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OVERVIEW

Management Advisory Services

1. The following characterize management advisory services except A. involve decision for the future

B. broader in scope and varied in nature

C. utilize more junior staff than senior members of the firm D. relate to specific problems where expert help is required

2. Which of the following is not classifiable as a management advisory service by CPA?

A. Systems design. C. Make or buy analysis.

B. Project feasibility study. D. Assistance in budget preparation.

Managerial Accounting

3. The following are inherent to either management accounting or financial accounting:

1. External report

2. Historical information

3. Contribution approach income statement 4. Generally accepted accounting principles 5. Prospective financial statements

Which of the foregoing are related to management accounting and financial accounting, respectively?

Management

Accounting Financial Accounting

A. 1, 2, 5 3, 4

B. 3, 5 1, 2, 4

C. 2, 3 1, 4, 5

D. 3 1, 2, 4, 5

COST BEHAVIOR

4. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted output and P280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted

fixed costs for P50,000 units. How much is Carera’s budgeted variable cost per unit of output?

A. P1.60 C. P3.00

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COST-VOLUME-PROFIT ANALYSIS Breakeven Point

5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even volume?

A. P120,000 C. P225,000*

B. P200,000 D. P450,000

6. Bush Electronics, Inc. had the following sales results for 2004:

TV sets CD

player Radios Peso sales component

ratio 0.30 0.30 0.40

Contribution margin ratio

0.40 0.40 0.60

Bush Electronics, Inc. had fixed costs of P2,400,000.

The break-even sales in pesos for Bush Electronics, Inc. are:

TV sets CD player Radios

A. P1,800,000 P1,800,000 P3,600,000

B P1,800,000 P1,800,000 P1,600,000

C. P1,500,000 P1,500,000 P2,000,000

D. P1,531,915 P1,531,915 P2,042,553

7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:

Selling price per pair of sunglasses P25.00 Variable costs per pair of sunglasses:

Raw materials P11.00

Direct labor 5.00

Manufacturing overhead 2.50

Selling expenses 1.30

Total variable costs per unit P19.80 Annual fixed costs:

Manufacturing overhead P192,000

Selling and administrative 276,000

Total fixed costs P468,000

Forecasted annual sales volume P3,000,000

(120,000 pairs)

Income tax rate 40%

Glareless Company estimates that its direct labor costs will increase 8 percent next year. How many units will Glareless have to sell next year to reach breakeven?

A. 97,500 units C. 83,572 units

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8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik device.

Direct labor P180

Direct materials 240

Factory overhead 105

Selling costs 75

Total variable costs P600

Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last five years.

In 2001, a significant change in Madel’s production technology caused a 10% increase in annual fixed costs and a 20% unit cost increase in the direct labor component as a result of higher skilled direct labor. However, this change permitted the replacement of a costly imported component with a local component. The effect was to reduce unit material costs by 25%. There has been no change in the Walastik selling price.

The annual sales units required for Madel to breakeven are:

A. B. C. D.

2000 22,000 22,000 14,000 14,000

2001 20,840 22,407 22,407 20,840

Profit Planning

9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and sales price per unit to remain the same in 2001, however total sales are expected to jump by 20%. If the 2001 projections are realized, net income in 2001 should exceed net income in 2000 by

A. 100% C. 20%

B. 80% D. 50%

10.Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is considering opening on Sundays. The annual incremental fixed costs of Sunday openings are estimated at

P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two estimates that 60 percent of its Sunday sales to customers would be made on other days if the stores were not open on Sundays. The one-day volume of Sunday sales that would be necessary for Six-Two to attain the same weekly operating income as the current six-day week is

A. P6,000 C. P7,500

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11.Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to generate an operating profit of P48,000?

A. P1,350,000 C. P1,135,000

B. P486,425 D. P910,000

12.Mount Park, Inc. had the following economic information for the year 2002:

Sales(50,000 units @ P20) P1,000,000

Variable manufacturing costs 400,000

Fixed costs 250,000

Income tax rate 40 percent

Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates increased competition; hence, an additional P75,000 advertising costs is budgeted in order to maintain its sales target for 2003.

What is the amount of peso sales needed for 2003 in order to equal the after-tax income in 2002?

A. P1,125,000 C. P1,187,500

B. P1,325,000 D. P1,387,500

13.Larz Company produces a single product. It sold 25,000 units last year with the following results:

Sales P625,000

Variable costs P375,000

Fixed costs 150,000 525,000

Net income before taxes P100,000

Income taxes 40,000

Net income P 60,000

In an attempt to improve its product in the coming year, Larz is considering replacing a component part in its product that has a cost of P2.50 with a new and better part costing P4.50 per unit. A new machine will also be needed to increase plant capacity. The machine would cost P18,000 with a useful life of 6 years and no

salvage value. The company uses straight-line depreciation on all plant assets.

If Larz wishes to maintain the same contribution margin ratio after implementing the changes, what selling price per unit of product must it charge next year to cover the increased material costs?

A. P27.00 C. P32.50

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Point of Indifference

14.Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of either product this year. Because the models are very similar, Ravine Ski will produce only one of the two models. The information below was compiled by the accounting department.

Mountaineering Touring Selling price per unit P880.00 P800.00 Variable costs per unit P528.00 P528.00

Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40% income tax rate.

