MGAB03 FE Review Q&As PDF

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Final Exam review. Consists of MCQs....

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 1: Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to see the numbers before he made a move. His division's return on investment (ROI) had led the company for three years, and he don't want any letdown.” Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company's East Division for last year are given below: Sales $21,000,000 Variable expenses 13,400,000 Contribution margin 7,600,000 Fixed expenses 5,920,000 Operating income $ 1,680,000 Divisional operating assets$ 5,250,000 The company had an overall ROI of 18% last year (considering all divisions). The new product line that headquarters wants Grenier's East Division to add would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows: Sales $9,000,000 Variable expenses65% of sales Fixed expenses $2,520,000

Required: 1. Compute the East Division's ROI for last year; also compute the ROI as it would appear if the new product line is added. 2. If you were in Grenier's position, would you accept or reject the new product line? Explain. 3. Why do you suppose headquarters is anxious for the East Division to add the new product line? 4. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income. 1. Compute East Division's residual income for last year; also compute the residual income as it would appear if the new product line is added. 2. Under these circumstances, if you were in Grenier's position, would you accept or reject the new product line? Explain.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 1- Solution 1. (1) (2) (3) (4) (5) (6)

Sales ............................... Operating income .......... Operating assets ............. Margin (2) ÷ (1) ............. Turnover (1) ÷ (3) .......... ROI (4) × (5)..................

Present $21,000,000 $1,680,000 $5,250,000 8.0% 4.00 32%

New Line $9,000,000 $630,000 * $3,000,000 7.0% 3.00 21%

* Sales .......................................................................... Variable expenses (65% x $9,000,000) ..................... Contribution margin .................................................. Fixed expenses .......................................................... Operating income ......................................................

Total $30,000,000 $2,310,000 $8,250,000 7.7% 3.64 28% $9,000,000 5,850,000 3,150,000 2,520,000 $ 630,000

2. Stefan Grenier will be inclined to reject the new product line, since accepting it would reduce his division’s overall rate of return. 3. The new product line promises an ROI of 21%, whereas the company’s overall ROI last year was only 18%. Thus, adding the new line would increase the company’s overall ROI. 4. a. Operating assets ............................. Minimum required return .............. Minimum operating income .......... Actual operating income ................ Minimum net operating income (above) ........................................ Residual income.............................

Present New Line Total $5,250,000 $3,000,000 $8,250,000 × 15% × 15% × 15% $787,500 $450,000 $1,237,500 $1,680,000 $ 630,000 $2,310,000 787,500 $ 892,500

450,000 1,237,500 $ 180,000 $1,072,500

b. Under the residual income approach, Stefan Grenier would be inclined to accept the new product line, since adding the product line would increase the total amount of his division’s residual income, as shown above.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 2: Gerbig Company's Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow: Selling price per unit on the outside market $40 Variable costs per unit $21 Fixed costs per unit (based on capacity) $9 Capacity in units 60,000 Gerbig Company has a Motor Division that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each year from another company at a cost of $38 per transformer. Gerbig Company evaluates its division managers on the basis of divisional profits.

Required: 1. Assume that the Electrical Division is now selling only 50,000 transformers each year to outside customers. 1. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? 2. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? 3. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or why not? 4. From the standpoint of the entire company, should a transfer take place? Why or why not? 2. Assume that the Electrical Division is now selling to outside customers all of the transformers it can produce. 1. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? 2. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? 3. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or why not? 4. From the standpoint of the entire company, should a transfer take place? Why or why not?

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 2- Solution 1. a. The lowest acceptable transfer price from the perspective of the selling division, the Electrical Division, is given by the following formula:

