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Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand.
The variable production costs per bag are $3.30 and total fixed costs are $10,000. The hamster food can be sold as it is for $8.65
per bag or be processed further into Premium Green and Green Deluxe at an additional $2,500 cost. The additional processing will
yield 10,000 bags of Premium Green and 3,500 bags of Green Deluxe, which can be sold for $7.65 and $5.65 per bag, respectively.
The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:
 
$93,775
$7,275.
$9,775.
$96,275.
$2,500.
   
Maxim manufactures a hamster food product called Green Health. Maxim currently has 15,500 bags of Green Health on hand.
The variable production costs per bag are $2.90 and total fixed costs are $21,000. The hamster food can be sold as it is for $10.00
per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield
15,500 bags of Premium Green and 4,100 bags of Green Deluxe, which can be sold for $9 and $7 per bag, respectively.
The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:
 
$8,200.
$5,000.
$168,200.
$163,200.
$13,200
  Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $5,000.
The division sales for the year were $1,059,000 and the variable costs were $862,000. The fixed costs of the division were $202,000.
If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating
income for eliminating this business segment would be:
 
$55,600 decrease
$197,000 increase
$197,000 decrease
$136,400 decrease
$60,600 decrease
   
Maxim manufactures a hamster food product called Green Health. Maxim currently has 15,500 bags of Green Health on hand.
The variable production costs per bag are $2.90 and total fixed costs are $21,000. The hamster food can be sold as it is for $10.00 per
bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 15,500
bags of Premium Green and 4,100 bags of Green Deluxe, which can be sold for $9 and $7 per bag, respectively. Assuming Maxim further
processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:
 
$8,200.
$5,000.
$163,200.
$168,200
$13,200
   
Benjamin Company had the following results of operations for the past year:
 
Sales (16,000 units at $10.25)                                                   $164,000
Direct materials and direct labor                                               $100,000            
Overhead (20% variable)                                                           20,000
Selling and administrative expenses (all fixed)                       32,500                  (152,500)
Operating income                                                                        $11,500
 
 
A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,500 units at $8.05 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $650 and selling and administrative costs by $350. If Benjamin accepts the offer, its profits will:
 
Increase by $5,975.
Increase by $8,100.
Increase by $36,225.
Increase by $6,975.
Decease by $8,100.
   
Walters manufactures a specialty food product that can currently be sold for $22.30 per unit and has 20,300 units on hand.
Alternatively, it can be further processed at a cost of $12,300 and converted into 12,300 units of Deluxe and 6,300 units of Super.
The selling price of Deluxe and Super are $30.30 and $20.30, respectively. The incremental net income of processing further would be:
 
$12,300.
$44,300.
$35,590
$18,300.
$47,890.
   
Epsilon Co. can produce a unit of product for the following costs:
                                                 
Direct material $                             7.90        
Direct labor                                    23.90     
Overhead                                        39.50     
Total costs per unit          $             71.30     
 
An outside supplier offers to provide Epsilon with all the units it needs at $63.45 per unit.
If Epsilon buys from the supplier, the company will still incur 30% of its overhead. Epsilon should choose to:
 
Buy since the relevant cost to make it is $43.65.
Buy since the relevant cost to make it is $71.30.
Buy since the relevant cost to make it is $59.45.
Make since the relevant cost to make it is $59.45
Make since the relevant cost to make it is $43.65
   
Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand.
The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00
per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing
will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.
 If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be $100,000.
 
68,000
$78,000
C. $98,000
D. $96,000.
   
Lattimer Company had the following results of operations for the past year:
                                                                                 
Sales (15,000 units at $12.05)                                                     $             180,750                                
Variable manufacturing costs                                                      $             98,250                                                                  
Fixed manufacturing costs                                                                            21,750                                                                  
Selling and administrative expenses (all fixed)                                      36,750                                 (156,750 )            
Operating income                                                                            $             24,000                  
 
A foreign company whose sales will not affect Lattimer's market offers to buy 5,100 units at $7.60 per unit. In addition to existing costs, selling these units would add a $0.26 selling cost for export fees. Lattimer’s annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:
 
$2,040 loss.
$8,466 loss.
$4,029 profit
$3,366 loss.
$5,355 profit
   
Ahngram Corp. has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year. The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12. The incremental net income (loss) from the choice of reworking the units would be:
                               
 
$5,500.
($2,500)
$10,500
$2,500
$1,500
   
Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials,
$10.10; direct labor, $14.10, variable overhead $3.10 and fixed overhead, $8.10. An outside supplier has offered to
sell the product to Paxton for $35.40. Compute the net incremental cost or savings of buying the component.
 