The total sales revenue at which Ravine Ski Company would make the same profit or loss regardless of the ski model it decided to produce is

A. P8,800,000 C. P9,240,000

B. P4,224,000 D. P6,864,000

15.Valley of Fire Corporation has one department that produces three replacement parts for the company. However, only one part can be produced in any month because of the adjustments that must be made to the equipment. The department can produce up to 15,000 units of any one of the three parts in each month. The company expresses the monthly after tax cost/volume/profit relationships for each part using an equation method. The format of the equations and the equation for each replacement part are given below:

(ATR) X ((SP – VC) x (U) – FC)

ATR = after-tax rate VC = variable cost FC = fixed costs SP = selling price U = units

Part Part Equations

AL45 .6 ((P4.00 – P1.25) (U) – P33,400) BT65 .6 ((P4.05 – P2.55) (U) – P15,000) GM17 .6 ((P4.10 - P2.00) (U) - P22,365)

The production and unit sales volume level at which Valley will be indifferent as to whether Part BT62 or GM17 is produced is

A. 7,365 C. 10,380

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16.BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors is considering a change to a commission arrangement that would pay each salesperson a salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.

The amount of total car sales at which BM Motors would be indifferent as to which plan to select is

A. P22,500,000 C. P24,000,000

B. P30,000,000 D. P12,000,000

17.Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each pair of shoes sold. Sales personnel also receive a small basic salary.

The following cost and revenue data relate to Store 9 and are typical of the company’s many sales outlets:

Selling price P800

Variable expenses:

Invoice costs P360

Sales commission 140

P500 Fixed expenses per year:

Rent P1,600,000

Advertising 3,000,000

Salaries 1,400,000

Total P6,000,000

The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by P2,142,000 annually. If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be indifferent to commission basis?

A. 25,300 C. 18,505

B. 15,300 D. 21,000

Sensitivity Analysis

18.If fixed costs increase while variable cost per unit remains constant, the contribution margin will be

A. lower C. unchanged

B. higher D. unpredictable

19.Firm D and Firm S are competitors within the same industry. Firm D produces its product using large amounts of direct labor. Firm S has replaced direct labor with investment in machinery. Projected sales for both firms are fifteen percent less than in the prior year. Which statement regarding projected profits is true?

A. Firm D will lose more profit than Firm S. B. Firm S will lose more profit than Firm D.

C. Firm D and Firm S will lose the same amount of profit. D. Neither Firm D nor Firm S will lose profit.

20.Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. During the current month when the unit sales are expected to be only 45,000, there is a loss of P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. The fixed costs amounted to

A. P80,000 C. P247,500

B. P360,000 D. P210,000

21.The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their place of business to the downtown area. Likewise it is anticipating that the selling price per unit and the variable expenses will not change. At present, the sales volume necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven would go up to P975,000. Based on these projections, what were the total fixed costs before the increase of P78,750?

A. P341,250 C. P183,750

B. P262,500 D. P300,000

22.Machan Co.’s year-end income statement is as follows:

Sales (20,000 units) P360,000

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Contribution margin P140,000

Fixed costs 105,000

Net income P 35,000

Management is unhappy with the results and plans to make some changes for next year. If management implements a new marketing program, fixed costs are expected to increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by 15 percent. What is the effect on income if the foregoing changes are implemented?

A. Decrease of P21,200 C. Increase of P13,800 B. Increase of P1,800 D. Increase of P14,800

23.Candyman Company is a wholesale distributor of candy. The company services grocery, convenience, and drug stores in Metro Manila. Small but steady growth in sales has been achieved by the company over the past few years while candy prices have been increasing. The company is formulating its plans for the coming fiscal year. Presented below are the data used to project the current year’s after-tax net income of P110,400.

Manufacturers of candy have announced that they will increase prices of their products an average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts, etc.) and labor costs. Candyman Company expects that all other costs will remain at the same rates or levels as the current year. Candyman is subject to 40 percent tax rate.

Average selling price P4.00 per box

Average variable costs

Cost of candy P2.00 per box

Selling expenses 0.40 per box

Total P2.40 per box

Annual fixed costs

Selling P169,000

Administrative 280,000

Total P440,000

Expected annual sales volume (390,000 boxes)

P1,560,000

If net income after taxes is to remain the same after the cost of candy increases but no increase in the sales price is made, how many boxes of candy must Candyman sell?

A. 480,000 C. 27,600

B. 400,000 D. 29,300

Margin of Safety

24.Claremont Company had is a manufacturer of its only one product line. It had sales of P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent. What are the company’s fixed costs?

A. P72,000 C. P288,000

B. P80,000 D. P320,000

25.Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs?

A. P36,000 C. P432,000

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Degree of Operating Leverage

26.A very high operating leverage indicates that a firm A. has high fixed costs

B. has a high net income C. has high variable costs

D. is operating close to its breakeven point

27.The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income for 2002 can be expected to increase by what amount over 2001?

A. P250,000 C. P500,000

B. 200 percent D. 40 percent

Situational

Questions 28 thru 34 are based on the following information:

Calamba Hospital operates a general hospital but rents space and beds to separate entities for specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each separate entity for common services to its patients like meals and laundry and for all administrative services such as billings, collections, etc. All uncollectible accounts are charged directly to the entity. Space and bed rentals are fixed for the year.

For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365 days, and had revenue of P1,138,800.

Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:

Basis of Allocation

Patient Days Bed Capacity

Dietary P 42,952

Janitorial P 12,800

Laundry 28,000

Lab, other than direct charges

to patients 47,800

Pharmacy 33,800

Repairs and maintenance 5,200 7,140

General administrative services 131,760

Rent 275,320

Billings and collections 40,000

Bad debt expense 47,000

Other 18,048 .

P262,800 P453,000 The only personnel directly employed by the Pediatrics Department are supervising nurses, nurses, and aides. The hospital has minimum personnel requirements based on total annual patient days. Hospital requirements beginning at the minimum, expected level of operation follow:

Annual Patient

Days Aides Nurses Supervising Nurses

10,000 – 14,000 21 11 4 14,001 – 17,000 22 12 4 17,001 – 23,725 22 13 4 23,726 – 25,550 25 14 5 25,551 – 27,375 26 14 5 27,376 – 29,200 29 16 6

The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics Department always employs only the minimum number of required full-time equivalent personnel.

Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000; and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and aides was P72,000, P169,000, and P110,000, respectively.

The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is estimated that during 90 of these capacity days, the demand average 17 patients more than capacity and even went as

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high as 20 patients more on some days. The hospital has an additional 20 beds available for rent for the coming fiscal year.

28.The variable expense per patient day is

A. P15.08 C. P15.00

B. P12.50 D. P50.00

29.The contribution margin per patient day is

A. P49.92 C. P50.00

B. P52.50 D. P52.00

30.How many patient days are necessary to cover fixed costs for bed capacity and for supervisory nurses?

A. 9,500 C. 12,500

B. 11,500 D. 10,500

31.The number of patient days needed to cover total costs is

A. 14,200 C. 15,820

B. 15,200 D. 14,220

32.If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as in the past year, what would be the increase in revenue?

A. P99,450 C. P105,450

B. P87,750 D. P89,750

33.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied per patient day is

A. P22,935 C. P22,965

B. P22,950 D. P23,935

34.What is the increased fixed cost applied for bed capacity, given the increased number of beds?

A. P151,000 C. P147,000

B. P173,950 D. P152,000

Questions 35 thru 37 are based on the following information.

Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 per month. Two women were hired to work full time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. This level of employment has been consistent. An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms. Casserole increased her business between 1998 and 2001. Profits have more than doubled since 1998. Ms. Casserole does not understand why profits have increased faster than volume.

A projected income statement for the year ended December 31, 2002, prepared by the accountant, is shown below:

Sales P95,000

Cost of food sold P28,500

Wages & fringe benefits:

Restaurant help 8,150 Delivery help 17,300 Rent 4,800 Accounting services 3,600 Depreciation: Delivery equipment 5,000 Restaurant equipment 3,000 Utilities 2,325 Supplies 1,200 73,875

Net income before taxes P21,125

Income taxes (40%) 8,450

Net income P12,675

Note: The average pizza sells for P2.50.

35.What is the tax shield on the noncash fixed costs?

A. P3,200 C. P3,400

B. P14,950 D. P5,400

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A. 25,929 C. 18,150

B. 23,569 D. 42,114

37.What is the cash flow breakeven point in number of pizzas that must be sold?

A. 19,529 C. 12,990

B. 21,284 D. 10,773

VARIABLE COSTING VS. ABSORPTION COSTING Absorption Costing

38.When a firm prepares financial reports by using absorption costing, it may find that

A. profits will always increase with increase in sales. B. profits will always decrease with decreases in sales.

C. profit may decrease with increased sales even if there is no change in selling price and costs.

D. decreased output and constant sales result in increased profit. 39.The Bush Company has provided information concerning its

projections for the coming year as follows:

Net sales P10,000,000

Fixed manufacturing costs P 1,000,000

Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in inventory, what will the projected cost of goods sold be?

A. P5,000,000 C. P7,000,000

B. P6,000,000 D. P8,000,000

40.Colger Company manufactures a single product using standard costing. Variable production costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of 12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under absorption costing would be

A. P115,000 C. P242,000

B. P132,000 D. P253,000

41.The Trinkets Company estimated the following data for the coming year:

Fixed manufacturing costs P565,000

Variable production costs per peso of sales

Materials P0.125

Direct labor 0.150

Variable overhead 0.075

Variable selling costs per peso of sales 0.150 Trinkets estimates its sales for the coming year to be P2,000,000. The expected cost of goods sold for the coming year is

A. P1,265,000 C. P1,115,000

B. P1,565,000 D. P 700,000

42.Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is from the financial records of the company for the year.

• Total manufacturing costs were P2,500,000. • Costs of goods of manufactured was P2,425,000.

• Applied factory overhead was 30 percent of total manufacturing costs.

• Factory overhead was applied to production at a rate of 80% of direct labor cost.

• Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.

What are the amounts/value of the following cost elements and inventory?

Direct labor Direct materials Work-in-process inventory

A. P750,000 P750,000 P225,000

B. P937,500 P812,500 P225,000

C. P937,500 P812,500 P300,000

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43.Black Forest, Inc. began operations on January 3. Standard costs were established in early January assuming a normal production volume of 160,000 units. However, Black Forest produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and 40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and 50% were selling. Black Forest had no raw materials or work-in-process inventories at December 31. Actual input prices and quantities per unit of product were equal to standard.

Using absorption costing, Black Forest’s income statement would show:

Cost of Goods Sold at

Standard Cost Overhead Volume Variance

A. P8,200,000 P800,000 Unf

B. P7,200,000 P800,000 Fav

C. P6,500,000 P700,000 Unf

D. P7,000,000 P700,000 Fav

Absorption Costing & Variable Costing

44.Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products are as follows:

Direct Materials P4.00

Direct labor 6.00

Factory overhead

Variable 3.00

Fixed (based on a normal capacity of

10,000 units) 2.00

Total 15.00

Beginning inventory 2,000 units

Production 8,000 units

Units sold (selling price P50) 7,000 units Actual costs:

Direct materials P 35,000

Direct labor 50,000

Variable overhead 23,000

Fixed 18,000

Variable selling and adm. 60,000

Fixed selling and adm. 35,000

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How much are the net income under absorption costing and variable costing methods?

