Corporate Finance
110. CSO: 2B1b LOS: 2B1b
The systematic risk of an individual security is measured by the
a. standard deviation of the security’s rate of return.
b. covariance between the security’s returns and the general market.
c. security’s contribution to the portfolio risk.
d. standard deviation of the security’s returns and other similar securities.
111. CSO: 2B1b LOS: 2B1c
Which one of the following provides the best measure of interest rate risk for a corporate bond?
a. Duration.
b. Yield to maturity.
c. Bond rating.
d. Maturity.
112. CSO: 2B1f LOS: 2B1i
Frasier Products has been growing at a rate of 10% per year and expects this growth to continue and produce earnings per share of $4.00 next year. The firm has a dividend payout ratio of 35% and a beta value of 1.25. If the risk-free rate is 7% and the return on the market is 15%, what is the expected current market value of Frasier’s common stock?
a. $14.00.
b. $16.00.
c. $20.00.
d. $28.00.
113. CSO: 2B1f LOS: 2B1h
Which one of the following would have the least impact on a firm’s beta value?
a. Debt-to-equity ratio.
b. Industry characteristics.
c. Operating leverage.
d. Payout ratio.
114. CSO: 2B1f LOS: 2B1h
If Dexter Industries has a beta value of 1.0, then its
a. return should equal the risk-free rate.
b. price is relatively stable.
c. expected return should approximate the overall market.
d. volatility is low.
115. CSO: 2B2b LOS: 2B2h
Buying a wheat futures contract to protect against price fluctuation of wheat would be classified as a
a. fair value hedge.
b. cash flow hedge.
c. foreign currency hedge.
d. swap.
116. CSO: 2B3b LOS: 2B3c
The call provision in some bond indentures allows
a. the issuer to exercise an option to redeem the bonds.
b. the bondholder to exchange the bond, at no additional cost, for common shares.
c. the bondholder to redeem the bond early by paying a call premium.
d. the issuer to pay a premium in order to prevent bondholders from redeeming bonds.
117. CSO: 2B3b LOS: 2B3c
Protective clauses set forth in an indenture are known as
a. provisions.
b. requirements.
c. addenda.
d. covenants.
118. CSO: 2B3b LOS: 2B3c
A requirement specified in an indenture agreement which states that a company cannot acquire or sell major assets without prior creditor approval is known as a
a. protective covenant.
b. call provision.
c. warrant.
d. put option.
119. CSO: 2B3b LOS: 2b3c
Dorsy Manufacturing plans to issue mortgage bonds subject to an indenture. Which of the following restrictions or requirements are likely to be contained in the indenture?
I. Receiving the trustee’s permission prior to selling the property.
II. Maintain the property in good operating condition.
III. Insuring plant and equipment at certain minimum levels.
IV. Including a negative pledge clause.
a. I and IV only.
b. II and III only.
c. I, III, and IV only.
d. I, II, III and IV.
120. CSO: 2B3c LOS: 2B3d
Which one of the following statements concerning debt instruments is correct?
a. The coupon rate and yield of an outstanding long-term bond will change over time as economic factors change.
b. A 25-year bond with a coupon rate of 9% and one year to maturity has more interest rate risk than a 10-year bond with a 9% coupon issued by the same firm with one year to maturity.
c. For long-term bonds, price sensitivity to a given change in interest rates is greater the longer the maturity of the bond.
d. A bond with one year to maturity would have more interest rate risk than a bond with 15 years to maturity.
121. CSO: 2B3c LOS: 2B3d
Which one of the following situations would prompt a firm to issue debt, as opposed to equity, the next time it raises external capital?
a. High breakeven point.
b. Significant percentage of assets under capital lease.
c. Low fixed-charge coverage.
d. High effective tax rate.
122. CSO: 2B3c LOS: 2B3c
Which one of the following is a debt instrument that generally has a maturity of ten years or more?
a. A bond.
b. A note.
c. A chattel mortgage.
d. A financial lease.
123. CSO: 2B3d LOS: 2B3b
James Hemming, the chief financial officer of a mid-western machine parts manufacturer, is considering splitting the company’s stock, which is currently selling at $80.00 per share. The stock currently pays a $1.00 per share dividend. If the split is two-for-one, Mr. Hemming may expect the post split price to be
a. exactly $40.00, regardless of dividend policy.
b. greater than $40.00, if the dividend is changed to $0.45 per new share.
c. greater than $40.00, if the dividend is changed to $0.55 per new share.
d. less than $40.00, regardless of dividend policy.
124. CSO: 2B3d LOS: 2B3b
Which one of the following best describes the record date as it pertains to common stock?
a. Four business days prior to the payment of a dividend.
b. The 52-week high for a stock published in the Wall Street Journal.
c. The date that is chosen to determine the ownership of shares.
d. The date on which a prospectus is declared effective by the Securities and Exchange Commission.
125. CSO: 2B3e LOS: 2B3b
Preferred stock may be retired through the use of any one of the following except a
a. conversion.
b. call provision.
c. refunding.
d. sinking fund.
126. CSO: 2B3e LOS: 2B3b
All of the following are characteristics of preferred stock except that
a. it may be callable at the option of the corporation.
b. it may be converted into common stock.
c. its dividends are tax deductible to the issuer.
d. it usually has no voting rights.
127. CSO: 2B3e LOS: 2B3b
Which one of the following describes a disadvantage to a firm that issues preferred stock?
a. Preferred stock dividends are legal obligations of the corporation.
b. Preferred stock typically has no maturity date.
c. Preferred stock is usually sold on a higher yield basis than bonds.
d. Most preferred stock is owned by corporate investors.
128. COS: 2B4a LOS: 2B4a
Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital?
I. The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.
a. I and III.
b. II and IV.
c. III and IV.
d. I, III and IV.
129. CSO: 2B4a LOS: 2B4b
An accountant for Stability Inc. must calculate the weighted average cost of capital of the corporation using the following information.
Interest Rate
Accounts payable $35,000,000 -0-
Long-term debt 10,000,000 8%
Common stock 10,000,000 15%
Retained earnings 5,000,000 18%
What is the weighted average cost of capital of Stability?
a. 6.88%.
b. 8.00%.
c. 10.25%.
d. 12.80%.
130. CSO: 2B4a LOS:2B4b
Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below.
Debt .30
Preferred stock .24
Equity .46
Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%.
Additional data:
• The before-tax cost of debt is estimated to be 11%.
• The market yield of preferred stock is estimated to be 12%.
• The after-tax cost of common stock is estimated to be 16%.
What is Kielly’s weighted average cost of capital?
a. 12.22%.
b. 13.00%.
c. 13.54%.
d. 14.00%.
131. CSO: 2B4a LOS: 2B4b
Following is an excerpt from Albion Corporation’s balance sheet.
Long-term debt (9% interest rate) $30,000,000
Preferred stock (100,000 shares, 12% dividend) 10,000,000
Common stock (5,000,000 shares outstanding) 60,000,000
Albion’s bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%. The preferred stock is trading at $125 per share. Common stock is selling at $16 per share, and Albion’s treasurer estimates that the firm’s cost of equity is 17%. If Albion’s effective income tax rate is 40%, what is the firm’s cost of capital?
a. 12.6%.
b. 13.0%.
c. 13.9%.
d. 14.1%.
132. CSO: 2B4a LOS: 2B4b
Thomas Company’s capital structure consists of 30% long-term debt, 25% preferred stock, and 45% common equity. The cost of capital for each component is shown below.
