five months of the year are expected to be

August September October November. December

$1,500,000 800,000 1,150,000 1,950,000 750,000

Required: Compute the expected amount of cash payments to suppliers for the months of October, November, and December.

(Appendix 9.1) (Florida Corporation; solving for cash payments.)

Budgeted Cash Payments to Suppliers in October: August Purchases (.10 X $1,500,000) September Purchases (.30 X $800,000) October Purchases (.60 X $1,150,000) Total Budgeted October Cash Payments Budgeted Cash Payments to Suppliers in November: September Purchases (.10 X $800,000) October Purchases (.30 X $1,150,000) November Purchases (.60 X $1,950,000) Total Budgeted November Cash Payments Budgeted Cash Payments to Suppliers in December: October Purchases (.10 X $1,150,000) November Purchases (.30 X $1,950,000) December Purchases (.60 X $750,000) Total Budgeted December Cash Payments

$ 150,000 240,000 690,000 $ 1,080,000 $ 80,000 345,000 1,170,000 $ 1,595,000 $ 115,000 585,000 450,000 $ 1,150,000

120. Solving for cash payments (Appendix 9.1). Arkansas Corporation purchases raw materials on account from various suppliers. It normally pays for 70 percent of these in the month purchased, 20 percent in the first month after purchase, and the remaining 10 percent in the second month after purchase. Raw materials purchases during the last five months of the year are expected to be

August September October November. December

$1,000,000 900,000 1,250,000 1,750,000 950,000

Required: Compute the expected amount of cash payments to suppliers for the months of October, November, and December.

(Appendix 9.1) (Arkansas Corporation; solving for cash payments.)

Budgeted Cash Payments to Suppliers in October: August Purchases (.10 X $1,000,000) September Purchases (.20 X $900,000) October Purchases (.70 X $1,250,000) Total Budgeted October Cash Payments Budgeted Cash Payments to Suppliers in November: September Purchases (.10 X $900,000) October Purchases (.20 X $1,250,000) November Purchases (.70 X $1,750,000) Total Budgeted November Cash Payments Budgeted Cash Payments to Suppliers in December: October Purchases (.10 X $1,250,000) November Purchases (.20 X $1,750,000) December Purchases (.70 X $950,000) Total Budgeted December Cash Payments

$ 100,000 180,000 875,000 $ 1,155,000 $ 90,000 250,000 1,225,000 $ 1,565,000 $ 125,000 350,000 665,000 $ 1,140,000

121. Sales volume variance analysis. Ralston Company prepared a budget last period with budgeted sales of 55,000 units at a price of $75 each. Variable costs were budgeted to be $10 per unit. Fixed costs were budgeted to be $2,000,000 for the period. During the period, actual sales totaled 58,000 units. Required: Prepare a variance report to show the difference between the master budget and the flexible budget. (Ralston Company; sales volume variance analysis.)

Sales Revenue Less Variable Costs Contribution Margin Less Fixed Costs Operating Profit

Flexible Budget (58,000 Units) $4,350,000(a) 580,000(c) $3,770,000 2,000,000 $ 1,770,000

Sales Volume Variance $ 225,000 F 30,000 U $ 195,000 F -$ 195,000 F

Master Budget (55,000 Units) $4,125,000(b) 550,000(d) $3,575,000 2,000,000 $ 1,575,000

(a) $4,350,000 = 58,000 Units X $75. (b) $4,125,000 = 55,000 Units X $75. (c) $580,000 = 58,000 Units X $10. (d) $550,000 = 55,000 Units X $10.

122. Sales volume variance analysis. Crank Company prepared a budget last period with budgeted sales of 56,000 units at a price of $70 each. Variable costs were budgeted to be $10 per unit. Fixed costs were budgeted to be $2,100,000 for the period. During the period, actual sales totaled 60,000 units. Required: Prepare a variance report to show the difference between the master budget and the flexible budget. (Crank Company; sales volume variance analysis.)