$3.10 savings per unit
$3.10 cost per unit.
$0 cost or savings per unit.
$8.10 savings per unit.
$8.10 cost per unit.
   
Factor Co. can produce a unit of product for the following costs:
                                 
Direct material                 $             7.90        
Direct labor                                     23.90     
Overhead                                        39.50     
Total costs per unit          $             71.30     
 
 
An outside supplier offers to provide Factor with all the units it needs at $43.63 per unit.
If Factor buys from the supplier, the company will still incur 65% of its overhead. Factor should choose to:
 
Buy since the relevant cost to make it is $31.80.
Make since the relevant cost to make it is $31.80.
Buy since the relevant cost to make it is $57.48.
Buy since the relevant cost to make it is $45.63
Make since the relevant cost to make it is $45.63
   
Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10.70; direct labor, $24.70,
and overhead, $16.70. An outside supplier has offered to sell the product to Wheeler for $48.32. If Wheeler buys from the supplier,
it will still incur 40% of its overhead cost. Compute the net incremental cost or savings of buying.
 
$2.90 savings per unit.
$5.61 cost per unit.
$2.90 cost per unit
$6.24 cost per unit.
$5.61 savings per unit.
   
Markson Company had the following results of operations for the past year:
 
                                                                                                                 
Sales (8,000 units at $19.30)                                $             154,400                                
Variable manufacturing costs                               $             83,200                                                                  
Fixed manufacturing costs                                                   14,300                                                                  
Variable selling and administrative expenses                    9,200                                                                     
Fixed selling and administrative expenses                        19,300                                 (126,000 )            
Operating income                                                    $            28,400                  
 
 
A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $12.95 per unit.
In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,530 for the purchase of
special tools. Markson’s annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:
 
Increase by $1,270.
Decrease by $5,600.
Decrease by $1,530.
Increase by $2,800.
Decrease by $4,330.
   
Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3.60 per unit. Bluebird currently produces and sells 75,000 units at $7.60 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler’s name and would not affect Bluebird’s sales through its normal channels. Production costs for these units are $4.40 per unit, which includes $2.55 variable cost and $1.85 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:
 
$54,000 increase.
$38,250 decrease.
$38,250 increase.
$12,000 decrease.
$15,750 increase
   
Chang Industries has 1,500 defective units of product that have already cost $13.50 each to produce. A salvage company will purchase
the defective units as they are for $4.50 each. Chang's production manager reports that the defects can be corrected for $6.50 per unit,
enabling them to be sold at their regular market price of $20.00. The incremental income or loss on reworking the units is:
 
$20,250 income.
$13,500 loss.
$13,500 income
$9,750 loss.
$23,250 income.
   
Granfield Company has a piece of manufacturing equipment with a book value of $37,000 and a remaining useful life of four years.
At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,400.
Granfield can purchase a new machine for $114,000 and receive $21,400 in return for trading in its old machine. The new machine
will reduce variable manufacturing costs by $18,400 per year over the four-year life of the new machine. The total increase or
decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:
 
$19,000 decrease
$19,000 increase
$49,900 increase
$15,600 decrease
$73,600 decrease
   
Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $41,000.
The division sales for the year were $941,000 and the variable costs were $465,000. The fixed costs of the division were $517,000.
If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's
operating income for eliminating this business segment would be:
 
$206,800 increase
$476,000 decrease
$269,200 increase
$269,200 decrease
$476,000 increase
   
Minor Electric has received a special one-time order for 600 light fixtures (units) at $12 per unit.
Minor currently produces and sells 3,000 units at $13.00 each. This level represents 75% of its capacity.
Production costs for these units are $15.00 per unit, which includes $10.00 variable cost and $5.00 fixed cost.
To produce the special order, a new machine needs to be purchased at a cost of $650 with a zero salvage value.
Management expects no other changes in costs as a result of the additional production.
If Minor wishes to earn $1,150 on the special order, the size of the order would need to be:
 
50 units.
840 units.
3,600 units.
900 units
1,800 units.
   