Long-term debt 8%
Preferred stock 11%
Common equity 15%
If Thomas pays taxes at the rate of 40%, what is the company’s after-tax weighted average cost of capital?
a. 7.14%.
b. 9.84%.
c. 10.94%.
d. 11.90%.
133. CSO: 2B4a LOS: 2B4b
Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firm’s total liabilities and equity are equal to $10,000,000. The effect of this exchange on the firm’s weighted average cost of capital is likely to be
a. no change, since it involves equal amounts of capital in the exchange and both instruments have the same rate.
b. a decrease, since a portion of the debt payments are tax deductible.
c. a decrease, since preferred stock payments do not need to be made each year, whereas debt payments must be made.
d. an increase, since a portion of the debt payments are tax deductible.
134. COS: 2B4b LOS: 2B4b
Cox Company has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue costs were $5 per share. Cox pays taxes at the rate of 40%. What is Cox’s cost of preferred stock capital?
a. 8.00%.
b. 8.25%.
c. 8.70%.
d. 9.20%.
135. CSO: 2B4b LOS: 2B4b
In calculating the component costs of long-term funds, the appropriate cost of retained earnings, ignoring flotation costs, is equal to
a. the cost of common stock.
b. the same as the cost of preferred stock.
c. the weighted average cost of capital for the firm.
d. zero, or no cost.
136. CSO: 2B4b LOS: 2B4b
The Hatch Sausage Company is projecting an annual growth rate for the foreseeable future of 9%. The most recent dividend paid was $3.00 per share. New common stock can be issued at $36 per share. Using the constant growth model, what is the approximate cost of capital for retained earnings?
a. 9.08%.
b. 17.33%.
c. 18.08%
d. 19.88%.
137. CSO: 2B4b LOS: 2B4b
The management of Old Fenske Company (OFC) has been reviewing the company’s financing arrangements. The current financing mix is $750,000 of common stock, $200,000 of preferred stock ($50 par) and $300,000 of debt. OFC currently pays a common stock cash dividend of $2. The common stock sells for $38, and dividends have been growing at about 10% per year. Debt currently provides a yield to maturity to the investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue of securities will have a flotation cost of approximately 3%. OFC has retained earnings available for the equity requirement. The company’s effective income tax rate is 40%. Based on this information, the cost of capital for retained earnings is
a. 9.5%.
b. 14.2%.
c. 15.8%.
d. 16.0%.
138. CSO: 2B4c LOS: 2B4b
Angela Company’s capital structure consists entirely of long-term debt and common equity. The cost of capital for each component is shown below.
Long-term debt 8%
Common equity 15%
Angela pays taxes at a rate of 40%. If Angela’s weighted average cost of capital is 10.41%, what proportion of the company’s capital structure is in the form of long-term debt?
a. 34%.
b. 45%.
c. 55%.
d. 66%.
Decision Analysis and Risk Management…
196. CSO: 2C1a LOS: 2C1g
Garner Products is considering a new accounts payable and cash disbursement process which is projected to add 3 days to the disbursement schedule without having significant negative effects on supplier relations. Daily cash outflows average $1,500,000. Garner is in a short-term borrowing position for 8 months of the year and in an investment position for 4 months. On an annual basis, bank lending rates are expected to average 7% and marketable securities yields are expected to average 4%. What is the maximum annual expense that Garner could incur for this new process and still break even?
a. $90,000.
b. $180,000.
c. $270,000.
d. $315,000.
197. CSO: 2C1a LOS: 2C1g
Bolger and Co. manufactures large gaskets for the turbine industry. Bolger’s per unit sales price and variable costs for the current year are as follows.
Sales price per unit $300
Variable costs per unit 210
Bolger’s total fixed costs aggregate $360,000. As Bolger’s labor agreement is expiring at the end of the year, management is concerned about the effect a new agreement will have on its unit breakeven point. The controller performed a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct labor increase and a $10,000 reduction in fixed costs. Based on these data, it was determined that the breakeven point would
a. decrease by 1,000 units.
b. decrease by 125 units.
c. increase by 375 units.
d. increase by 500 units.
198. CSO: 2C1a LOS: 2C1b
Phillips & Company produces educational software. Its unit cost structure, based upon an anticipated production volume of 150,000 units, is as follows.
Sales price $160
Variable costs 60
Fixed costs 55
The marketing department has estimated sales for the coming year at 175,000 units, which is within the relevant range of Phillip’s cost structure. Phillip’s break-even volume (in units) and anticipated operating income for the coming year would amount to
a. 82,500 units and $7,875,000 of operating income.
b. 82,500 units and $9,250,000 of operating income.
c. 96,250 units and $3,543,750 of operating income.
d. 96,250 units and $7,875,000 of operating income.
199. CSO: 2C1a LOS: 2C1a
All of the following are assumptions of cost-volume-profit analysis except
a. total fixed costs do not change with a change in volume.
b. revenues change proportionately with volume.
c. variable costs per unit change proportionately with volume.
d. sales mix for multi-product situations do not vary with volume changes.
200. CSO: 2C1a LOS: 2C1g
Ace Manufacturing plans to produce two products, Product C and Product F, during the next year, with the following characteristics.
Product C Product F
Selling price per unit $10 $15
Variable cost per unit $ 8 $10
Expected sales (units) 20,000 5,000
Total projected fixed costs for the company are $30,000. Assume that the product mix would be the same at the breakeven point as at the expected level of sales of both products. What is the projected number of units (rounded) of Product C to be sold at the breakeven point?
a. 2,308 units.
b. 9,231 units.
c. 11,538 units.
d. 15,000 units.
201. CSO: 2C1a LOS: 2C1g
Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary planning has just begun for the upcoming season, and Starlight has developed the following estimated data.
Average
Number of Attendance per Ticket Variable Fixed
Production Performances Performance Price Costs 1 Costs 2
Mr. Wonderful 12 3,500 $18 $3 $165,000
That’s Life 20 3,000 15 1 249,000
All That Jazz 12 4,000 20 0 316,000
1 Represent payments to production companies and are based on tickets sold.
2 Costs directly associated with the entire run of each production for costumes, sets, and artist fees.
Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility costs, and advertising) for the entire season, and is subject to a 30% income tax rate. These common charges are allocated based on total attendance for each production.
If Starlight’s schedule of musicals is held, as planned, how many patrons would have to attend for Starlight to break even during the summer season?
a. 77,918.
b. 79,302.
c. 79,938.
d. 81,344.
202. CSO: 2C1a LOS: 2C1g
Carson Inc. manufactures only one product and is preparing its budget for next year based on the following information.
Selling price per unit $ 100
Variable costs per unit 75
Fixed costs 250,000
Effective tax rate 35%
If Carson wants to achieve a net income of $1.3 million next year, its sales must be
a. 62,000 units.
b. 70,200 units.
c. 80,000 units.
d. 90,000 units.
203. CSO: 2C1a LOS: 2C1g
MetalCraft produces three inexpensive socket wrench sets that are popular with do-it-yourselfers. Budgeted information for the upcoming year is as follows.