A. B. C. D.

Absorption P144,000 P143,000 144,000 142,000

Variable 143,000 144,000 142,000 144,000

45.Lord Industries manufactures a single product. Variable production costs are P10 and fixed production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units. The volume variance under each product costing are:

A. B. C. D. Under Absorption Costing P3,750 P3,750 P7,500 P7,500 Under Variable Costing P 0 P7,500 P0 P0

Absorption Costing Income vs. Variable Costing Income

46.Simple Corp. produces a single product. The following cost structure applied to their first year of operations, 2000:

Variable Costs per

Unit Annual Fixed Costs

SG&A P2.00 P14,000

Production 4.00 P20,000

Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory. How much larger or smaller would Simple Corp.’s income be if it uses absorption rather than variable costing?

A. The absorption costing income would be P6,000 larger B. The absorption costing income would be P6,000 smaller C. The absorption costing income would be P4,800 larger* D. The absorption costing income would be P4,000 smaller STANDARD COSTING & VARIANCE ANALYSIS

Basic Concepts

47.Which of the following is a difference between a static budget and a flexible budget?

A. A flexible budget includes only variable costs; a static budget includes only fixed costs.

B. A flexible budget includes all costs, a static budget includes only fixed costs.

C. A flexible budget gives different allowances for different levels of activity, a static budget does not.

D. There is no difference between the two. Setting Standards

48.Which of the following statements about the selection of standards is true?

A. Ideal standards tend to extract higher performance levels since they give employees something to live up to.

B. Currently attainable standards may encourage operating inefficiencies.

C. Currently attainable standards discourage employees from achieving their full performance potential.

D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus causing a decline in performance.

49.The per-unit standard cost for variable overhead is normally based on the

A. standard quantity of an input factor used in a unit of product. B. actual variable overhead cost incurred at the achieved level of

production.

C. budgeted total cost for variable overhead divided by the number of units expected to be produced.

D. ratio of fringe benefits to the basic cost of labor.

50.Relevant Company had the following flexible budget for 2003 at 100 percent capacity of 30,000 direct labor hours.

Direct materials P800,000

Direct labor 600,000

Variable manufacturing overhead 360,000

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What is the total manufacturing overhead application rate if the Relevant Company has to operate at 80 percent of the stated capacity?

A. P24.00 C. P24.60

B. P27.00 D. P21.60

Raw Materials Variances

51.Derby Co. uses a standard costing system in connection with the manufacture of a line of T-shirts. Each unit of finished product contains 2 yards of direct material. However, a 20 percent direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct materials is P120 per yard.

The standard direct material cost per unit of finished product is

A. P192 C. P288

B. P240 D. P300

52.Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance and a P3,735 favorable usage variance. If there were no changes in the component of inventory, how many units of finished product were produced?

A. 994 units C. 1,725 units

B. 1,160 units D. 828 units

53.The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600 units of finished product. The material quantity variance is

A. P6,000 unfavorable C. P5,200 unfavorable B. P3,200 unfavorable D. P2,000 unfavorable

54.Ramie has a standard price of P5.50 per pound for materials. July’s results showed an unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066 pounds were used in production, what was the standard quantity allowed for materials?

A. 1,104 C. 1,074

B. 1,066 D. 1,100

Direct Labor Variance

55.Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage rate?

A. P8.94 C. P7.94

B. P8.00 D. P7.80

56.The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual output for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor expense. Direct labor hours of 6,375 were actually worked during the month. Variance analysis of the performance for the month of May would show a(n)

A. favorable material quantity variance of P7,500

B. unfavorable direct labor efficiency variance of P1,275 C. unfavorable material quantity variance of P7,500 D. unfavorable direct labor rate variance of P1,275

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Two-Way Overhead Variances

57.Karla Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Karla’s budgeted overhead for the month is

A. P12,800 C. P84,800

B. P18,800 D. P774,000

58.If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the standard hours allowed is P15,600, then the overhead controllable variance is

A. P600F C. P1,600F

B. P2,200U D. P1,600U

59.Universal Company uses a standard cost system and prepared the following budget at normal capacity for January

Direct labor hours 24,000

Variable factory OH P48,000

Fixed factory OH P108,000

Total factory OH per DLH P6.50

Actual data for January were as follows:

Direct labor hours worked 22,000

Total factory OH P147,000

Standard DLHs allowed for capacity attained 21,000 Using the two-way analysis of overhead variance, what is the controllable variance for January?

A. P3,000 F C. P9,000 F

B. P5,000 F D. P10,500 U

60.The Terrain Company has a standard absorption and flexible budgeting system and uses a two-way analysis of overhead variances. Selected data for the June production activity are:

Budgeted fixed factory overhead costs P 64,000

Actual factory overhead 230,000

Variable factory overhead rater per DLH P 5

Standard DLH 32,000

Actual DLH 32,000

The budget (controllable) variance for June is

A. P1,000 favorable C. P6,000 favorable B. P1,000 unfavorable D. P6,000 unfavorable

61.South Company has total budgeted fixed costs of P75,000, Actual production of 19,500 units resulted in a P3,000 favorable volume variance. What normal capacity was used to determine the fixed overhead rate?

A. 16,500 C. 20,313

B. 18,750 D. 20,325

62.CTV Company has a standard fixed cost of P6 per unit. At an actual production of 8,000 units a favorable volume variance of P12,000 resulted. What were total budgeted fixed costs?

A. P36,000 C. P60,000

B. P48,000 D. P75,000

63.The Pinatubo Company makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following:

Variable factory overhead: 3.0 DLHs @ P4.00 per DLH. Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH

For January, the company incurred P22,000 of actual fixed overhead costs and recorded a P875 favorable volume variance.

