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6) Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision. Answer: FALSE Difficulty: 2 Medium Topic: Decision Making and Six Key Concepts Learning Objective: 11-01 Identify relevant and irrelevant costs and benefits in a decision. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

21) Fixed costs are irrelevant in decisions about whether a product should be dropped. Answer: FALSE Difficulty: 2 Medium Topic: Adding and Dropping Product Lines and Other Segments Learning Objective: 11-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

25) A vertically integrated company is less dependent on its suppliers than a company that is not vertically integrated. Answer: TRUE Difficulty: 1 Easy Topic: Make or Buy Decisions Learning Objective: 11-03 Prepare a make or buy analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

30) When a company has a production constraint, the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority. Answer: FALSE Difficulty: 1 Easy Topic: Utilizing a Constrained Resource to Maximize Profits Learning Objective: 11-05 Determine the most profitable use of a constrained resource. Bloom's: Remember AACSB: Reflective Thinking

AICPA: FN Measurement; BB Critical Thinking

36) The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products can be recognized as separate products. Answer: TRUE Difficulty: 1 Easy Topic: Joint Product Costs and Sell or Process Further Decisions Learning Objective: 11-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

47) United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their: A) gross margin B) contribution margin C) selling price D) contribution margin per unit of the constrained resource Answer: D Difficulty: 1 Easy Topic: Utilizing a Constrained Resource to Maximize Profits Learning Objective: 11-05 Determine the most profitable use of a constrained resource. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

59) Lusk Corporation produces and sells 10,000 units of Product X each month. The selling price of Product X is $40 per unit, and variable expenses are $32 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $70,000 of the $120,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the annual financial advantage (disadvantage) for the company of eliminating this product should be: A) ($30,000) B) $30,000 C) $40,000 D) ($40,000) Answer: A

Explanation: Keep Product Drop Product X X Sales (10,000 units × $40 $ 400,000 per unit) Variable expenses (10,000 320,000 units × $32 per unit) Contribution margin Fixed expenses Financial advantage (disadvantage)

$

0

Difference $ ( 400,000)

0

320,000

80,000

0

( 80,000)

120,000

70,000

50,000

$ ( 40,000)

$ (70,000)

$ ( 30,000)

Difficulty: 1 Easy Topic: Adding and Dropping Product Lines and Other Segments Learning Objective: 11-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

74) Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Direct materials

Per Unit $ 3.80

Direct labor

$ 3.80

Variable manufacturing overhead

$ 1.10

Supervisor's salary

$ 2.50

Depreciation of special equipment

$ 1.40

Allocated general overhead

$ 8.60

An outside supplier has offered to make and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part E07 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

A) ($6,800) B) ($163,200) C) $163,200 D) $6,800 Answer: B Explanation: Direct materials (17,000 units × $3.80 per unit)

Make $ 64,600

Direct labor (17,000 units × $3.80 per unit)

64,600

Variable overhead (17,000 units × $1.10 per unit)

18,700

Supervisor's salary (17,000 units × $2.50 per unit)

42,500

Depreciation of special equipment (not relevant)

0

Allocated general overhead (avoidable only))

0

Total relevant cost to make

$ 190,400 Make

Total cost to buy (17,000 units × $20.80 per unit) Total relevant cost to make

$ 353,600 190,400

Higher cost to buy $ 163,200 Difficulty: 1 Easy Topic: Make or Buy Decisions Learning Objective: 11-03 Prepare a make or buy analysis. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

94) The Freed Corporation produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the split-off point for total annual revenues of $50,000, or it can be processed further at a total annual cost of $16,000 and then sold for $68,000. Which of the following statements is true concerning Product Y? A) Product Y should be sold at the split-off point rather than processed further. B) The annual financial advantage from processing Product Y further is $18,000. C) The annual financial advantage from processing Product Y further is $68,000. D) The annual financial advantage from processing Product Y further is $2,000. Answer: D Explanation:

Final sales value after further processing

$ 68,000

Less sales value at split-off point

50,000

Incremental revenue from further processing

18,000

Less cost of further processing

16,000

Financial advantage (disadvantage) from further processing

$

2,000

Difficulty: 1 Easy Topic: Joint Product Costs and Sell or Process Further Decisions Learning Objective: 11-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