Estimated
Model Selling Price Variable Cost Sales Volume
No. 109 $10.00 $ 5.50 30,000 sets
No. 145 15.00 8.00 75,000 sets
No. 153 20.00 14.00 45,000 sets
Total fixed costs for the socket wrench product line is $961,000. If the company’s actual experience remains consistent with the estimated sales volume percentage distribution, and the firm desires to generate total operating income of $161,200, how many Model No. 153 socket sets will MetalCraft have to sell?
a. 26,000.
b. 54,300.
c. 155,000.
d. 181,000.
204. CSO: 2C1a LOS: 2C1g
Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary planning has just begun for the upcoming season, and Starlight has developed the following estimated data.
Average
Number of Attendance per Ticket Variable Fixed
Production Performances Performance Price Costs1 Costs 2
Mr. Wonderful 12 3,500 $18 $3 $165,000
That’s Life 20 3,000 15 1 249,000
All That Jazz 12 4,000 20 0 316,000
1 Represent payments to production companies and are based on tickets sold.
2 Costs directly associated with the entire run of each production for costumes, sets, and artist fees.
Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility costs, and advertising) for the entire season, and is subject to a 30% income tax rate.
If management desires Mr. Wonderful to produce an after-tax contribution of $210,000 toward the firm’s overall operating income for the year, total attendance for the production would have to be
a. 20,800.
b. 25,000.
c. 25,833.
d. 31,000.
205. CSO: 2C1a LOS: 2C1g
Robin Company wants to earn a 6% return on sales after taxes. The company’s effective income tax rate is 40%, and its contribution margin is 30%. If Robin has fixed costs of $240,000, the amount of sales required to earn the desired return is
a. $375,000.
b. $400,000.
c. $1,000,000.
d. $1,200,000.
206. CSO: 2C1a LOS: 2C1g
Bargain Press is considering publishing a new textbook. The publisher has developed the following cost data related to a production run of 6,000, the minimum possible production run. Bargain Press will sell the textbook for $45 per copy.
Estimated cost
Development (reviews, class testing, editing) $35,000
Typesetting 18,500
Depreciation on Equipment 9,320
General and Administrative 7,500
Miscellaneous Fixed Costs 4,400
Printing and Binding 30,000
Sales staff commissions (2% of selling price) 5,400
Bookstore commissions (25% of selling price) 67,500
Author’s Royalties (10% of selling price) 27,000
Total costs at production of 6,000 copies $204,620
How many textbooks must Bargain Press sell in order to generate operating earnings (earnings before interest and taxes) of 20% on sales? (Round your answer up to the nearest whole textbook.)
a. 2,076 copies.
b. 5,207 copies.
c. 5,412 copies.
d. 6,199 copies.
207. CSO: 2C1a LOS: 2C1g
Zipper Company invested $300,000 in a new machine to produce cones for the textile industry. Zipper’s variable costs are 30% of the selling price, and its fixed costs are $600,000. Zipper has an effective income tax rate of 40%. The amount of sales required to earn an 8% after-tax return on its investment would be
a. $891,429.
b. $914,286.
c. $2,080,000.
d. $2,133,333.
208. CSO: 2C1a LOS: 2C1a
Breakeven quantity is defined as the volume of output at which revenues are equal to
a. marginal costs.
b. total costs.
c. variable costs.
d. fixed costs.
209. CSO: 2C1a LOS: 2C1b
Eagle Brand Inc. produces two products. Data regarding these products are presented below.
Product X Product Y
Selling price per unit $100 $130
Variable costs per unit $80 $100
Raw materials used per unit 4 lbs. 10 lbs.
Eagle Brand has 1,000 lbs. of raw materials which can be used to produce Products X and Y.
Which one of the alternatives below should Eagle Brand accept in order to maximize contribution margin?
a. 100 units of product Y.
b. 250 units of product X.
c. 200 units of product X and 20 units of product Y.
d. 200 units of product X and 50 units of product Y.
210. CSO: 2C1b LOS: 2C1b
For the year just ended, Silverstone Company’s sales revenue was $450,000. Silverstone’s fixed costs were $120,000 and its variable costs amounted to $270,000. For the current year sales are forecasted at $500,000. If the fixed costs do not change, Silverstone’s profits this year will be
a. $60,000.
b. $80,000.
c. $110,000.
d. $200,000.
211. CSO: 2C1b LOS: 2C1f
Breeze Company has a contribution margin of $4,000 and fixed costs of $1,000. If the total contribution margin increases by $1,000, operating profit would
a. decrease by $1,000.
b. increase by more than $1,000.
c. increase by $1,000.
d. remain unchanged.
212. CSO: 2C1b LOS: 2C1b
Wilkinson Company sells its single product for $30 per unit. The contribution margin ratio is 45% and Wilkinson has fixed costs of $10,000 per month. If 3,000 units are sold in the current month, Wilkinson’s income would be
a. $30,500.
b. $49,500.
c. $40,500.
d. $90,000.
213. CSO: 2C1c LOS: 2C1i
Cervine Corporation makes motors for various products. Operating data and unit cost information for its products are presented below.
Product A Product B
Annual unit capacity 10,000 20,000
Annual unit demand 10,000 20,000
Selling price $100 $80
Variable manufacturing cost 53 45
Fixed manufacturing cost 10 10
Variable selling & administrative 10 11
Fixed selling & administrative 5 4
Fixed other administrative 2 -
Unit operating profit $ 20 $10
Machine hours per unit 2.0 1.5
Cervine has 40,000 productive machine hours available. What is the maximum total contribution margin that Cervine can generate in the coming year?
a. $665,000.
b. $689,992.
c. $850,000.
d. $980,000.
214. CSO: 2C1c LOS: 2C1i
Specialty Cakes Inc. produces two types of cakes, a 2 lbs. round cake and a 3 lbs. heart-shaped cake. Total fixed costs for the firm are $94,000. Variable costs and sales data for the two types of cakes are presented below.
2 lbs. 3 lbs.
Round Cake Heart-shape Cake
Selling price per unit $12 $20
Variable cost per unit $8 $15
Current sales (units) 10,000 15,000
If the product sales mix were to change to three heart-shaped cakes for each round cake, the breakeven volume for each of these products would be
a. 8,174 round cakes, 12,261 heart-shaped cakes.
b. 12,261 round cakes, 8,174 heart-shaped cakes.
c. 4,947 round cakes, 14,842 heart-shaped cakes.
d. 15,326 round cakes, 8,109 heart-shaped cakes.
215. CSO: 2C1c LOS: 2C1f
Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs, and resource utilization for these products are as follows.
Crates Boxes
Selling price $20 $30
Direct material costs $ 5 $ 5
Direct labor costs 8 10
Variable overhead costs 3 5
Variable selling costs 1 2
Machine hours per unit 2 4
Production of Crates and Boxes involves joint processes and use of the same facilities. The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000. Production and sales are scheduled for 500,000 units of Crates and 700,000 units of Boxes. Lazar maintains no direct materials, work-in-process, or finished goods inventory.
Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs. However, it would increase machine-hour production time by 1-1/2 hours per unit. For Crates, variable overhead costs are allocated based on machine hours. What would be the effect on the total contribution margin if this change was implemented?
a. $125,000 increase.
b. $250,000 decrease.
c. $300,000 increase.
d. $1,250,000 increase.
216. CSO: 2C1c LOS: 2C1h
Ticker Company sells two products. Product A provides a contribution margin of $3 per unit, and Product B provides a contribution margin of $4 per unit. If Ticker’s sales mix shifts toward Product A, which one of the following statements is correct?
a. The total number of units necessary to break even will decrease.
b. The overall contribution margin ratio will increase.
c. Operating income will decrease if the total number of units sold remains constant.
d. The contribution margin ratios for Products A and B will change.