The budgeted fixed overhead cost for January is

A. P31,500 C. P32,375

B. P30,625 D. P33,250

Questions 64 & 65 are based on the following information. Lucky Company sets the following standards for 2003:

Direct labor cost (2 DLH @ P4.50) P 9.00 Manufacturing overhead (2 DLH @ P7.50) 15.00 Lucky Company plans to produce its only product equally each month. The annual budget for overhead costs are:

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Variable overhead 300,000 Normal activity in direct labor hours 60,000 In March, Lucky Company produced 2,450 units with actual direct labor hours used of 5,050. Actual overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.)

64.The amount of overhead volume variance for Lucky Company is A. P250 unfavorable C. P750 Unfavorable

B. P500 unfavorable D. P375 Unfavorable

65.Using the preceding data for Lucky Company, the controllable overhead variance was

A. P505 favorable C. P245 favorable B. P505 unfavorable D. P245 unfavorable Three-Way Overhead Variances

66.Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable overhead spending variance, and P2,000 total under applied overhead. The fixed overhead budget variance is A. P41,000 favorable C. P41,000 Unfavorable B. P45,000 favorable D. P45,000 Unfavorable Four-Way Overhead Variances

67.Franklin Glass Works’ production budget for the year ended November 30, 2001 was based on 200,000 units. Each unit requires two standard hours of labor for completion. Total overhead was budgeted at P900,000 for the year, and the fixed overhead rate was estimated to be P3.00 per unit. Both fixed and variable overhead are assigned to the product on the basis of direct labor hours. The actual data for the year ended November 30, 2001 are presented below.

Actual production in units 198,000

Actual direct labor hours 440,000

Actual variable overhead P 352,000 Actual fixed overhead P 575,000 Franklin’s variable overhead efficiency variance for the year ended November 30, 2001 is

A. P33,000 unfavorable C. P66,000 unfavorable B. P35,520 favorable D. P33,000 favorable

68.The Virgin Island Company has standard variable costs as follows: Materials, 3 pounds at P4.00 per pound P12.00

Labor, 2 hours P10.00 per hour 20.00

Variable overhead, P7.50 per labor hour 15.00

Total P47.00

During September, Virgin Island produced 6,000 units, using 11,560 labor hours at a total wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead variances are:

A. B. C. D.

Spendin

g favorableP1,900 unfavorableP1,900 favorableP1,400 unfavorableP1,400 Efficienc y P3,300 unfavorable P3,300 favorable P1,900 favorable P1,900 favorable 69.Fixed manufacturing overhead was budgeted at P500,000 and

25,000 direct labor hours were budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied must be

A. P516,000 C. P504,000

B. P512,000 D. P496,000

70.Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost: C = P80,000 + P12M

Where C = monthly manufacturing overhead cost M = machine hours

The standard error of the estimate of the regression is P6,000.

The standard time required to manufacture one six-unit case of Mulvey’s single product is 4 machine hours. Mulvey applies manufacturing overhead to production on the basis of machine hours and its normal annual production is 50,000 cases.

Mulvey’s estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases would be

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A. P80,000 C. P240,000

B. P320,000 D. P360,000

Questions 71 thru 73 are based on the following information.

The Lustre Company produces its only product, Kool Chewing Gum. The standard overhead cost for one pack of the product follows:

Fixed overhead (1.50 hours at P18.00) P27.00 Variable overhead (1.50 hours at P10.00) 15.00

Total application rate P42.00

Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and P308,700 variable. 71.The amount of variable overhead spending variance is

A. P6,300 Favorable C. P6,300 Unfavorable B. P 8,700 Favorable D. P8,700 Unfavorable 72.The total overhead controllable variance is

A. P13,700 Favorable C. P13,700 Unfavorable B. P 8,700 Favorable D. P 8, 700 Unfavorable

73.The overhead efficiency variance is

A. P22,500 Favorable C. P22,500 Unfavorable B. P15,000 Favorable D. P15,000 Unfavorable Gross Profit Variance Analysis

74.Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are as follows:

Actual Expected

Sales in units 10,000 9,500

Selling price per

unit P11 P10

Variable expense

per unit P 6

What are the price variance and price volume variance?

A. B. C. D.

Sales Price

Variance P10,000 F P 5,000 F P 5,000 U P10,000 U Price Volume

Variance P 5,000 F P10,000 U P10,000 F P 5,000 U RESPONSIBILITY ACCOUNTING & TRANSFER PRICING

Basic Concepts

75.Controllable costs are costs that

A. are likely to respond to the amount of attention devoted to them by a specified manager.

B. are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity. C. will be unaffected by current managerial decisions.

D. fluctuate in total in response to small change in the rate of utilization of capacity.

76.Which of the following does not apply to the content of managerial reports?

A. Reporting standard is relevant to the decision to be made. B. May extend beyond double-entry accounting system. C. Pertain to subunits of the entity and may be very detailed.

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D. Pertains to the entity as a whole and is highly aggregated.* Return on Investment

77.If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the ROI would

A. increase by 30% C. decrease by 37% B. decrease by 10% D. decrease by 33.3%

78.Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if sales

A. increased by the same peso amount as expenses and total assets increased.

B. remained the same and expenses were reduced by the same peso amount that total asset increased.

C. decreased by the same peso amount that expenses increased. D. and expenses increased by the same percentage that total

assets increased.

79.If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would

A. increase by 4% C. increase by 30% B. increase by 6% D. decrease by 50% Residual Income

80.Jar Division of Handy, Inc. expects the following result for 2004:

Unit sales 70,000

Unit selling price P 10

Unit variable cost P 4

Total fixed costs P300,000

Total investment P500,000

The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Jar’s manager with an offer to buy 10,000 units at P7 each. If Jar accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000.

What is the minimum price that Jar could accept for the order and still maintain its expected residual income?