Sales Revenue Less Variable Costs Contribution Margin Less Fixed Costs Operating Profit

Flexible Budget (60,000 Units) $4,200,000(a) 600,000(c) $3,600,000 2,100,000 $ 1,500,000

Sales Volume Variance $ 280,000 F 40,000 U $ 240,000 F -$ 240,000 F

Master Budget (56,000 Units) $3,920,000(b) 560,000(d) $3,360,000 2,100,000 $ 1,260,000

(a) $4,200,000 = 60,000 Units X $70. (b) $3,920,000 = 56,000 Units X $70. (c) $600,000 = 60,000 Units X $10. (d) $560,000 = 56,000 Units X $10.

123. Flexible budgeting-manufacturing costs. As a result of studying past cost behavior and adjusting for expected price increases in the future, Gavin Company estimates that its manufacturing costs will be as follows:

Direct Materials Direct Labor Manufacturing Overhead: Variable Fixed

$10.00 per Unit $6.00 per Unit $3.00 per Unit $100,000 per Period

Required: Gavin uses these estimates for planning and control purposes. a. Gavin expects to produce 20,000 units during the next period. Prepare a schedule of the expected manufacturing costs. b. Suppose that Gavin produces only 16,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 16,000-unit level of activity. c. Suppose that Gavin produces 25,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 25,000-unit level of activity.

(Gavin Company; flexible budgetingmanufacturing costs.) a. Expected Manufacturing Costs:


Direct Materials: ($10.00 per Unit X 20,000 Units). Direct Labor: ($6.00 per Unit X 20,000 Units) Manufacturing Overhead: Variable Overhead ($3.00 per Unit X 20,000 Units) Fixed Overhead Total Budgeted Manufacturing Costs $ 200,000 120,000 60,000 100,000 $ 480,000

b. Flexible Budget for Production Department (16,000 Units of Activity): Total Costs for Production = Department Fixed Costs Direct Materials Direct Labor Variable Overhead

= $100,000 + = $100,000 + Total Production Costs for 16,000 = Units of $404,000 Activity

($10.00 + $6.00 + $3.00) X (Units Produced) ($19.00 X 16,000 Units Produced)

c. Total Production Costs for 25,000 Units Produced: = $100,000 + ($19.00 X 25,000 Units Produced) = $575,000.

124. Flexible budgeting-manufacturing costs. As a result of studying past cost behavior and adjusting for expected price increases in the future, Goldman Company estimates that its manufacturing costs will be as follows:

Direct Materials Direct Labor Manufacturing Overhead: Variable Fixed

$12.00 per Unit $7.00 per Unit $4.00 per Unit $130,000 per Period

Required: Goldman uses these estimates for planning and control purposes. a. Goldman expects to produce 25,000 units during the next period. Prepare a schedule of the expected manufacturing costs. b. Suppose that Goldman produces only 18,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 18,000-unit level of activity. c. Suppose that Goldman produces 28,000 units during the next period. Prepare a flexible budget of manufacturing costs for the 28,000-unit level of activity.

(Goldman Company; flexible budgetingmanufacturing costs.) a. Expected Manufacturing Costs:


Direct Materials: ($12.00 per Unit X 25,000 Units). Direct Labor: ($7.00 per Unit X 25,000 Units) Manufacturing Overhead: Variable Overhead ($4.00 per Unit X 25,000 Units) Fixed Overhead Total Budgeted Manufacturing Costs $ 300,000 175,000 100,000 130,000 $ 705,000

b. Flexible Budget for Production Department (18,000 Units of Activity): Total Costs for Production = Department Fixed Costs Direct Materials Direct Labor Variable Overhead

= $130,000 + = $130,000 + Total Production Costs for 18,000 = Units of $544,000 Activity

($12.00 + $7.00 + $4.00) X (Units Produced) ($23.00 X 18,000 Units Produced)

c. Total Production Costs for 28,000 Units Produced: = $130,000 + ($23.00 X 28,000 Units Produced) = $774,000.