Transfer price ≥ Variable cost+ Total contribution margin on lost sales per unit

Number of units transferred

Because there is enough idle capacity to fill the entire order from the Motor Division, there are no lost outside sales. And because the variable cost per unit is $21, the lowest acceptable transfer price as far as the selling division is concerned is also $21. Transfer price  $21 + $0/10,000 = $21 b. The Motor Division can buy a similar transformer from an outside supplier for $38. Therefore, the Motor Division would be unwilling to pay more than $38 per transformer. Transfer price  Cost of buying from outside supplier = $38 c. Combining the requirements of both the selling division and the buying division, the acceptable range of transfer prices in this situation is: $21  Transfer price  $38 Assuming that the managers understand their own businesses and that they are cooperative, they should be able to agree on a transfer price within this range and the transfer should take place. d. From the standpoint of the entire company, the transfer should take place. The cost of the transformers transferred is only $21 and the company saves the $38 cost of the transformers purchased from the outside supplier. 2. a. Each of the 10,000 units transferred to the Motor Division must displace a sale to an outsider at a price of $40. Therefore, the selling division would demand a transfer price of at least $40. This can also be computed using the formula for the lowest acceptable transfer price as follows: Transfer price  $21 + [($40 - $21) × 10,000]/10,000 = $21+ ($40 - $21) = $40 b. As before, the Motor Division would be unwilling to pay more than $38 per transformer. c. The requirements of the selling and buying divisions in this instance are incompatible. The selling division must have a price of at least $40 whereas the buying division will not pay more than $38. An agreement to transfer the transformers is extremely unlikely. d. From the standpoint of the entire company, the transfer should not take place. By transferring a transformer internally, the company gives up revenue of $40 and saves $38, for a loss of $2.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 3: Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the information presented below. If the company keeps and overhauls its present generator, then the generator will be usable for eight more years. If a new generator is purchased, it will be used for eight years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown below. The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate. Present GeneratorNew Generator Purchase cost new $16,000 $20,000 Remaining book value $ 9,000 — Overhaul needed now $ 8,000 — Annual cash operating costs $12,500 $ 7,500 Salvage value now $ 4,000 — Salvage value eight years from now $ 3,000 $ 6,000

Required: (Ignore income taxes.) 1. Should Eastbay Hospital keep the old generator or purchase the new one? Use the totalcost approach to net present value in making your decision. 2. Redo (1) above, this time using the incremental-cost approach.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 3- Solution 1. The total-cost approach: Year(s)

Amount of Cash Flows

16% Factor

Present Value of Cash Flows

Purchase the new generator: Cost of the new generator ...................................

Now

$(20,000)

1.000

Salvage of the old generator ...............................

Now

$4,000

1.000

4,000

Annual cash operating costs ...............................

1-8

$(7,500)

4.344

(32,580)

Salvage of the new generator ..............................

8

$6,000

0.305

1,830

Present value of the net cash outflows ...................

$(20,000)

$(46,750)

Keep the old generator: Overhaul needed now .............................................

Now

$(8,000)

1.000

$ (8,000)

Annual cash operating costs ...................................

1-8

$(12,500)

4.344

(54,300)

Salvage of the old generator ...................................

8

$3,000

0.305

Present value of the net cash outflows ...................

915 $(61,385)

Net present value in favour of purchasing the new generator .............................................................

$ 14,635

The hospital should purchase the new generator, since it has the lowest present value of total cost. 2.

The incremental-cost approach:

Year(s)

Amount of Cash Flows

16% Factor

Present Value of Cash Flows

Incremental investment—new generator* ................

Now

$(12,000)

1.000

$(12,000)

Salvage of the old generator .....................................

Now

$4,000

1.000

4,000

Savings in annual cash operating costs.....................

1-8

$5,000

4.344

21,720

Difference in salvage value in 8 years ......................

8

$3,000

0.305

915

Net present value in favour of purchasing the new generator ...........................................................

*$20,000 – $8,000 = $12,000.

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$ 14,635

MGAB03 Managerial Accounting – Final Exam Review Questions Question 4: The owner of a small mining supply company has requested for a cash budget for June. After examining the records of the company, you find the following: a. Cash balance on June 1 is $ 830. b. Actual sales for April and May are as follows :

c. Credit sales are collected over a three month period. 50 percent in the month of sale, 30 percent in the second month, and 15 percent in the third month. The sales collected in the third month are subject to a 1 percent late fee, which is paid by those customers in addition to what they owe. The remaining sales are uncollectible. d. Inventory purchase average 75 percent of a month’s total sales. Of those purchases, 20 percent are paid for in the month of purchase. The remaining 80 percent are paid for in the following month. e. Salaries and wages total $ 8,700 per month, including a $ 4,500 salary paid to the owner. f. Rent is $ 1,340 per month. g. Taxes to be paid in June are $ 5,500. The owner also tells you that he expects cash sales of $ 15,000 and credit sales of $ 50,000 for June,. No minimum cash balance is required. The owner of the company does not have access to short term loans.

Required: (1) Prepare a cash budget for June. Include supporting schedules for cash collection and cash payments. (2) Did the business show a negative cash balance for June ? Assuming that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for dealing with a negative cash balance ?

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 4-Solution 1.