217. CSO: 2C1c LOS: 2C1i
Lazar Industries produces two products, Crates and Trunks. Per unit selling prices, costs, and resource utilization for these products are as follows.
Crates Trunks
Selling price $20 $30
Direct material costs $ 5 $ 5
Direct labor costs 8 10
Variable overhead costs 3 5
Variable selling costs 1 2
Machine hours per unit 2 4
Production of Crates and Trunks involves joint processes and use of the same facilities. The total fixed factory overhead cost is $2,000,000 and total fixed selling and administrative costs are $840,000. Production and sales are scheduled for 500,000 Crates and 700,000 Trunks. Lazar has a normal capacity to produce a total of 2,000,000 units in any combination of Crates and Trunks, and maintains no direct materials, work-in-process, or finished goods inventory.
Due to plant renovations Lazar Industries will be limited to 1,000,000 machine hours. What is the maximum amount of contribution margin Lazar can generate during the renovation period?
a. $1,500,000.
b. $2,000,000.
c. $3,000,000.
d. $7,000,000.
218. CSO: 2C2a LOS: 2C2c
Johnson waits two hours in line to buy a ticket to an NCAA Final Four Tournament. The opportunity cost of buying the $200 ticket is
a. Johnson’s best alternative use of the $200.
b. Johnson’s best alternative use of the two hours it took to wait in line.
c. the value of the $200 to the ticket agent.
d. Johnson’s best alternative use of both the $200 and the two hours spent in line.
219. CSO: 2C2a LOS: 2C2a
In a management decision process, the cost measurement of the benefits sacrificed due to selecting an alternative use of resources is most often referred to as a(n)
a. relevant cost.
b. sunk cost.
c. opportunity cost.
d. differential cost.
220. CSO: 2C2a LOS: 2C2a
In order to avoid pitfalls in relevant-cost analysis, management should focus on
a. variable cost items that differ for each alternative.
b. long-run fixed costs of each alternative.
c. anticipated fixed costs and variable costs of all alternatives.
d. anticipated revenues and costs that differ for each alternative.
221. CSO: 2C2a LOS: 2C2a
In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products after the split-off point should be viewed as
a. sunk costs.
b. relevant costs.
c. standard costs.
d. differential costs.
222. CSO: 2C2a LOS: 2C2a
Jack Blaze wants to rent store space in a new shopping mall for the three month holiday shopping season. Blaze believes he has a new product available which has the potential for good sales. The product can be obtained on consignment at the cost of $20 per unit and he expects to sell the item for $100 per unit. Due to other business ventures, Blaze’s risk tolerance is low. He recognizes that, as the product is entirely new, there is an element of risk. The mall management has offered Blaze three rental options: (1) a fixed fee of $8,000 per month, (2) a fixed fee of $3,990 per month plus 10% of Blaze’s revenue, or (3) 30% of Blaze’s revenues. Which one of the following actions would you recommend to Jack Blaze?
a. Choose the first option no matter what Blaze expects the revenues to be.
b. Choose the second option no matter what Blaze expects the revenues to be.
c. Choose the second option only if Blaze expects revenues to exceed $5,700.
d. Choose the third option no matter what Blaze expects the revenues to be.
223. CSO: 2C2a LOS: 2C2a
Profits that are lost by moving an input from one use to another are referred to as
a. out-of-pocket costs.
b. cannibalization charges.
c. replacement costs.
d. opportunity costs.
224. CSO: 2C2a LOS: 2C2a
In differential cost analysis, which one of the following best fits the description of a sunk cost?
a. Direct materials required in the manufacture of a table.
b. Purchasing department costs incurred in acquiring material.
c. Cost of the forklift driver to move the material to the manufacturing floor.
d. Cost of a large crane used to move materials.
225. CSO: 2C2a LOS: 2C2d
Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $ 7
Direct labor 12
Variable overhead 5
Fixed overhead 10
Total costs $34
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments’ offer the plant would be idled and fixed overhead amounting to $6 per unit could be eliminated. The total relevant costs associated with the manufacture of ice-makers amount to
a. $480,000.
b. $560,000.
c. $600,000.
d. $680,000.
226. CSO: 2C2b LOS: 2C2f
Edwards Products has just developed a new product with a manufacturing cost of $30. The Marketing Director has identified three marketing approaches for this new product.
Approach X Set a selling price of $36 and have the firm’s sales staff sell the product at a 10% commission with no advertising program. Estimated annual sales would be 10,000 units.
Approach Y Set a selling price of $38, have the firm’s sales staff sell the product at a 10% commission, and back them up with a $30,000 advertising program. Estimated annual sales would be 12,000 units.
Approach Z Rely on wholesalers to handle the product. Edwards would sell the new product to the wholesalers at $32 per unit and incur no selling expenses. Estimated annual sales would be 14,000 units.
Rank the three alternatives in order of net profit, from highest net profit to lowest.
a. X, Y, Z.
b. Y, Z, X.
c. Z, X, Y.
d. Z, Y, X.
227. CSO: 2C2b LOS: 2C2g
Auburn Products Inc. has compiled the following daily cost information for its manufacturing operation.
Output (units) Fixed Cost Variable Cost
0 $2,000 $ 0
1 2,000 200
2 2,000 380
3 2,000 550
4 2,000 700
5 2,000 860
6 2,000 1,040
7 2,000 1,250
8 2,000 1,500
Auburn’s average total cost at an output level of 3 units is
a. $667.
b. $850.
c. $1,217.
d. $2,550.
228. CSO: 2C2b LOS: 2C2g
Daily costs for Kelso Manufacturing include $1,000 of fixed costs and total variable costs are shown below.
Unit Output 10 11 12 13 14 15
Cost $125 $250 $400 $525 $700 $825
The average total cost at an output level of 11 units is
a. $113.64.
b. $125.00.
c. $215.91.
d. $250.00.
229. CSO: 2C2b LOS: 2C2f
Harper Products’ cost information for the normal range of output in a month is shown below.
Output in units Total Cost
20,000 $3,000,000
22,500 3,325,000
25,000 3,650,000
What is Harper’s short-run marginal cost?
a. $26.
b. $130.
c. $146.
d. $150.
230. CSO: 2C2b LOS: 2C2f
Auburn Products Inc. has compiled the following daily cost information for its manufacturing operation.
Output (units) Fixed Cost Variable Cost
0 $2,000 $ 0
1 2,000 200
2 2,000 380
3 2,000 550
4 2,000 700
5 2,000 860
6 2,000 1,040
7 2,000 1,250
8 2,000 1,500
Auburn’s marginal cost for the 7th unit is
a. $179.
b. $210.
c. $286.
d. $464.
231. CSO: 2C2b LOS: 2C2f
Daily costs for Kelso Manufacturing include $1,250 in fixed costs and total variable costs are shown below.
Unit Output 10 11 12 13 14 15
Cost $150 $300 $480 $620 $750 $900
The marginal cost of the 12th unit is
a. $180.00.
b. $140.00.
c. $104.16.
d. $40.00.
232. CSO: 2C2b LOS: 2C2g
The total cost of producing 100 units of a good is $800. If a firm’s average variable cost is $5 per unit, then the firm’s
a. average fixed cost is $3.
b. total variable cost is $300.
c. marginal cost is $3.
d. marginal cost is $8.