A. P5.00 C. P4.75

B. P5.60 D. P9.00

Return on Investment & Residual Income 81.Scotch Co. has the following results for the year:

Sales P740,000

Variable expenses 260,000

Fixed expenses 300,000

Total divisional assets average P1,000,000. The company’s minimum required rate of return is 14 percent. The residual income and return on investment for Scotch are:

A. B. C. D.

Residual Income P36,000 P40,000 P36,000 P40,000

Return on

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82.The following information relates to two projects of Rica Corporation. Project A Project B Operating income P2,500,000 P600,000 Residual income P 500,000 P200,000 ROI 10% 12% Return on residual investment 2% 4%

A bonus of P50,000 will be paid to the manager whose project contributed most to the overall performance of the firm. The P50,000 bonus should go to the manager of

A. project A because the residual income is higher B. project B because the return on investment is higher C. project A because it was a larger, more complex project

D. project B because the return on residual investment is higher* Transfer Pricing

83.An appropriate transfer price between two divisions of the Star Corporation can be determined from the following data:

Fabrication Division Market price of subassembly P50 Variable cost of subassembly P20

Excess capacity (in units) 1,000

Assembling Division

Number of units needed 900

What is the natural bargaining range for the two divisions? A. Between P20 and P50 C. Any amount less than P50 B. Between P50 and P70 D. 50 is the only acceptable price PRODUCT PRICING

84.In a cost-based pricing system the markup should cover I. Selling and administrative expenses

II. Desired profit III. Manufacturing cost

A. I, II, and III C. I and III only

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RELEVANT COSTING Basic Concepts

85.The potential benefit that may be obtained from following an alternative course of action is called

A. opportunity benefit C. relevant cost B. opportunity cost D. sunk cost 86.Opportunity costs:

A. Are treated as period costs under variable costing. B. Have already been incurred as a result of past action.

C. Are benefits that could have been obtained by following another course of action.

D. Do not vary among alternative courses of action.

87.The Auto Division of Fly Insurance employs three claims processors capable of processing 5,000 claims each. The division currently processes 12,000 claims. The manager has recently been approached by two sister divisions. Division A would like the auto division to process approximately 2,000 claims. Division B would like the auto division to process approximately 5,000 claims. The Auto Division would be compensated Division A or Division B for processing these claims. Assume that these are mutually exclusive alternatives. Claims processor salary cost is relevant for

A. division A alternative only B. division B alternative only

C. both Division A and Division B alternatives D. neither Division A nor Division B alternatives Sell as is or Process-Further

88.Ottawa Corporation produces two products from a joint process. Information about the two joint products follows:

Product X Product Y Anticipated production 2,000 lbs 4,000 lbs Selling price per lb. at split-off P30 P16 Additional processing costs/lb after split- P15 P30

off (all variable)

Selling price/lb after further processing P40 P50 The cost of the joint process is P85,000.

Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which maximizes profit, Ottawa’s profit will increase by

A. P16,000 C. P50,000

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Obsolete Inventories

89.The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is P50. The company has unused production capacity and has determined that units could be finished and sold for P65 with an increase in variable costs of 40%. What is the additional net income per unit to be gained by finishing the unit?

A. P3 C. P15

B. P10 D. P12

Profit Maximization

90.Fe Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate 80% of its machine time to the product that will provide the most income, Fe will have a total monthly contribution margin of

A. P250,000 C. P210,000

B. P240,000 D. P200,000

91.Geary Manufacturing has assembled the following data pertaining to two popular products.

Blender Electric mixer

Direct materials P 6 P11

Direct labor 4 9

Factory overhead @ P16

per hour 16 32

Cost if purchased from an outside supplier

20 38

Annual demand (units) 20,000 28,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal strategy, it should produce

A. 25,000 electric mixers, and purchase all other units as needed B. 20,000 blenders and 15,000 electric mixers, and purchase all

other units as needed

C. 20,000 blenders and purchase all other units as needed D. 28,000 electric mixers and purchase all other units as needed

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92.

ABC Electronics has the following standard costs and other data: Part Beta Part Zeta

Direct materials P 4.00 P80.00

Direct labor 10.00 47.00

Factory overhead 40.00 20.00

Unit standard cost P54.00 P147.00

Units needed per year 6,000 8,000 Machine hours per unit 4 2 Unit cost if purchased P50 P150.00

In past years, ABC has manufactured all of its required components; however, this year only 30,000 hours of otherwise idle machine time can be devoted to the production of components. Accordingly, some of the parts must be purchased from outside suppliers. In producing parts, factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will not be affected by any make-or-buy decision represent 60% of the applied overhead.

The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum potential cost savings. The relevant unit production costs that should be considered in the decision to schedule machine time are:

A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta

B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta

Questions 93 & 94 are based on the following information.

Brynles Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.

Per Unit XY-7 BD-4

Selling price P4.00 P3.00

Variable

manufacturing cost P2.00 P1.50

Fixed manufacturing

cost P0.75 P0.20

Variable selling cost P1.00 P1.00

The sales manager has had a P160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company’s customers.

The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4.

93.The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased advertising is

A. B. C. D.

XY-7 P160,000 P640,000 P 80,000 P 80,000

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94.Suppose Brynles has only 100,000 machine hours that can be made available to produce additional units of XY-7 and BD-4. If the potential increase in sales units for either product resulting from advertising is far in excess of this production capacity, which product should be advertised and what is the estimated increase in contribution margin earned?