Granfield Company has a piece of manufacturing equipment with a book value of $41,500 and are remaining useful life
of four years. At the end of the four years the equipment will have a zero-salvage value. The market value of the equipment
is currently $22,300. Granfield can purchase a new machine for$123,000 and receive $22,300 in return for trading in its
old machine. The new machine will reduce variable manufacturing costs by $19,300 per year over the four-year life of the
new machine. The total increase or decrease in net income by replacing the current machine with the new machine
(ignoring the time value of money) is:
 
$23,500 increase
$23,500 decrease
$19,200 decrease
$53,050 increase
$77,200 decrease
   
If a merchandiser's budgeted beginning inventory is $8,300, budgeted ending inventory is $9,400, and cost of
goods sold is expected to be $10,260, then budgeted purchases should be?
 
$11,360
   
A company's history indicates that 20% of its sales are for cash and the remaining 80% are on credit. Collections on credit
sales are 30% in the month of the sale and 70% the following month. Projected sales for January, February, and March are
$75,000, $92,000 and $60,000, respectively. The March expected cash receipts are?
 
$77,920
   
ABC provides the following sales forecast for the next three months:
 
                                July                    August                 September
Sales units           5,000                    5,700                    5,560
 
The company wants to end each month with ending finished goods inventory equal to 25% of the next
month's sales. Finished goods inventory on June 30 is 1,250 units. The budgeted production units for August are:
 
5,665 units.
7,090 units.
6,950 units.
4,135 units.
4,310
   
JCP has budgeted sales of 12,000 men's suits in September. Management wants to have 6,000 suits in inventory
at the end of the month to prepare for the winter season. Beginning inventory for September is expected to be 4,000 suits.
What is the dollar amount of the purchase of suits if each suit has a cost of $75.
 
$900,000.
$1,350,000.
$750,000.
$1,200,000.
$1,050,000
   
BC's budgeted production calls for 56,000 liters in April and 52,000 liters in May of a key raw material
that costs $1.85 per liter. Each month's ending raw materials inventory should equal 30% of the following month's
budgeted materials. The April 1 inventory for this material is 16,800 liters. What is the budgeted materials purchases for April?
 
$103,600
$72,520
$132,460
$106,560
$101,380
   
A company's flexible budget for 12,000 units of production showed
 
sales                                      $48,000
variable costs                     $18,000
fixed costs                           $16,000
 
The contribution margin expected if the company produces and sells 16,000 units is:
 
$40,000
$18,000
$48,000
$24,000
$64,000
   
ABC has 2,000 defective units of product that have already cost $14 each to produce. A salvage company
will purchase the defective units as they are for $5 each. Chang's production manager reports that the defect scan
be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. Chang should:
 
Sell 1,000 units to the salvage company and repair the remainder
Throw the units away.
Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
Correct the defects and sell the units at the regular price.
Sell the units to the salvage company for $5 per unit.
   
Use the following data to find the direct labor efficiency variance if the company produced 3,500 units
during the period.
 
Direct labor standard (4 hrs. @ $7/hr.) $ 28 per unit
Actual hours worked 12,250
Actual rate per hour $ 7.50
 
$6,125 unfavorable.
$7,000 unfavorable.
$6,125 favorable.
$12,250 favorable.
$7,000 favorable.
   
A company has the choice of either selling 600 defective units as scrap or rebuilding them.  The company could
sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs
of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt
units for $5.00 each. What should the company do?
 
Rebuild the units.
Sell the units as scrap.
Since both alternatives produce a loss, store the units in hopes of a better price later.
Throw the units away.
It does not matter because both alternatives have the same result
   
ABC manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000units on hand.
Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of
Deluxe and 6,000 units of Super. The selling price for Deluxe and Super are $30 and $20, respectively.
The incremental net income of processing further would be:
 
$12,000.
$40,000.
$44,000.
$18,000.
$28,000.
   
An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.
 
True
False
   
Opportunity costs are the additional or incremental revenues generated by selecting a certain course of action.
 
True
False
   
A sunk cost arises from a past decision and cannot be avoided or changed.
 
True
False
   
An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.
 