233. CSO: 2C2b LOS: 2C2f
Daily sales and cost data for Crawford Industries are shown below.
Sales Total
Units $ Costs
20 $2,000 $1,200
21 2,090 1,250
22 2,170 1,290
23 2,240 1,330
24 2,300 1,380
25 2,350 1,440
The marginal cost of the 23rd unit is
a. $30.00.
b. $40.00.
c. $50.00.
d. $57.83.}
234. CSO: 2C2b LOS: 2C2f
Parker Manufacturing is analyzing the market potential for its specialty turbines. Parker developed its pricing and cost structures for their specialty turbines over various relevant ranges. The pricing and cost data for each relevant range are presented below.
Units produced and sold 1 - 5 6 - 10 11 - 15 16 - 20
Total fixed costs $200,000 $400,000 $600,000 $800,000
Unit variable cost 50,000 50,000 45,000 45,000
Unit selling price 100,000 100,000 100,000 100,000
Which one of the following production/sales levels would produce the highest operating income for Parker?
a. 8 units.
b. 10 units.
c. 14 units.
d. 17 units.
235. CSO: 2C2c LOS: 2C2i
Johnson Company manufactures a variety of shoes, and has received a special one-time-only order directly from a wholesaler. Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50 per pair. Johnson’s normal selling price is $11.50 per pair of sneakers. Variable manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair. Johnson’s variable selling expense for its normal line of sneakers is $1.00 per pair. What would the effect on Johnson’s operating income be if the company accepted the special order?
a. Decrease by $60,000.
b. Increase by $22,500.
c. Increase by $37,500.
d. Increase by $52,500.
236. CSO: 2C2c LOS: 2C2i
The Robo Division, a decentralized division of GMT Industries, has been approached to submit a bid for a potential project for the RSP Company. Robo Division has been informed by RSP that they will not consider bids over $8,000,000. Robo Division purchases its materials from the Cross Division of GMT Industries. There would be no additional fixed costs for either the Robo or Cross Divisions. Information regarding this project is as follows.
Cross Division Robo Division
Variable Costs $1,500,000 $4,800,000
Transfer Price 3,700,000 -
If Robo Division submits a bid for $8,000,000, the amount of contribution margin recognized by the Robo Division and GMT Industries, respectively, is
a. $(500,000) and $(2,000,000).
b. $3,200,000 and $(500,000).
c. $(500,000) and $1,700,000.
d. $3,200,000 and $1,700.000.
237. CSO: 2C2c LOS: 2C2i
Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full cost basis. Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost. BCC believes bids in excess of $925 per computer are not likely to be considered.
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer and $20 per labor hour. Assembly and testing of each computer requires 12 labor hours. BCC’s variable manufacturing overhead is $2 per labor hour, fixed manufacturing overhead is $3 per labor hour, and incremental administrative costs are $8 per computer assembled.
The company has received a request from the School Board for 500 computers. BCC’s management expects heavy competition in bidding for this job. As this is a very large order for BCC, and could lead to other educational institution orders, management is extremely interested in submitting a bid which would win the job, but at a price high enough so that current net income will not be unfavorably impacted. Management believes this order can be absorbed within its current manufacturing facility. Which one of the following bid prices should be recommended to BCC’s management?
a. $764.00.
b. $772.00.
c. $849.20.
d. $888.80.
238. CSO: 2C2c LOS: 2C2h
The loss of a key customer has temporarily caused Bedford Machining to have some excess manufacturing capacity. Bedford is considering the acceptance of a special order, one that involves Bedford’s most popular product. Consider the following types of costs.
I. Variable costs of the product
II. Fixed costs of the product
III. Direct fixed costs associated with the order
IV. Opportunity cost of the temporarily idle capacity
Which one of the following combinations of cost types should be considered in the special order acceptance decision?
a. I and II.
b. I and IV.
c. II and III.
d. I, III, and IV.
239. CSO: 2C2c LOS: 2C2h
Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a one-time-only order for 2,000 units from another buyer. Sale of the special order items will not require any additional selling effort. Raymund has a manufacturing capacity to produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s Income Statement, before consideration of the one-time-only order, is as follows.
Sales (5,000 units at $20 per unit) $100,000
Variable manufacturing costs $50,000
Variable selling costs 15,000 65,000
Contribution margin 35,000
Fixed manufacturing costs 16,000
Fixed selling costs 4,000 20,000
Operating income 15,000
Income taxes 6,000
Net income $ 9,000
In negotiating a price for the special order, Raymund should set the minimum per unit selling price at
a. $10.
b. $13.
c. $17.
d. $18.
240. CSO: 2C2c LOS: 2C2d
Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of $15,300. The market for this product has become very strong, with the price jumping to $4.05 per pound. Because of the demand, Hickory can buy or sell Kaylene at this price. Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene. In deciding whether to accept the order, management must evaluate a number of decision factors. Without regard to income taxes, which one of the following combination of factors correctly depicts relevant and irrelevant decision factors, respectively?
Relevant Decision Factor Irrelevant Decision Factor
a. Remaining 300 pounds of Kaylene Market price of $4.05 per lb.
b. Market price of $4.05 per lb. Purchase price of $3.40 per lb.
c. Purchase price of $3.40 per lb. Market price of $4.05 per lb.
d. 4,500 pounds of Kaylene Remaining 300 pounds of Kaylene.
241. CSO: 2C2c LOS: 2C2i
Gardener Company currently is using its full capacity of 25,000 machine hours to manufacture product XR-2000. LJB Corporation placed an order with Gardener for the manufacture of 1,000 units of KT-6500. LJB would normally manufacture this component. However, due to a fire at its plant, LJB needs to purchase these units to continue manufacturing other products. This is a one time special order. The following reflects unit cost data, and selling prices.
KT-6500 XR-2000
Material $27 $24
Direct labor 12 10
Variable overhead 6 5
Fixed overhead 48 40
Variable selling & administrative 5 4
Fixed selling & administrative 12 10
Normal selling price $125 $105
Machine hours required 3 4
What is the minimum unit price that Gardener should charge LJB to manufacture 1,000 units of KT-6500?
a. $93.00.
b. $96.50.
c. $110.00.
d. $125.00.
242. CSO: 2C2c LOS: 2C2o
Green Corporation builds custom-designed machinery. A review of selected data and the company’s pricing policies revealed the following.
• A 10% commission is paid on all sales orders.
• Variable and fixed factory overheads total 40% and 20%, respectively, of direct labor.
• Corporate administrative costs amount to 10% of direct labor.
• When bidding on jobs, Green adds a 25% markup to the total of all factory and administrative costs to cover income taxes and produce a profit.
• The firm’s income tax rate is 40%.
The company expects to operate at a maximum of 80% of practical capacity.
Green recently received an invitation to bid on the manufacture of some custom machinery for Kennendale, Inc. For this project, Green’s production accountants estimate the material and labor costs will be $66,000 and $120,000, respectively. Accordingly, Green submitted a bid to Kennendale in the amount of $375,000. Feeling Green’s bid was too high, Kennendale countered with a price of $280,000. Which one of the following options should be recommended to Green’s management?
a. Accept the counteroffer because the order will increase operating income.
b. Accept the counteroffer even though the order will decrease operating income.
c. Reject the counteroffer even though the order will increase operating income.
d. Reject the counteroffer because the order will decrease operating income.