A. Product XY-7 should be produced, yielding a contribution margin of P75,000.

B. Product XY-7 should be produced, yielding a contribution margin of P133,333.

C. Product BD-4 should be produced, yielding a contribution margin of P187,500.

D. Product BD-4 should be produced, yielding a contribution margin of P250,000.

Special Order

95.An opportunity cost commonly associated with a special order is A. the contribution margin on lost sales

B. the variable costs of the order

C. additional fixed related to the increased output D. any of the above

96.Jap Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are:

Manufacturing costs Direct materials P39 Direct labor 6 Variable overhead 8 Fixed overhead 9 Selling expenses Variable 30 Fixed 11

The company desires to seek an order for 5,000 units from a foreign customer. The variable selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be P20,000. Domestic sales will not be affected by the order.

The minimum break-even price per unit to be considered on this special sale is

A. P71 C. P69

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Make or Buy

97.For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As material costs have steadily increased, the controller of the Blue Company is reviewing the decision to continue to make the small motors and has identified the following facts: 1. The equipment used to manufacture the electric motors has a

book value of P150,000.

2. The space now occupied by the electric motor manufacturing department could be used to eliminate the need for storage space now being rented.

3. Comparable units can be purchased from an outside supplier for P59.75.

4. Four of the persons who work in the electric motor manufacturing department would be terminated and given eight weeks’ severance pay.

5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing process.

Which of the items above are relevant to the decision that the controller has to make?

A. 1, 3, and 4 C. 2, 3, 4, and 5

B. 2, 3, and 4 D. 1, 2, 4, and 5

98.Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of its product a year. The following information pertains to the production costs at capacity:

Variable costs P 80,000

Fixed costs 120,000

Total costs P200,000

A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed costs. What is the price per unit that makes Buena indifferent between the “Make” and “Buy” options?

A. P8 C. P20

B. P12 D. P10

99.Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If Elly were to buy Part MR24 from an outsiDe supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of their present amount. The variable production costs of Part MR24 are P11 per unit.

If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier’s unit price is less than

A. P14.00 C. P16.00

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100. Below are a company’s monthly unit costs to manufacture and market a particular product.

Manufacturing Costs: Direct materials P2.00 Direct labor 2.40 Variable indirect 1.60 Fixed indirect 1.00 Marketing Costs: Variable 3.00 Fixed 1.50

The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing its operating income?

A. P8.50 C. P7.75

B. P6.75 D. P6.90

101. Cable Company produces 1,000 units of Part W per month. The total manufacturing costs of the part are as follows:

Direct materials P10,000

Direct labor 5,000

Variable overhead 5,000

Fixed overhead 30,000

Total manufacturing costs P50,000

An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead assigned to Part W will no longer be incurred if the company purchases the part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the outside supplier per month, then its monthly operating income will

A. decrease by P4,000 C. decrease by P20,000 B. increase by P1,000 D. increase by P20,000

102. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows:

Direct materials P10,000

Direct labor 5,000

Variable overhead 5,000

Fixed overhead 30,000

Total manufacturing cost P50,000

An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the outside supplier per month, then its monthly operating income will

A. decrease by P4,000 C. decrease by P20,000 B. increase by P1,000 D. increase by P20,000 Keep or Drop

103. Indicate which of the following costs would be avoided if a segment is eliminated.

1. variable manufacturing costs 2. direct fixed costs

3. common fixed costs 4. variable selling costs 5. direct fixed selling costs 6. common fixed selling costs

A. 2, 3, 5, 6 C.

B. 1, 2, 4, 5* D. 1, 2, 3, 4, 54, 5, 6

104. BEA Industries produces two products. Information about the products is as follows:

Item 38B Item 40F

Units produced and

sold 1,000 4,000

Selling price per

unit P 25 P 20

Variable expenses

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The company’s fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is

A. P3,200 C. P(2,000)

B. P7,000 D. P10,000

Shut Down Point

105. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small electrical relay used in the automotive industry as a component part in various products. The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total P150,000 per month, and fixed selling costs total P30,000 per month.

Employment-contract strikes in the companies that purchase the bulk of the E14 have caused Bulusan Company’s sales to temporarily drop to only 9,000 units per month. Bulusan Company estimates that the strikes will last for about two months, after which time sales of E14 should return to normal. Due to the current low level of sales, however, Bulusan Company is thinking about closing down its own plant during the two months that the strikes are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced to P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since Bulusan Company uses just-in-time production method, no inventories are on hand.

At what level of unit sales for the two-month period should Bulusan Company be indifferent between closing the plant or keeping it open?

A. 11,000 C. 10,000

B. 24,125 D. 8,000

CAPITAL BUDGETING Basic Concepts

106. If Sol Company expects to get a one-year loan to help cover the initial financing of capital project, the analysis of the project should

A. offset the loan against any investment in inventory or receivable required by the project

B. show the loan as an increase in the investment

C. show the loan as a cash outflow in the second year of the project’s life

D. ignore the loan

107. When compared Net Present Value method to Internal Rate of Return in terms of reinvestment of cash flows, NPV is better than IRR. What are the reinvestment rate for each method?

Net Present Value method Internal Rate of Return method

A. Discount Rate Discount Rate

B. Discount Rate IRR

C. IRR IRR

D. IRR Discount Rate

Accounting Rate of Return

108. Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12 percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value of 1 due in 10 periods at 12 percent is 0.322. The average accrual accounting rate of return during the first year of asset’s use is

A. 20.0 percent C. 10.0 percent

B. 10.5 percent D. 40.0 percent

109. The Fields Company is planning to purchase a new machine which it will depreciate, for book purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s depreciation taken in the year of acquisition. The new machine is expected to produce cash flow from operations, net of income taxes, of P66,000 a year in each of the next ten years. The

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accounting (book value) rate of return on the initial investment is expected to be 12%. How much will the new machine cost?

