1) Operating leverage is an important concept for many companies.
Required:
A. Define operating leverage.
B. Assume that a firm pays no income taxes and is planning to increase its selling price.
If sales volume in units does not change, what will be the effect on the operating
leverage factor? Explain.
C. Assume that another firm that pays no income taxes is planning to increase total
fixed manufacturing costs and decrease variable manufacturing costs per unit. At the
present volume of production, the total manufacturing costs will be unchanged. What
will this change do to the operating leverage factor? Explain.
2) Lawson Company invests $60,000 today and has $148,560 by the end of eight years.
What is the firm’s compound annual interest rate?
A.10.00%
B.12.00%
C.18.45%
D.40.39%
E.None of the other answers are correct
3) Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. If Brooklyn’s unit sales are 200
units less than anticipated, its breakeven point will:
A.increase by $12 per unit sold
B.decrease by $12 per unit sold
C.increase by $8 per unit sold
D.decrease by $8 per unit sold
E.not change
4) Fixed costs are costs that:
A.vary directly with changes in activity
B.vary inversely with changes in activity
C.remain constant on a per-unit basis
D.remain constant as activity changes
E.increase on a per-unit basis as activity increases
5) Eagle Airways Company is planning a project that is expected to last for six years
and generate annual net cash inflows of $75,000. The project will require the purchase
of a $280,000 machine, which is expected to have a salvage value of $10,000 at the end
of the six-year period. The machine will require a $50,000 overhaul at the end of the
fourth year. The company presently has a 12% minimum desired rate of return.
Based on this information, an accountant prepared the following analysis:
The accountant recommends that the project be rejected because it does not meet the
company’s minimum desired rate of return. Ignore income taxes.
Required:
A. What criticism(s) would you make of the accountant’s evaluation?
B. Use the net-present-value method and determine whether the project should be
accepted.
C. Based on your answer in requirement “B,” is the internal rate of return greater or less
than 12%? Explain.
6)
If purchases of raw materials were $135,000 during the year, what was the amount of
raw materials used during the year?
A.$129,200
B.$140,800
C.$135,000
D.$146,600
E.None of the other answers are correct
7) Which of the following would not be considered if a company desires to establish a
series of practical manufacturing standards?
A.Production time lost during unusual machinery breakdowns
B.Normal worker fatigue
C.Freight charges on incoming raw materials
D.Production time lost during setup procedures for new manufacturing runs
E.The historical 2% defect rate associated with raw material inputs
8) Non-value-added costs occur in nonmanufacturing organizations as well as in
manufacturing firms.
Required:
A. Explain what is meant by a non-value-added cost.
B. Identify two potential non-value-added costs for each of the following service
providers: airlines, banks, and hotels.
9) You are a sports agent who is representing Jack Lofton, a star football player, in
contract negotiations with the New York Landmarks. The Landmarks have offered
Lofton a four-year contract, with annual raises and performance bonuses that will result
in a growing cash-flow stream for Lofton each year. Which table factor(s) should you
use to most efficiently determine the “value” of the contract?
A.Future value of $1
B.Future value of a $1 annuity
C.Present value of $1
D.Present value of a $1 annuity
E.Both Present value of $1 and Present value of a $1 annuity
10) The following data relate to the Lisle Company for May and August of the current
year:
May and August were the lowest and highest activity levels, and Lisle uses the high-low
method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours
in October, which of the following statements is true?
A.Total maintenance costs will be $1,175,000
B.Total maintenance costs will be $1,182,000
C.Total maintenance costs will be $1,193,000
D.Total maintenance costs will be $1,221,000
E.Total maintenance costs will be $1,247,000
11) Which of the following managerial functions involves a detailed financial and
operational description of anticipated operations?
A.Decision making
B.Planning
C.Directing operational activities
D.Controlling
E.Measuring
12) Which of the following is a period cost?
A.Direct material
B.Advertising expense
C.Indirect labor
D.Miscellaneous supplies used in production activities
E.Advertising expense and indirect labor
13) A company used the net-present-value method to analyze an investment and found
the investment to be very attractive. If the firm used Modified Accelerated Cost
Recovery System (MACRS) and changes to the straight-line depreciation, the
investment’s net present value will:
A.increase
B.remain the same
C.decrease
D.change, but the direction cannot be determined based on the data presented
E.fluctuate in an erratic manner
14)
Refer to the figure above. The slope of line B is equal to the:
A.fixed cost per unit
B.selling price per unit
C.variable cost per unit
D.profit per unit
E.unit contribution margin
15) Gilberto adds materials at the beginning of production and incurs conversion cost
uniformly throughout manufacturing. Consider the data that follow.