243. CSO: 2C2d LOS: 2C2o
Synergy Inc. produces a component that is popular in many refrigeration systems. Data on three of the five different models of this component are as follows.
Model
A B C
Volume needed (units) 5,000 6,000 3,000
Manufacturing costs
Variable direct costs $10 $24 $20
Variable overhead 5 10 15
Fixed overhead 11 20 17
Total manufacturing costs $26 $54 $52
Cost if purchased $21 $42 $39
Synergy applies variable overhead on the basis of machine hours at the rate of $2.50 per hour. Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours. Which one of the following options should be recommended to Synergy's management?
a. Purchase all three products in the quantities required.
b. Manufacture all three products in the quantities required.
c. The Freezer Department's manufacturing plan should include 5,000 units of Model A and 4,500 units of Model B.
d. The Freezer Department's manufacturing plan should include 2,000 units of Model A and 6,000 units of Model B.
244. CSO: 2C2d LOS: 2C2d
Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $ 7
Direct labor 12
Variable overhead 5
Fixed overhead 10
Total costs $34
Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments’ offer, the facilities used to manufacture ice-makers could be used to produce water filtration units. Revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales. In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.
For Refrigerator Company to determine the most appropriate action to take in this situation, the total relevant costs of make vs. buy, respectively, are
a. $600,000 vs. $560,000.
b. $648,000 vs. $528,000.
c. $600,000 vs. $528,000.
d. $680,000 vs. $440,000.
245. CSO: 2C2d LOS: 2C2d
Sunshine Corporation is considering the purchase of a new machine for $800,000. The machine is capable of producing 1.6 million units of product over its useful life. The manufacturer’s engineering specifications state that the machine-related cost of producing each unit of product should be $.50. Sunshine’s total anticipated demand over the asset’s useful life is 1.2 million units. The average cost of materials and labor for each unit is $.40. In considering whether to buy the new machine, would you recommend that Sunshine use the manufacturer’s engineering specification of machine-related unit production cost?
a. No, the machine-related cost of producing each unit is $2.00.
b. No, the machine-related cost of producing each unit is $.67.
c. No, the machine-related cost of producing each unit is $.90.
d. Yes, the machine-related cost of producing each unit is $.50.
246. CSO: 2C2d LOS: 2C2h
Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of $150,000, and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned production levels.
If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than
a. $12.00.
b. $12.50.
c. $13.00.
d. $14.00.
247. CSO: 2C2d LOS: 2C2a
Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year.
Option One - Acquire a New Finishing Machine.
The cost of the machine is $1,000,000 and will have a useful life of five years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for five years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on their current fully depreciated finishing machine.
Option Two - Outsource the Finishing Work.
Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If they outsource, Verla will scrap their current fully depreciated finishing machine.
Verla’s effective income tax rate is 40%. The weighted-average cost of capital is 10%.
When comparing the two options, the $50,000 trade-in allowance would be considered
a. irrelevant because it does not affect taxes.
b. relevant because it is a decrease in cash outflow.
c. irrelevant because it does not affect cash.
d. relevant because it is an increase in cash outflows.
248. CSO: 2C2e LOS: 2C2o
Jones Enterprises manufactures 3 products, A, B, and C. During the month of May Jones’ production, costs, and sales data were as follows.
Products
A B C Totals
Units of production 30,000 20,000 70,000 120,000
Joint production costs
to split-off point $480,000
Further processing costs $ - $60,000 $140,000
Unit sales price
At split-off 3.75 5.50 10.25
After further processing - 8.00 12.50
Based on the above information, which one of the following alternatives should be recommended to Jones’ management?
a. Sell both Product B and Product C at the split-off point.
b. Process Product B further but sell Product C at the split-off point.
c. Process Product C further but sell Product B at the split-off point.
d. Process both Products B and C further.
249. CSO: 2C2e LOS: 2C2l
Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a joint production process, incurring $250,000 of joint costs. Oakes allocates joint costs based on the physical volume of each product produced. Mononate and Beracyl can each be sold at the split-off point in a semifinished state or, alternatively, processed further. Additional data about the two products are as follows.
Mononate Beracyl
Sales price per gallon at split-off $7 $15
Sales price per gallon if processed further $10 $18
Variable production costs if processed further $125,000 $115,000
An assistant in the company’s cost accounting department was overheard saying “....that when both joint and separable costs are considered, the firm has no business processing either product beyond the split-off point. The extra revenue is simply not worth the effort.” Which of the following strategies should be recommended for Oakes?
Mononate Beracyl
a. Sell at split-off Sell at split-off.
b. Sell at split-off Process further.
c. Process further Sell at split-off.
d. Process further Process further.
250. CSO: 2C2f LOS: 2C2l
Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive Restaurant Total
Sales $500,000 $400,000 $100,000 $1,000,000
Variable costs 300,000 200,000 70,000 570,000
Fixed costs 100,000 100,000 50,000 250,000
Operating income (loss) $100,000 $100,000 $(20,000) $ 180,000
Management is contemplating the discontinuance of the Restaurant segment since “it is losing money.” If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. What will Whitman’s total contribution margin be if the Restaurant segment is discontinued?
a. $160,000.
b. $220,000.
c. $367,650.
d. $380,000.
251. CSO: 2C2f LOS: 2C2h
Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive Restaurant Total
Sales $500,000 $400,000 $100,000 $1,000,000
Variable costs 300,000 200,000 70,000 570,000
Fixed costs 100,000 100,000 50,000 250,000
Operating income (loss) $100,000 $100,000 $ (20,000) $ 180,000
Management is contemplating the discontinuance of the Restaurant segment since “it is losing money.” If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. When considering the decision, Whitman’s controller advised that one of the financial aspects Whitman should review is contribution margin. Which one of the following options reflects the current contribution margin ratios for each of Whitman’s business segments?
Retailing Automotive Restaurant
a. 60% 50% 30%.
b. 60% 50% 70%.
c. 40% 50% 70%.
d. 40% 50% 30%.
252. CSO: 2C2f LOS: 2C2d
Capital Company has decided to discontinue a product produced on a machine purchased four years ago at a cost of $70,000. The machine has a current book value of $30,000. Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage value. The company is reviewing the various aspects involved in the production of a new product. The engineering staff advised that the existing machine can be used to produce the new product. Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000.
Ignoring income taxes, the costs relevant to the decision to produce or not to produce the new product would be
a. $25,000.
b. $30,000.
c. $55,000.
d. $95,000.
253. CSO: 2C2f LOS: 2C2d
Reynolds Inc. manufactures several different products, including a premium lawn fertilizer and weed killer that is popular in hot, dry climates. Reynolds is currently operating at less than full capacity because of market saturation for lawn fertilizer. Sales and cost data for a 40-pound bag of Reynolds lawn fertilizer is as follows.
Selling price $18.50
Production cost
Materials and labor $12.25
Variable overhead 3.75
Allocated fixed overhead 4.00 20.00
Income (loss) per bag $(1.50)
On the basis of this information, which one of the following alternatives should be recommended to Reynolds management?
a. Select a different cost driver to allocate its overhead.
b. Drop this product from its product line.
c. Continue to produce and market this product.
d. Increase output and spread fixed overhead over a larger volume base.
254. CSO: 2C2f LOS: 2C2l
Following are the operating results of the two segments of Parklin Corporation.