A. P300,000 C. P660,000

B. P550,000 D. P792,000

110. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a five-year project at the beginning of the year. GMF estimates that the annual cash savings from this project will amount to P65,000. Tax and book depreciation on the project will be P40,000 per year for five years. On investments of this type, GMF’s desired rate of return is 12%. Information on present value factors is as follows:

At 12% At

14% 16%At Present value of P1 for 5 periods 0.57 0.52 0.48 Present value of an annuity of 1

for 5 periods 3.6 3.4 3.3

For the project’s first year, GMF’s accounting rate of return, based on the project’s average book value would be

A. 14.4% C. 12.5%

B. 13.9% D. 12.0%

Payback Period

111. The payback method assumes that all cash inflows are reinvested to yield a return equal to

A. zero C. the

Time-Adjusted-Rate-of-Return

B. the Discount Rate D. the Cost-of-Capital Bailout Period

112. A project costing P1,800,000 is expected to produce the following annual cash flows (after tax) and salvage value:

Year Net cash inflow Salvage value

1 500,000 800,000

2 500,000 600,000

3 600,000 500,000

4 800,000 400,000

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What is the bailout period for the project?

A. 3.25 yrs. C. 2.73 yrs

B. 2.5 yrs D. 2.4 yrs.

Net Present Value

113. Panama Insurance Company’s management is considering an advertising program that would require an initial expenditure of P165,500 and bring in additional sales over the next five years. The cost of advertising is immediately recognized as expense. The projected additional sales revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Panama Insurance Company’s tax rate is 40 percent.

The present value of 1 at 10 percent, end of each period:

Periods Present value Factory

1 0.90909

2 0.82645

3 0.75131

4 0.68301

5 0.62092

The net present value of the advertising program would be

A. P37,064 C. P(37,064)

B. P29,136 D. P(29,136)

114. For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of five years with no salvage value. The machine is expected to produce cash flow from operations, net of 40 percent income taxes, as follows:

First year P160,000

Second year 140,000

Third year 180,000

Fourth year 120,000

Fifth year 100,000

Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:

First year P150,000

Second year 120,000

Third year 90,000

Fourth year 60,000

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The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 percent at end of each period are:

End of: Period 1 – 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552, Period 5 - 0.56743

Had Roxas used straight-line method of depreciation, what is the difference in net present value provided by the machine at a discount rate of 12 percent?

A. Increase of P9,750 C. Decrease of P24,376 B. Decrease of P9,750 D. Increase of P24,376 Profitability Index

115. A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are P20,505 on an investment of P50,000. the profitability index for this project is

A. 1.367 C. 2.438

B. 3.333 D. 1.300

Internal Rate of Return

116. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate of return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and for three years is .751. The cash flow, net of income taxes, will be P30,000 for the first year (present value of P27,270) and P36,000 for the second year (present value of P29,736). Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for the third year?

A. P17,268 C. P22,994

B. P22,000 D. P30, 618

117. Care Products Company is considering a new product that will sell for P100 and have a variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and having a five-year useful life and no salvage value is needed, and will be depreciated using the straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end

of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.

Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?

A. P81.00 C. P70.00

(29)

118. Payback Company is considering the purchase of a copier machine for P42,825. The copier machine will be expected to be economically productive for 4 years. The salvage value at the end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of return. The company is subject to 40 percent income tax rate.

The present value of an ordinary annuity of 1 for 4 periods is 2.85498.

In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to be provided by the machine?

A. P17,860 C. P25,000

B. P15,000 D. P35,700

Equipment Replacement

119. A company is considering replacing a machine with one that will save P40,000 per year in cash operating costs and have P10,000 more depreciation expenses per year than the existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of the company by

A. P28,000 C. P18,0000

B. P24,000 D. P6,000

120. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines. The new machine would cost P90,000, have a five-year life, and no estimated salvage value. Variable operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per year. Ignore present value calculations and income taxes.

Considering the five years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed to retaining the present one?

A. P10,000 decrease C. P35,000 increase B. P15,000 decrease D. P40,000 increase Investment Decision

121. The NPV and IRR methods give

A. the same decision (accept or reject) for any single investment B. the same choice from among mutually exclusive investments C. different rankings of projects with unequal lives

D. the same rankings of projects with different required investments

(30)

122. In choosing from among mutually exclusive investments the manager should normally select the one with the highest

A. NPV C. payback reciprocal

B. IRR D. book rate of return

123. Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

A. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash flows will be reinvested at the internal rate of return.

B. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes a reinvestment rate equal to the internal rate of return.*

C. The IRR method does not assume reinvestment of the cash flows while the NPV assumes the reinvestment rate is equal to the discount rate.

D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method assumes a reinvestment rate equal to the discount rate.

124. Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

Project 1 Project

2 Project 3 Project 4 Initial cash outlay P200,000 P298,0

00 P248,000 P272,000 Annual net cash

inflows Year 1 P 65,000 P100,0 00 80,000P P 95,000 Year 2 70,000 135,00 0 95,000 125,000 Year 3 80,000 90,000 90,000 90,000 Year 4 40,000 65,000 80,000 60,000

Net present value ( 3,798) 4,276 14,064 14,662

Profitability index 98% 101% 106% 105%

Internal rate of

return 11% 13% 14% 15%

Which project(s) should Investors, Inc. select during the upcoming year under each budgeted amount of funds?

No Budget

Restriction P600,000Available Funds P300,000Available Funds A. Projects 2,3, & 4 Projects 3 & 4 Project 3

B. Projects 1, 2, &

3 Projects 2, 3 & 4 Projects 3 & 4 C. Projects 1, 3, &

4

Projects 2 & 3 Project 2 D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4

Figure

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References

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