True
False
   
Significant sunk costs are relevant to decisions about the future.
 
True
False
   
Wages from a job a student gives up to attend summer school would be a sunk cost.
 
True
False
   
Employee morale, timeliness of delivery, and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.
 
True
False
   
An opportunity cost:
 
Is the potential benefit lost by choosing a specific alternative course of action among two or more.
   
Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce.
A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:
 
Correct the defects and sell the watches at the regular price.
   
Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive
capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit.  Product B sells for $12 per
 unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:
 
Produce only Product B.
   
Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable
production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed
further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and
3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further
into Premium Green and Green Deluxe, revenue from the two products would be:
 
$98,000
 
10,000 bags x 8 = 80,000
3,000 bags x 6 = 18,000
80,000 + 18,000 = 98,000
   
Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit.
Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity.
These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through
its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost
and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental revenue will be:
 
$45,000.
 
15,000 x 3
   
Frederick Co. is thinking about having one of its products manufactured by an outside supplier.
Currently, the cost of manufacturing 5,000 units follows:
 
Direct material                                   $62,000
Direct labor                                         47,000
Variable factory overhead                 38,000
Factory overhead                               52,000
 
If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:
 
Buy the product because the total incremental costs of manufacturing are greater than $130,000.
   
A company has the choice of either selling 1,000 defective units as scrap or rebuilding them.
The company could sell the defective units as they are for $4.00 per unit.
Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for
labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. If the company rebuilds
the units, what is the impact on income?
 
Income will decrease by $500.
   
Capital budgeting is the process of analyzing alternative long-term
 
investments and deciding which assets to acquire or sell.
   
A formal statement of future plans, usually expressed in monetary terms, is a
 
Prospectus.
Variance analysis.
Variance report.
Position statement.
Budget
   
Which of the following is a benefit derived from budgeting?
 
Budgeting avoids the need for incentives to improve employee performance.
Budgeting focuses management's attention on past performance.
Budgeting provides a basis for evaluating performance.
Budgeting eliminates the need for coordination across departments.
Budgeting avoids needing industry and economic factors in decision making
   
Budgets that are periodically revised and have new periods added to replace those that have lapsed are called:
 
Rolling budgets.
Capital expenditures budgets.
Sales budgets.
Production budgets.
Cash budgets
   
The usual starting point for preparing a master budget is forecasting or estimating:
 
Sales.
Expenditures.
Cash payments.
Income.
Production
   
Which of the following budgets is not an operating budget?
 
Sales budget.
Production budget.
Selling expenses budget.
General and administrative expense budget.
Cash budget.
   
Boulware Company's budgeted production calls for 6400 units in October and 9400 units in November.
Each unit requires 8 pounds (lbs.) of raw material A. Each month's ending inventory of raw materials should equal
30% of the following month's budgeted materials requirements. The October 1 inventory for this material is 15,360 pounds.
What is the budgeted materials purchases for this key material in pounds forOctober?
 
58,400 lbs.
51,200 lbs.
89,120 lbs.
46,180 lbs.
73,760 lbs.
   
Alliance Company's budgets production of 36,000 units in January and 40,000 units in February. Each finished unit requires 3 pounds of raw material K
that costs $2.00 per pound. Each month's ending raw materials inventory should equal 30% of the following month's budgeted materials. The January 1
inventory for this material is 32,400 pounds. What is the budgeted materials need in pounds for January?
 
A) 111,600 pounds.
B) 108,000 pounds.
C) 68,400 pounds.
D) 75,600 pounds.
E) 144,000 pounds.
   
Glaston Company manufactures a single product using a JIT inventory system. The production budget indicates that the number of units
expected to be produced are 186,000 in October, 194,500 in November, and 191,000 in December. Glaston assigns variable overhead at
a rate of $0.70 per unit of production. Fixed overhead equals $143,000 per month. Compute the total budgeted overhead that would
appear on the factory overhead budget for month of October.
 
A) $143,000.
B) $279,150.
C) $329,000.
D) $130,200.
E) $273,200
   
Zhang Industries budgets production of 260 units in June and 270 units in July. Each unit requires 1.5hours of direct labor.
The direct labor rate is $13.20 per hour. The indirect labor rate is $20.20 per hour. Compute the budgeted direct labor cost for July.
 