104) Ouzts Corporation is considering Alternative A and Alternative B. Costs associated with the alternatives are listed below: Alternative A

Alternative B

Materials costs

$ 40,000

$ 56,000

Processing costs

$ 37,000

$ 37,000

Equipment rental

$ 13,000

$ 13,000

Occupancy costs

$ 15,000

$ 22,000

What is the financial advantage (disadvantage) of Alternative B over Alternative A? A) $105,000 B) $23,000 C) $128,000 D) $116,500 Answer: B Explanation: Alternative A $ 40,000

Alternative B $ 56,000

Processing costs

37,000

37,000

0

Equipment rental

13,000

13,000

0

Materials costs

Differential Cost $ 16,000

Occupancy costs Total cost

15,000

22,000

7,000

$ 105,000

$ 128,000

$ 23,000

Difficulty: 1 Easy Topic: Decision Making and Six Key Concepts Learning Objective: 11-01 Identify relevant and irrelevant costs and benefits in a decision. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

147) Cranston Corporation makes four products in a single facility. Data concerning these products appear below:

A

Products B C

D

Selling price per unit

$ 42.30 $ 50.00 $ 37.60 $ 33.50

Variable manufacturing cost per unit

$ 20.80 $ 30.70 $ 21.00 $ 19.90

Variable selling cost per unit

$

Milling machine minutes per unit Monthly demand in units

2.70 $

2.10 $

1.00 $

2.40

3.30

4.10

2.60

1.30

1,000

4,000

3,000

3,000

The milling machines are potentially the constraint in the production facility. A total of 28,200 minutes are available per month on these machines. How many minutes of milling machine time would be required to satisfy demand for all four products? A) 11,000 B) 28,200 C) 23,500 D) 31,400 Answer: D Explanation: Milling machine minutes per unit Monthly demand in units Minutes of milling time Difficulty: 1 Easy

Product A B C D Total 3.30 4.10 2.60 1.30 1,000 4,000 3,000 3,000 3,300 16,400 7,800 3,900 31,400

Topic: Utilizing a Constrained Resource to Maximize Profits; Managing Constraints Learning Objective: 11-05 Determine the most profitable use of a constrained resource.; 11-06 Determine the value of obtaining more of the constrained resource. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

153) Bruce Corporation makes four products in a single facility. These products have the following unit product costs: Products A Direct materials

$

Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost

$

19.90

B $

C

D

20.80 $

23.20

15.20 $

12.20

8.70

10.50

7.40

1.60

2.10

2.00

2.10

10.80

11.90

8.80

10.70

44.50

$

37.90 $

42.10 $

43.40

Additional data concerning these products are listed below.

A Grinding minutes per unit

1.20

Products B C 0.70

0.60

D 0.60

Selling price per unit

$ 59.30 $ 51.70 $ 59.50 $ 55.60

Variable selling cost per unit

$

Monthly demand in units

3.60 $ 4,000

1.50 $ 2,000

2.20 $ 4,000

3.60 2,000

The grinding machines are potentially the constraint in the production facility. A total of 9,000 minutes are available per month on these machines. Direct labor is a variable cost in this company. How many minutes of grinding machine time would be required to satisfy demand for all four products? A) 10,800 B) 9,800 C) 10,500 D) 12,000

Answer: B Explanation: Grinding minutes per unit Monthly demand in units Minutes of grinding time

Products A B C D Total 1.20 0.70 0.60 0.60 4,000 2,000 4,000 2,000 4,800 1,400 2,400 1,200 9,800

Difficulty: 1 Easy Topic: Utilizing a Constrained Resource to Maximize Profits; Managing Constraints Learning Objective: 11-05 Determine the most profitable use of a constrained resource.; 11-06 Determine the value of obtaining more of the constrained resource. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking 2) When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. Answer: TRUE Difficulty: 1 Easy Topic: The Payback Method Learning Objective: 12-01 Determine the payback period for an investment. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking 7) The cost of capital is the average rate of return that the company earns on its investments. Answer: FALSE Difficulty: 2 Medium Topic: The Net Present Value Method Learning Objective: 12-02 Evaluate the acceptability of an investment project using the net present value method. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

14) The internal rate of return is the rate of return of an investment project over its useful life. Answer: TRUE Difficulty: 1 Easy Topic: The Internal Rate of Return Method Learning Objective: 12-03 Evaluate the acceptability of an investment project using the internal rate of return method.

Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

27) The simple rate of return focuses on cash flows rather than on accounting net operating income. Answer: FALSE Difficulty: 1 Easy Topic: The Simple Rate of Return Method Learning Objective: 12-06 Compute the simple rate of return for an investment. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Critical Thinking

39) Olinick Corporation is considering a project that would require an investment of $343,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows (Ignore income taxes, Add: Noncash deduction for depreciation.): Sales Variable expenses Contribution margin Fixed expenses: Salaries Rents Depreciation Total fixed expenses Net operating income

$ 227,000 52,000 175,000 27,000 41,000 40,000 108,000 $ 67,000

The scrap value of the project's assets at the end of the project would be $23,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: A) 3.0 years B) 5.1 years C) 3.2 years D) 4.8 years Answer: C Explanation: Net operating income Add: Noncash deduction for depreciation

$

67,000 40,000

Annual net cash inflow

$ 107,000

Payback period = Investment required ÷ Annual net cash inflow = $343,000 ÷ $107,000 per year = 3.2 years Difficulty: 1 Easy Topic: The Payback Method Learning Objective: 12-01 Determine the payback period for an investment. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

55) The management of Penfold Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $102,000 per year. The company requires a minimum pretax return of 16% on all investment projects. The net present value of the proposed project is closest to (Ignore income taxes.): Refer to Exhibit 12B-1 and Exhibit 12B-2 to determine the appropriate discount factor(s) using the tables provided. A) $(28,022) B) $96,949 C) $(79,196) D) $274,000 Answer: A Explanation: Year Now Initial investment

$ (440,000)

Annual net cash flow Total cash flows (a)

1-7

$ 102,000 $ (440,000)

Discount factor (16%) (b)

1.000

Present value of cash flows (a) × (b)

$ (440,000)

Net present value

$

$ 102,000 4.039 $ 411,978

(28,022)

Difficulty: 1 Easy Topic: The Net Present Value Method Learning Objective: 12-02 Evaluate the acceptability of an investment project using the net present value method. Bloom's: Apply

AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

75) The following data pertain to an investment project (Ignore income taxes.): Investment required Annual savings Life of the project

$ 34,055 $ 5,000 15 years

Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided. The internal rate of return is closest to: A) 12% B) 14% C) 10% D) 8% Answer: A Explanation: Factor of the internal rate of return = Investment required ÷ Annual net cash inflow = $34,055 ÷ $5,000 = 6.811 This factor is the present value of an annuity for 15 periods at 12% per period. Difficulty: 1 Easy Topic: The Internal Rate of Return Method Learning Objective: 12-03 Evaluate the acceptability of an investment project using the internal rate of return method. Bloom's: Apply AACSB: Analytical Thinking

91) The management of Solar Corporation is considering the following three investment projects (Ignore income taxes.): Project L

Project M

Project N

Investment required

$ 37,000

$ 55,000

$ 82,000

Present value of cash inflows

$ 38,480

$ 62,150

$ 90,200

Rank the projects according to the profitability index, from most profitable to least profitable. A) M, N, L B) L, N, M C) N, L, M D) N, M, L

Answer: A Explanation: Present value of cash inflows

Project L

Project M

$ 38,480

$ 62,150

$ 90,200

37,000

55,000

82,000

Investment required (a) Net present value (b) Project profitability index (b) ÷ (a) Ranked by project profitability index

$

1,480

$

7,150

Project N

$

8,200

0.04

0.13

0.10

3

1

2

Difficulty: 1 Easy Topic: Preference Decisions: The Ranking of Investment Projects Learning Objective: 12-05 Rank investment projects in order of preference. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

98) The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): A) 18.1% B) 11.1% C) 28.4% D) 17.3% Answer: A Explanation: Annual incremental cost savings Annual depreciation ($243,000 – $0)/9 Annual incremental net operating income

$ 69,000 27,000 $ 42,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = $42,000 ÷ ($243,000 – $11,000) = 18.1% (rounded) Difficulty: 1 Easy Topic: The Simple Rate of Return Method Learning Objective: 12-06 Compute the simple rate of return for an investment. Bloom's: Apply

AACSB: Analytical Thinking AICPA: FN Measurement; BB Critical Thinking

1) The present value of a cash flow will never be greater than the future doll...