Segment A Segment B Total
Sales $10,000 $15,000 $25,000
Variable costs of goods sold 4,000 8,500 12,500
Fixed costs of goods sold 1,500 2,500 4,000
Gross margin 4,500 4,000 8,500
Variable selling and administrative 2,000 3,000 5,000
Fixed selling and administrative 1,500 1,500 3,000
Operating income (loss) $ 1,000 $ (500) $ 500
Variable costs of goods sold are directly related to the operating segments. Fixed costs of goods sold are allocated to each segment based on the number of employees. Fixed selling and administrative expenses are allocated equally. If Segment B is eliminated, $1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed, the effect on operating income would be
a. an increase of $500.
b. an increase of $2,000.
c. a decrease of $2,000.
d. a decrease of $2,500.
255. CSO: 2C2f LOS: 2C2d
Grapevine Corporation produces two joint products, JP-1 and JP-2, and a single by-product, BP-1, in Department 2 of its manufacturing plant. JP-1 is subsequently transferred to Department 3 where it is refined into a more expensive, higher-priced product, JP-1R, and a by-product known as BP-2. Recently, Santa Fe Company introduced a product that would compete directly with JP-1R and, as a result, Grapevine must reevaluate its decision to process JP-1 further. The market for JP-1 will not be affected by Santa Fe’s product, and Grapevine plans to continue production of JP-1, even if further processing is terminated. Should this latter action be necessary, Department 3 will be dismantled.
Which of the following items should Grapevine consider in its decision to continue or terminate Department 3 operations?
1. The selling price per pound of JP-1.
2. The total hourly direct labor cost in Department 3.
3. Unit marketing and packaging costs for BP-2.
4. Supervisory salaries of Department 3 personnel who will be transferred elsewhere in the plant, if processing is terminated.
5. Department 2 joint cost allocated to JP-1 and transferred to Department 3.
6. The cost of existing JP-1R inventory.
a. 2, 3, 4.
b. 1, 2, 3.
c. 2, 3, 5 ,6.
d. 1, 2, 3, 4, 5.
256. CSO: 2C2f LOS: 2C2l
The Doll House, a very profitable company, plans to introduce a new type of doll to its product line. The sales price and costs for the new dolls are as follows.
Selling price per doll $100
Variable cost per doll $60
Incremental annual fixed costs $456,000
Income tax rate 30%
If 10,000 new dolls are produced and sold, the effect on Doll House’s profit (loss) would be
a. $(176,000).
b. $(56,000).
c. $(39,200).
d. $280,000.
257. CSO: 2C2f LOS: 2C2o
The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak furniture line does not seem to be doing well and the president of the company is considering dropping this line. If it is dropped, the revenues associated with the Oak Division will be lost and the related variable costs saved. Also, 50% of the fixed costs allocated to the oak furniture line would be eliminated. The income statements, by divisions, are as follows.
Maple Oak Cherry
Sales $55,000 $85,000 $100,000
Variable Costs 40,000 72,000 82,000
Contribution Margin 15,000 13,000 18,000
Fixed costs 10,000 14,000 10,200
Operating profit (loss) $ 5,000 $(1,000) $ 7,800
Which one of the following options should be recommended to the president of the company?
a. Continue operating the Oak Division as discontinuance would result in a total operating loss of $1,200.
b. Continue operating the Oak Division as discontinuance would result in a $6,000 decline in operating profits.
c. Discontinue the Oak Division which would result in a $1,000 increase in operating profits.
d. Discontinue the Oak Division which would result in a $7,000 increase in operating profits.
258. CSO: 2C2g LOS: 2C2m
Milton Manufacturing occasionally has capacity problems in its metal shaping division, where the chief cost driver is machine hours. In evaluating the attractiveness of its individual products for decision-making purposes, which measurement tool should the firm select?
If machine hours do not If machine hours
constrain the number constrain the number
of units to be produced of units to be produced
a. Contribution margin Contribution margin per machine hour.
b. Gross profit Contribution margin.
c. Contribution margin Contribution margin ratio.
d. Contribution margin per Contribution margin.
machine hour
259. CSO: 2C2g LOS: 2C2m
Elgers Company produces valves for the plumbing industry. Elgers’ per unit sales price and variable costs are as follows.
Sales price $12
Variable costs 8
Elgers’ practical plant capacity is 40,000 units. Elgers’ total fixed costs aggregate $48,000 and it has a 40% effective tax rate. The maximum net profit that Elger can earn is
a. $48,000.
b. $67,200.
c. $96,000.
d. $112,000.
260. CSO: 2C2g LOS: 2C2m
Dayton Corporation manufactures pipe elbows for the plumbing industry. Dayton’s per unit sales price and variable costs are as follows.
Sales price $10
Variable costs 7
Dayton’s practical plant capacity is 35,000 units. Dayton’s total fixed costs amount to $42,000, and the company has a 50% effective tax rate. If Dayton produced and sold 30,000 units, net income would be
a. $24,000.
b. $45,000.
c. $48,000.
d. $90,000.
261. CSO: 2C2g LOS: 2C2m
Raymund Inc., a bearings manufacturer, has the capacity to produce 7,000 bearings per month. The company is planning to replace a portion of its labor intensive production process with a highly automated process, which would increase Raymund’s fixed manufacturing costs by $30,000 per month and reduce its variable costs by $5 per unit.
Raymund’s Income Statement for an average month is as follows.
Sales (5,000 units at $20 per unit) $100,000
Variable manufacturing costs $50,000
Variable selling costs 15,000 65,000
Contribution margin 35,000
Fixed manufacturing costs 16,000
Fixed selling costs 4,000 20,000
Operating income $ 15,000
If Raymund installs the automated process, the company’s monthly operating income would be
a. $5,000.
b. $10,000.
c. $30,000.
d. $40,000.
262. CSO: 2C2g LOS: 2C2m
Phillips and Company produces educational software. Its current unit cost, based upon an anticipated volume of 150,000 units, is as follows.
Selling price $150
Variable costs 60
Contribution margin 90
Fixed costs 60
Operating income 30
Sales for the coming year are estimated at 175,000 units, which is within the relevant range of Phillip’s cost structure. Cost management initiatives are expected to yield a 20% reduction in variable costs and a reduction of $750,000 in fixed costs. Phillip’s cost structure for the coming year will include a
a. per unit contribution margin of $72 and fixed costs of $55.
b. total contribution margin of $15,300,000 and fixed costs of $8,250,000.
c. variable cost ratio of 32% and operating income of $9,600,000.
d. contribution margin ratio of 68% and operating income of $7,050,000.
263. CSO: 2C2g LOS: 2C2d
Cervine Corporation makes two types of motors for use in various products. Operating data and unit cost information for its products are presented below.
Product A Product B
Annual unit capacity 10,000 20,000
Annual unit demand 10,000 20,000
Selling price $100 $80
Variable manufacturing cost 53 45
Fixed manufacturing cost 10 10
Variable selling & administrative 10 11
Fixed selling & administrative 5 4
Fixed other administrative 2 0
Unit operating profit $ 20 $10
Machine hours per unit 2.0 1.5
Cervine has 40,000 productive machine hours available. The relevant contribution margins, per machine hour for each product, to be utilized in making a decision on product priorities for the coming year, are
Product A Product B
a. $17.00 $14.00.
b. $18.50 $16.00.
c. $20.00 $10.00.
d. $37.00 $24.00.
264. CSO: 2C2g LOS: 2C2o
Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units of Product B. Lark’s staff developed the following information with regard to meeting this contract.