A) $5346.
B) $8181.
C) $13,527.
D) $7878.
E) $5148
   
The anticipated costs incurred under normal conditions to produce a specific product or to perform a specific service are:
 
A) Standard costs.
B) Fixed costs.
C) Variable costs.
D) Period costs.
E) Product costs
   
The difference between actual price per unit of input and the standard price per unit of input results in a:
 
A) Price variance.
B) Standard variance.
C) Controllable variance.
D) Volume variance.
E) Quantity variance
   
The difference between actual quantity of input used and the standard quantity of input used results in a:
 
A) Controllable variance.
B) Price variance.
C) Standard variance.
D) Quantity variance.
E) Budget variance.
   
The difference between the actual cost incurred and the standard cost is called the:
 
A) Price variance.
B) Flexible variance.
C) Controllable variance.
D) Cost variance.
E) Volume variance
   
Standard costs are used in the calculation of:
 
A) Price variances only.
B) Price, quantity, and sales variances.
C) Price and quantity variances.
D) Quantity variances only.
E) Quantity and sales variances
   
A company provided the following direct materials cost information. Compute the direct materials quantity variance.
 
Standard costs assigned:               Direct materials standard cost (405,000 units @ $2.00/unit) $ 810,000
Actual costs:                                       Direct Materials costs incurred (403,750 units @ $2.20/unit) $ 888,250
 
A) $2.500 Favorable.
B) $2,500 Unfavorable.
C) $2,750 Favorable.
D) $2,750 Unfavorable
E) $78,250 Favorable
 
2 x (405,000 – 403,750) = 2,500
   
A company's flexible budget for 12,000 units of production showed sales, $48,000; variable costs, $18,000; and fixed costs, $16,000.
The variable costs expected if the company produces and sells 16,000 units is:
 
A) $48,000.
B) $64,000.
C) $18,000.
D) $40,000.
E) $24,000
   
Parallel Enterprises has collected the following data on one of its products. During the period the company produced
25,000 units. The direct materials price variance is:
Direct materials standard (7 kg. @ $2/kg) $ 14per finished unit
Actual cost of materials purchased $ 322,500
Actual direct materials purchased and used 150,000lbs.
 
A) $50,000 unfavorable.
B) $22,500 favorable.
C) $27,500 unfavorable.
D) $22,500 unfavorable.
E) $50,000 favorable
$22,500 unfavorable
   
Hassock Corp. produces woven wall hangings. It takes 2 hours of direct labor to produce a single wall-hanging. Hassock's standard labor
cost is $12 per hour. During August, Hassock produced 10,000 units and used 21,040 hours of direct labor at a total cost of $250,376.
What is Hassock's labor efficiency variance for August?
 
A) $10,376 unfavorable.
B) $14,584 unfavorable.
C) $4,160 favorable.
D) $12,480 favorable.
E) $12,480 unfavorable
   
Use the following data to find the direct labor rate variance if the company produced 3,500 units during the period.
Direct labor standard (4 hrs. @ $7/hr.) $ 28 per unit Actual hours worked 12,250 Actual rate per hour $ 7.50
 
A) $6,125 unfavorable.
B) $6,125 favorable.
C) $7,000 favorable.
D) $12,250 favorable.
E) $7,000 unfavorable.
   
An opportunity cost:
A) Is irrelevant in decision making because it occurred in the past.
B) Is the potential benefit lost by choosing a specific alternative course of action among two or more.
C) Requires a current outlay of cash.
D) Is an unavoidable cost because it remains the same regardless of the alternative chosen.
E) Results from past managerial decisions TEST
   
A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):
 
A) Out-of-pocket cost.
B) Opportunity cost.
C) Uncontrollable cost.
D) Incremental cost.
E) Sunk cost
   
An additional cost incurred only if a company pursues a particular course of action is a(n):
 
A) Incremental cost.
B) Period cost.
C) Pocket cost.
D) Sunk cost.
E) Discount cost
   
A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next
5 years. The $19,000 cost is an example of a(n):
 
A) Incremental cost.
B) Fixed cost.
C) Opportunity cost.
D) Sunk cost.
E) Uncontrollable cost
   
If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same,
production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100%
of its capacity to the product that has the higher contribution margin per unit of operating capacity.
 