Cash Budget For June Beginning cash balance.................................................. Collections: Cash sales .................................................................. Credit sales: Current month ($50,000 × 50%) ...................... May credit sales ($35,000 × 30%) ..................... April credit sales* .............................................. Total cash available........................................................ Less disbursements: Inventory purchases: Current month ($65,000 × 75% × 20%) .......... Prior month ($50,000 × 75% × 80%) ............... Salaries and wages ................................................... Rent ........................................................................... Taxes.......................................................................... Total cash needs ................................................. Excess of cash available over needs ..............................

$

830 15,000 25,000 10,500 3,788 $ 55,118

$ 9,750 30,000 8,700 1,340 5,500 $

55,290 (172)

*$25,000 × 15% = $3,750 $3,750 × 0.01 = $38 $3,750 + $38 = $3,788 Yes, the business does show a negative cash balance for the month of June. A negative budgeted cash balance is unacceptable. The easiest way to deal with it would be for the owner to consider taking less cash salary.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 5: Franklin Products Limited manufactures and distributes a number of products to retailers. One of these products, SuperStick, requires four kilograms of material D236 in the manufacture of each unit. The company is now planning raw materials needs for the third quarter —July, August, and September. Peak sales of SuperStick occur in the third quarter of each year. To keep production and shipments moving smoothly, the company has the following inventory requirements: 1. The finished goods inventory on hand at the end of each month must be equal to 8,000 units plus 20% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 22,000 units. 2. The raw materials inventory on hand at the end of each month must be equal to 40% of the following month's production needs for raw materials. The raw materials inventory on June 30 for material D236 is budgeted to be 129,000 kilograms. 3. The company maintains no work in process inventories. A sales budget for SuperStick for the last six months of the year follows.

July August September October November December

Budgeted Sales in Units 60,000 75,000 105,000 53,000 30,000 15,000

Required: 1. Prepare a production budget for SuperStick for the months July, August, September, and October. 2. Examine the production budget that you prepared. Why will the company produce more units than it sells in July and August and fewer units than it sells in September and October? 3. Prepare a direct materials purchases budget showing the quantity of material D236 to be purchased for July, August, and September and for the quarter in total.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 5: Solution 1.

Production budget:

July August September Budgeted sales (units).................. 60,000 75,000 105,000 Add desired ending inventory .... 23,000 29,000 18,600 Total needs ................................... 83,000 104,000 123,600 Less beginning inventory ............ 22,000 23,000 29,000 Required production .................... 61,000 81,000 94,600 Note: July E.I. = 8,000 units + 75,000 (next months sales) x 20% October E.I. = 8,000 units + 30,000 (Nov. Sales) x 20%

October 53,000 14,000 67,000 18,600 48,400

2. During July and August the company is building inventories in anticipation of peak sales in September. Therefore, production exceeds sales during these months. In September and October inventories are being reduced in anticipation of a decrease in sales during the last months of the year. Therefore, production is less than sales during these months to cut back on inventory levels. 3. Direct materials budget:

Required production (units) ...... Material D236 needed per unit . Production needs (kgs.)............. Add desired ending inventory (kgs.) ...................................... Total Material D236 needs ........ Less beginning inventory (kgs.) Material D236 purchases (kgs.)

July August September 61,000 81,000 94,600 x 4 kgs. x 4 kgs. x 4 kgs. 244,000 324,000 378,400

Third Quarter 236,600 x 4 kgs. 946,400

129,600 373,600 129,000 244,600

77,440 1,023,840 129,000 894,840

151,360 475,360 129,600 345,760

77,440 * 455840 151,360 304,480

* 48,400 units (October production) × 4 kgs. per unit = 193,600 kgs.; 193,600 kgs. × 0.4 = 77,440 kgs. As shown in part (1), production is greatest in September. However, as shown in the raw material purchases budget, the purchases of materials is greatest a month earlier because materials must be on hand to support the heavy production scheduled for September.

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MGAB03 Managerial Accounting – Final Exam Review Questions Question 6: The engineering department of an automotive supplier has developed a $600,000 machine for assembling school bus recliners. The machine has been used to produce only one batch of 1,000 units so far (prototypes). The company will amortize the $600,000 initial machine investment evenly over 5 years, after which production of recliners will be stopped. The company’s expected annual costs will be direct materials, $300,000, direct labour, $120,000 and variable manufacturing overhead, $240,000. Variable manufacturing overhead varies with direct manufacturing labour costs. Fixed manufacturing overhead, exclusive of amortization, is $90,000 annually, and fixed marketing and administrative costs are ...