Product A Product B Total
Selling Price $75 $125
Variable costs $30 $48
Fixed overhead $1,600,000
Machine hours required 3 5
Machine hours available 160,000
Cost if outsourced $45 $60
Lark’s operations manager has identified the following alternatives. Which alternative should be recommended to Lark’s management?
a. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
b. Make 25,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
c. Make 20,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
d. Rent additional capacity of 30,000 machine hours which will increase fixed costs by $150,000.
265. CSO: 2C2g LOS: 2C2o
Aspen Company plans to sell 12,000 units of product XT and 8,000 units of product RP. Aspen has a capacity of 12,000 productive machine hours. The unit cost structure and machine hours required for each product is as follows.
Unit Costs XT RP
Materials $37 $24
Direct labor 12 13
Variable overhead 6 3
Fixed overhead 37 38
Machine hours required 1.0 1.5
Aspen can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the following actions should be recommended to Aspen's management?
a. Produce XT internally and purchase RP.
b. Produce RP internally and purchase XT.
c. Purchase both XT and RP.
d. Produce both XT and RP.
266. CSO: 2C3b LOS: 2C3d
Which one of the following would cause the demand curve for bagels to shift to the left?
a. A decrease in the cost of muffins.
b. An increase in the population.
c. A decrease in the price of bagels.
d. An increase in the supply of bagels.
267. CSO: 2C3b LOS: 2C3d
Which one of the following would cause the demand curve for prepared meals sold in supermarkets to shift to the right?
a. An increase in the price of prepared meals.
b. An increase in consumer income.
c. A decrease in the price of restaurant meals.
d. An increase in the supply of prepared meals.
268. CSO: 2C3b LOS: 2C3n
If the demand for a product is elastic, a price increase will result in
a. no change in total revenue.
b. an increase in total revenue.
c. a decrease in total revenue.
d. an indeterminate change in revenue.
269. CSO: 2C3b LOS: 2C3b
The advantages of incorporating full product costs in pricing decisions include all the following except
a. ease in identifying unit fixed costs with individual products.
b. full product cost recovery.
c. the promotion of price stability.
d. a pricing formula that meets the cost-benefit test; i.e., simplicity.
270. CSO: 2C3b LOS: 2C3p
An economist determined the following market data for a commodity.
Price Quantity Supplied Quantity Demanded
$25 250 750
50 500 500
75 750 250
100 1,000 0
Based on this information, which one of the following statements is correct?
a. In the short-term, there would be excess supply at a price of $40.
b. In the long-run, if producers’ costs per unit decline, then a reasonable market clearing price could be $65.
c. In the short-term, there would be excess demand at a price of $70.
d. In the long-run, if producers’ costs per unit increase, then a reasonable market clearing price could be $70.
271. CSO: 2C3b LOS: 2C3m
If a product’s price elasticity of demand is greater than one, then a 1% price increase will cause the quantity demanded to
a. increase by more than 1%.
b. increase by less than 1%.
c. decrease by less than 1%.
d. decrease by more than 1%.
272. CSO: 2C3b LOS: 2C3o
If the demand for a good is elastic, then a(n)
a. decrease in price will increase total revenue.
b. increase in price will increase total revenue.
c. decrease in price will decrease total revenue.
d. increase in price will have no effect on total revenue.
273. CSO: 2C3b LOS: 2C3c
Leader Industries is planning to introduce a new product, DMA. It is expected that 10,000 units of DMA will be sold. The full product cost per unit is $300. Invested capital for this product amounts to $20 million. Leader’s target rate of return on investment is 20%. The markup percentage for this product, based on operating income as a percentage of full product cost, will be
a. 42.9%.
b. 57.1%.
c. 133.3%.
d. 233.7%.
274. CSO: 2C3b LOS: 2C3b
Which one of the following situations best lends itself to a cost-based pricing approach?
a. A paper manufacturer negotiating the price for supplying copy paper to a new mass merchandiser of office products.
b. An industrial equipment fabricator negotiating pricing for one of its standard models with a major steel manufacturer.
c. A computer component manufacturer debating pricing terms with a customer in a new channel of distribution.
d. A computer component manufacturer debating pricing with a new customer for a made to order, state of the art application.
275. CSO: 2C3b LOS: 2C3r
Basic Computer Company (BCC) sells its microcomputers using bid pricing. It develops its bids on a full cost basis. Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost. BCC believes bids in excess of $1,050 per computer are not likely to be considered.
BCC’s current cost structure, based on its normal production levels, is $500 for materials per computer and $20 per labor hour. Assembly and testing of each computer requires 17 labor hours. BCC expects to incur variable manufacturing overhead of $2 per labor hour, fixed manufacturing overhead of $3 per labor hour, and incremental administrative costs of $8 per computer assembled.
BCC has received a request from a school board for 200 computers. Using the full-cost criteria and desired level of return, which one of the following prices should be recommended to BCC’s management for bidding purposes?
a. $874.00.
b. $882.00.
c. $961.40.
d. $1,026.30.
276. CSO: 2C3b LOS: 2C3b
Companies that manufacture made-to-order industrial equipment typically use which one of the following?
a. Cost-based pricing.
b. Market-based pricing.
c. Material-based pricing.
d. Price discrimination.
277. CSO: 2C3b LOS: 2C3b
Which one of the following is not a characteristic of market-based costing?
a. It has a customer-driven external focus.
b. It is used by companies facing stiff competition.
c. It is used by companies facing minimal competition.
d. It starts with a target selling price and target profit.
278. CSO: 2C3b LOS: 2C3c
Almelo Manpower Inc. provides contracted bookkeeping services. Almelo has annual fixed costs of $100,000 and variable costs of $6 per hour. This year the company budgeted 50,000 hours of bookkeeping services. Almelo prices its services at full cost and uses a cost-plus pricing approach. The company developed a billing price of $9 per hour. The company’s mark-up level would be
a. 12.5%.
b. 33.3%.
c. 50.0%.
d. 66.6%.
279. CSO: 2C3c LOS: 2C3j
Fennel Products is using cost-based pricing to determine the selling price for its new product based on the following information.
Annual volume 25,000 units
Fixed costs $700,000 per year
Variable costs $200 per unit
Plant investment $3,000,000
Working capital $1,000,000
Effective tax rate 40%
The target price that Fennell needs to set for the new product to achieve a 15% after-tax return on investment (ROI) would be
a. $228.
b. $238.
c. $258.
d. $268.
280. CSO: 2C3f LOS: 2C3f
A monopoly will maximize profits if it produces an output where marginal cost is
a. less than marginal revenue.
b. greater than marginal revenue.
c. equal to marginal revenue.
d. equal to price.
281. CSO: 2C3f LOS: 2C3f
At the long-run profit maximizing equilibrium of a firm in a perfectly competitive market, all of the following are correct except that
a. price equals marginal cost.
b. price equals average total cost.
c. economic profits are positive.
d. marginal cost equals marginal revenue.
282. CSO: 2C4a LOS: 2C4f
A firm is constructing a risk analysis to quantify the exposure of its data center to various types of threats. Which one of the following situations would represent the highest annual loss exposure after adjustment for insurance proceeds?
Frequency of
Occurrence Loss Insurance
(years) Amount (% coverage)
a. 1 $ 15,000 85.
b. 8 75,000 80.
c. 20 200,000 80.
d. 100 400,000 50.
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