A) True
B) False
   
Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce.
A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects
can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:
 
A) Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.
B) Correct the defects and sell the watches at the regular price.
C) Throw the watches away.
D) Sell 5,000 watches to the salvage company and repair the remainder.
E) Sell the watches for $3 per unit
   
Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand.
The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00
per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield
10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:
 
A) $ 6,000.
B) $ 8,000.
C) $ 2,000.
D) $98,000.
E) $96,000
   
Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and
sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit,
which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased
at a cost of $1,000 with a zero-salvage value. Management expects no other changes in costs as a result of the additional
production. Should the company accept the special order?
 
A) No, because net income would decrease by $5,500.
B) No, because net income would decrease by $2,000.
C) Yes, because net income would increase by $7,500.
D) No, because net income would decrease by $1,500.
E) Yes, because net income would increase by $2,000
   
The payback period reflects the amount of time for the investment to generate enough net cash flow to return the
cash initially invested to purchase it.
 
True
False
   
If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.
 
True
False
   
Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.
 
True
False
   
In ranking choices with the break-even time (BET) method, the investment
with the longest BET gets the highest rank.
 
True
False
   
The payback period method of evaluating an investment fails to consider cash inflows after the point where an investment's
costs are fully recovered.
 
True
False
   
The accounting rate of return (ARR) is computed by dividing a project's after-tax net income by the average annual investment.
 
True
False
   
The accounting rate of return is based on cash flows rather than net income in its calculation.
 
True
False
   
The time value of money concept:
 
Means that a dollar today is worth more than a dollar tomorrow.
   
A minimum acceptable rate of return for an investment decision is called the:
 
Hurdle rate of return.
   
The rate that yields a net present value of zero for an investment is the:
 
Internal rate of return.
   
A given project requires a $30,000 investment and is expected to
generate end-of-period annual cash inflows as follows:
 
Year 1: $12,000
Year 2: $8,000
Year 3: $10,000
Total: $30,000
 
Assuming a discount rate of 10%, what is the net present value of this investment?
Selected present value factors for a single sum are shown in the table below
 
I = 10%                 n = 1,                     0.9091
I = 10%                 n = 2,                     0.8264
I = 10%                 n = 3,                     0.7513
 
$4,966.68
 
0.9091(12,000) + 0.8264(8,000) + 0.7513(10,000) - $30,000 =4,966.68
   
Restating future cash flows in terms of present values and then determing the payback period using these present values is known as:
 
Break-even time (BET)
   
If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?
 
BET or IRR
   
Coffer Co. is analyzing two projects for the future. Assume that only
one project can be selected.
 
Project X              Project Y
 
Cost of machine:                               $77,000               $55,000
Net cash flow:
Year 1:                                                  28,000                  2,000
Year 2:                                                  28,000                  25,000
Year 3:                                                  28,000                  25,000
Year 4:                                                  0                             20,000
 
If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?
 
2.75 years
 
77,000 / 28,000 = 2.75
   
A company wishes to buy new equipment for $9,000. The equipment is expected to generate an additional $2,800 in cash inflows for six years.
All cash flows occur at year-end. A bank will make a $9,000 loan to the company at a 10% interest rate so that the company can purchase the equipment.
Use the table below to determine break-even time for this equipment:
 
Year       Present Value of 1 at 10%
0                             1.0000
1                             0.9091
2                             0.8264
3                             0.7513
4                             0.6830
5                             0.6209
6                             0.5645
 
4.07 years
 
4 + 125 / 1,739 = 4.07
   
A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income
of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine?
 
6 years
 
21,000 / (2,000 + 1,500) = 6
   
A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.
The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected
income statement for each year of the asset's life appears below. What is the payback period for this machine?
 
Sales                                                                $90,000
Costs: Manufacturing                                     $52,000
Depreciation on machine                              4,000
Selling and administrative expenses           30,000 (86,000)
Income before taxes                                       $4,000
Income tax (50%) (2,000)
Net income $2,000
 
4 years
 
24,000 / 6 = 4,000
2,000 + 4,000 = 6,000
24,000 / 6,000 = 4
   
A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.
The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected
income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine?
 
16.7%
 
2,000 / 24,000 / 2] = 0.166666667 (round to 0.167)
0.167 x 100 = 16.7%

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