Conversion cost in the beginning work-in-process inventory totaled $120,000, and
August conversion cost totaled $270,000. Assuming use of the weighted-average
method, which of the following choices correctly depicts the number of equivalent units
for materials and the conversion cost per equivalent unit?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
16) Excel Division reported a residual income of $200,000 for the year just ended. The
division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of
this information, the imputed interest rate was:
A.2.5%
B.10.0%
C.12.5%
D.20.0%
E.None of the other answers are correct
17) To derive the raw material to purchase during an accounting period, an accountant
would calculate the raw material required for production and then:
A.add the beginning raw-material inventory and the desired ending raw-material
inventory
B.subtract the beginning raw-material inventory and the desired ending raw-material
inventory
C.add the beginning raw-material inventory and subtract the desired ending
raw-material inventory
D.add the desired ending raw-material inventory and subtract the beginning
raw-material inventory
E.add the desired ending raw-material inventory and subtract both the beginning
raw-material inventory and the expected units to be sold
18) A cash flow measured in real dollars:
A.is the actual cash flow that we experience
B.is the actual cash flow adjusted for a change in the dollar’s purchasing power
C.reflects the time value of money
D.equals the cash flow measured in nominal dollars
E.coincides with the amount of contemplated new investment
19) Paul’s Auto Repair uses time and material pricing. The body shop, which anticipates
10,000 direct labor hours of activity, has the following data:
Assuming there is no profit markup on material cost, the amount to be added to each
dollar of material cost to obtain the total material charge is:
A.$0.06
B.$0.08
C.$0.10
D.$0.13
E.none of the other answers are correct
20) Coleman, Inc. anticipates sales of 50,000 units, 48,000 units, 51,000 units and
50,000 units in July, August, September and October, respectively. Company policy is
to maintain an ending finished-goods inventory equal to 40% of the following month’s
sales. On the basis of this information, how many units would the company plan to
produce in September?
A.46,800
B.49,200
C.49,800
D.50,600
E.None of the other answers are correct
21) In an activity-based costing system, direct materials used would typically be
classified as a:
A.unit-level cost
B.batch-level cost
C.product-sustaining cost
D.facility-level cost
E.matrix-level cost
22) A trade-off in a decision situation sometimes occurs between information:
A.accuracy and relevance
B.relevance and uniqueness
C.accuracy and timeliness
D.sensitivity and accuracy
E.sensitivity and relevance
23) A company that desires to lower its break-even point should strive to:
A.decrease selling prices
B.reduce variable costs
C.increase fixed costs
D.sell more units
E.achieve more than one of the other answers listed
24) Cost pools should be charged to responsibility centers by using:
A.budgeted amounts of allocation bases because the cost allocation to one
responsibility center should influence the allocations to others
B.budgeted amounts of allocation bases because the cost allocation to one responsibility
center should not influence the allocations to others
C.actual amounts of allocation bases because the cost allocation to one responsibility
center should influence the allocations to others
D.actual amounts of allocation bases because the cost allocation to one responsibility
center should not influence the allocations to others
E.some other approach
25) Northcutt’s production data for a new deluxe product were taken from the most
recent quarterly production budget:
In addition, Northcutt produces 5,000 units a month of its standard product. It takes two
direct labor hours to produce each standard unit and 2.25 direct labor hours to produce
each deluxe unit. Northwest’s cost per labor hour is $15. Direct labor cost for
September would be budgeted at:
A.$187,125
B.$183,075
C.$194,750
D.$197,075
E.None of the other answers are correct
26) A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income.
How much should the firm add to fixed costs when figuring the sales revenues
necessary to produce this income level?
A.$200,000
B.$300,000
C.$500,000
D.$833,333
E.$1,250,000
27) Uncle Roscoe, a wealthy relative, has given you a choice of receiving $10,000
today or $3,000 at the end of each year for the next four years. Which table factor(s)
should be used to most efficiently determine the “value” of the $3,000 cash-flow
stream?
A.Future value of $1
B.Future value of a $1 annuity
C.Present value of $1
D.Present value of a $1 annuity
E.Both Present value of $1 and Present value of a $1 annuity
28) Scotch Company plans to sell 400,000 units of finished product in July 20×1 .
Management (1) anticipates a growth rate in sales of 5% per month thereafter and (2)
desires a monthly ending finished-goods inventory (in units) of 80% of the following
month’s estimated sales. There are 300,000 completed units in the June 30, 20×1
inventory.
Each unit of finished product requires four pounds of direct material at a cost of $1.50
per pound. There are 1,600,000 pounds of direct material in inventory on June 30,
20×1 .
Required:
A. Prepare a production budget for the quarter ended September 30, 20×1 . Note: For
both part “A” and part “B” of this problem, prepare your budget on a quarterly (not
monthly) basis.
B. Independent of your answer to part “A,” assume that Scotch plans to produce
1,200,000 units of finished product for the quarter ended September 30. If the firm
desires to stock direct materials at the end of this period equal to 25% of current
production usage, compute the cost of direct material purchases for the quarter.