125. Estimating flexible selling expense budget and computing sales volume variance. Miami Products estimates that it will incur the following selling expenses next period:

Salaries (fixed) Commissions (0.05 of sales revenue) Travel (0.03 of sales revenue) Advertising (fixed). Sales Office Costs ($4,000 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold). Total Selling Expenses

$ 20,000 17,875 10,725 50,000 7,250 6,500 $112,350

Required: a. Derive the cost equation for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Miami sells 50,000 units during the period. Budgeted sales totaled 65,000 units at a budgeted sales price of $5.50 per unit. Prepare a variance report to show the difference between the master budget and the flexible budget.

(Miami Products; estimating flexible selling expense budget and computing variances.) a.
Fixed Costs Variable Costs as a Function of Revenue Variable Costs as a Function of Units Sold Total Selling Expenses = $20,000 [Salaries] + $50,000 [Advertising] + $4,000 [Sales Office] = $74,000 = (.05 [Commissions] X Revenue) + (.03 [Travel] X Revenue) = ($.05 [Office] X Units Sold) + ($.10 [Shipping] X Units Sold)

= $74,000 + (.08 X Revenues) + ($.15 X Units Sold)

b. Sales Volume Variance Analysis Flexible Budget (50,000 Units) Sales Revenue Less Variable Costs Contribution Margin Less Fixed Costs Operating Profit $ 275,000 (a) 29,500 (c) $ 245,500 74,000 $ 171,500 Sales Volume Variance Master Budget (65,000 Units) $ 357,500 (b) 38,350 (d) $ 319,150 74,000 $ 245,150

$ 82,500 U 8,850 F $ 73,650 U -$ 73,650 U

(a) $275,000 = $5.50 X 50,000 units. (b) $357,500 = $5.50 X 65,000 units. (c) $29,500 = (.08 X $275,000) + ($.15 X 50,000) = $22,000 + $7,500 (d) $38,350 = (.08 X $357,500) + ($.15 X 65,000) = $28,600 + $9,750.

126. Estimating flexible selling expense budget and computing sales volume variance. Florence Products estimates that it will incur the following selling expenses next period:

Salaries (fixed) Commissions (0.06 of sales revenue) Travel (0.02 of sales revenue) Advertising (fixed). Sales Office Costs ($6,000 plus $0.05 per unit sold) Shipping Costs ($0.10 per unit sold). Total Selling Expenses

$ 25,000 24,750 8,250 45,000 9,750 7,500 $120,250

Required: a. Derive the cost equation for selling expenses. (Hint: y = a + bx + cy.) b. Assume that Florence sells 62,000 units during the period. Budgeted sales totaled 75,000 units at a budgeted sales price of $5.50 per unit. Prepare a variance report to show the difference between the master budget and the flexible budget.

(Florence Products; estimating flexible selling expense budget and computing variances.) a.
Fixed Costs Variable Costs as a Function of Revenue Variable Costs as a Function of Units Sold Total Selling Expenses = $25,000 [Salaries] + $45,000 [Advertising] + $6,000 [Sales Office] = $74,000 = (.06 [Commissions] X Revenue) + (.02 [Travel] X Revenue) = ($.05 [Office] X Units Sold) + ($.10 [Shipping] X Units Sold)

= $76,000 + (.08 X Revenues) + ($.15 X Units Sold)

b. Sales Volume Variance Analysis Flexible Budget (62,000 Units) Sales Revenue Less Variable Costs Contribution Margin Less Fixed Costs Operating Profit $ 341,000 (a) 36,580 (c) $ 304,420 76,000 $ 228,420 Sales Volume Variance Master Budget (75,000 Units) $ 412,500 (b) 44,250 (d) $ 368,250 76,000 $ 292,250

$ 71,500 U 7,670 F $ 63,830 U -$ 63,830 U

(a) $275,000 = $5.50 X 62,000 units. (b) $357,500 = $5.50 X 75,000 units. (c) $36,580 = (.08 X $341,000) + ($.15 X 62,000) = $27,280 + $9,300 (d) $44,250 = (.08 X $412,500) + ($.15 X 75,000) = $33,000 + $11,250.

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