29) Which of the following correctly lists all the information needed to calculate a labor
rate variance?
A.Standard labor rate and actual hours worked
B.Actual hours worked and actual units produced
C.Standard labor rate, actual labor rate, and actual units produced
D.Actual labor rate and actual hours worked
E.Actual labor rate, standard labor rate, and actual hours worked
30) Information taken from Giles Corporation’s May accounting records follows.
Required:
A. Assuming the use of variable costing, compute the inventoriable costs for the month.
B. Compute the month’s inventoriable costs by using absorption costing.
C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000
units were sold during May. Determine the amount of fixed manufacturing overhead
and fixed selling and administrative costs that would be expensed for the month under
(1) variable costing and (2) absorption costing.
D. Assume the same data as in requirement “C.” Compute the contribution margin that
would be reported on a variable-costing income statement.
31) HiTech Products manufactures three types of remote-control devices: Economy,
Standard, and Deluxe. The company, which uses activity-based costing, has identified
five activities (and related cost drivers). Each activity, its budgeted cost, and related cost
driver is identified below.
The following information pertains to the three product lines for next year:
What is HiTech’s pool rate for the automated machinery activity?
A.$24.00 per machine hour
B.$24.50 per labor hour
C.$49.42 per unit
D.$50.00 per machine hour
E.None of the other answers is correct
32) Assume that HiTech is using a volume-based costing system, and the preceding
overhead costs are applied to all products on the basis of direct labor hours. The
overhead cost that would be assigned to the Standard product line is closest to:
A.$456,471
B.$646,471
C.$961,176
D.$1,141,176
E.None of the other answers is correct
33) Roma Corporation has computed the following unit costs for the year just ended:
Under variable costing, each unit of the company’s inventory would be carried at:
A.$49
B.$54
C.$72
D.$104
E.None of the other answers are correct
34) Which of the following choices correctly depicts a cost that arises from a
batch-level activity and one that arises from a facility-level activity?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
35) Which of the following is an appropriate base to distribute the cost of building
depreciation to responsibility centers?
A.Number of employees in the responsibility centers
B.Budgeted sales dollars of the responsibility centers
C.Square feet occupied by the responsibility centers
D.Budgeted net income of the responsibility centers
E.Total budgeted direct operating costs of the responsibility centers
36) Which of the following occurs if a company was able to reduce its variable cost per
unit?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
E.Choice E
37) Cunningham, Inc., which produces electronic parts in the United States, has a very
strong local market for part no. 54. The variable production cost is $40, and the
company can sell its entire supply domestically for $110. The U.S. tax rate is 30%.
Alternatively, Cunningham can ship the part to a division that is located in Switzerland,
to be used in a product that the Swiss division will distribute throughout Europe.
Information about the Swiss product and the division’s operating environment follows.
Selling price of final product: $400
Shipping fees to import part no. 54: $20
Labor, overhead, and additional material costs of final product: $230
Import duties levied on part no. 54 (to be paid by the Swiss division): 10% of transfer
price
Swiss tax rate: 40%
Based on U.S. and Swiss tax laws, the company has established a transfer price for part
no. 54 equal to the U.S. market price. Assume that the Swiss division can obtain part
no. 54 in Switzerland for $125.
Required:
A. If you were the head of the Swiss division, would you be better off financially to
conduct business with your U.S. division or buy part no. 54 locally? Why? Show
computations.
B. Cunningham’s accounting department has figured that the company will make
$66.40 for each unit transferred and used in the Swiss division’s product. Rather than
proceed with a transfer, would Cunningham be better off to sell its goods domestically
and allow the Swiss division to acquire part no. 54 in Switzerland? Show computations
for both U.S. and Swiss operations to support your answer.
C. Generally speaking, when tax rates differ between countries, what income strategy
should a company use in setting its transfer prices? If the seller is in a low tax-rate
country, what type of price should it set? Why?
38) A cost that has both a fixed and variable component is known as a:
A.step-fixed cost
B.step-variable cost
C.semivariable cost
D.curvilinear cost
E.discretionary cost
39) Lennox Industries manufactures two products: A and B. A review of the company’s
accounting records revealed the following per-unit costs and production volumes:
Manufacturing overhead is currently computed by spreading overhead of $1,860,000
over 20,000 direct labor hours. Management is considering a shift to activity-based
costing in an effort to improve the firm’s accounting procedures, and the following data
are available:
Lennox determines selling prices by adding 40% to a product’s total cost.
Required:
A. Compute the per-unit cost and selling price of product B by using Lennox’s current
costing procedures.
B. Compute the per-unit overhead cost of product B if the company switches to
activity-based costing.
C. Compute B’s total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B,
with considerable business being lost to very aggressive suppliers. Will activity-based
costing allow the company to be more competitive with product B from a price
perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox
changes to activity-based costing? Why? Hint: No calculations are necessary.
