0405 MAS Preweek Quizzer

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Quality Costs1. The following activities are typical in production management:

1. Warranty work2. Labor and overhead incurred for rework of defective products found by an inspector3. Quality training program4. The costs of a consumer complaint department5. In-process inspection costs6. Reinspection of reworked products7. Downtime attributed to quality problems8. Product recalls9. Lower sales due to poor product performance10. Quality auditsTo what classification of quality costs do the foregoing described costs belong?

Prevention Appraisal Internal Failure External FailureA. 3,7,10 3,5 2 1,4,8,9B. 3,10 5 2,6,7 1,4,8,9C. 10 3 2,5,6 1,4,7,8,9D. 3,10 5 1,2,10 4,7,8,9

Questions 2 thru 4 are based on the following information.At the beginning of the year, Joshua Corporation initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data was collected for the current and preceding year.

Preceding Year Current YearSales P1,000,000 P 1,000,000Recruiting 1,000 1,500Packaging inspections 2,500 4,000Downtime 20,000 15,000Reinspection 40,000 25,000Product inspection 5,000 10,000Product liability 35,000 27,500

2. As a result of quality improvements, profits have increased byA. P32,500 C. P7,500B. P20,500 D. P5,00

3. If quality costs had been reduced to 2.5 percent of sales in the current year, profits would have increased byA. P177,000 C. P61,000B. P58,000 D. P25,000

4. For the current year, the respective percentages based on sales of the different quality costs, respectively, are:

Prevention Appraisal Internal Failure External failureA. 0.15% 1.40% 2.50% 1.50%B. 0.15% 1.40% 4.00% 2.75%C. 0.65% 1.00% 1.50% 4.25%D. 0.65% 1.00% 2.50% 1.50%

Productivity MeasuresQuestions 5 & 6 are based on the following information.Information about Rose Company is as follows:

2001 2002Output (units) 80,000 84,000Selling price per unit P25 P25Input quantities:Materials (pounds) 4,000 4,000Labor (hours) 3,200 3,250Input prices:Materials (per pound) P5.00 P5.50Labor (per hour) P7.00 P7.50

5. What are the materials productivity, and labor productivity ratio for 2001?A. B. C. D.

Materials 20.00 100.00 25.00 20.00Labor 25.00 95.45 24.00 24.00

6. By how much did profits change as a result of changes in productivity related to materials, and labor, respectively?

A. B. C. D.Materials P(1,100) P1,100 P(625) P625Labor P (825) P 825 P 625 P625

Activity-Based Costing7. Designing and changing are activities that are classified as:

A. Unit-level C. Product-levelMay 9, 2004 Page 1 of 22


B. Batch-level D. Facility-level

8. How are the following activities classified using ABC system?1. Security2. Product inspections3. Insurance on the plant4. Materials handling5. Modifications made by engineering to the product design of several products6. Machine-related overhead7. Set-ups8. Providing space and utilities9. Moving of inventory

Unit Level Batch Level Product Level Facility LevelA. 4,6,8 2,4,7 1,3 10B. 2,6 4,5 1,7 3,10C. 6 2,4,7,10 5 1,3,8D. 2 1,6,7 10 3,4,5,8

9. Protex Company makes two products, X and Z. X is being introduced this period, whereas Z has been in production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The only relevant overhead item is the cost of engineering change orders. X and Z are expected to require eight and two change orders, respectively. X and Z are expected to require 2 and 3 machine hours, respectively. The cost of a change orderis P600.If Protex applies engineering change order cost on the basis of machine hours, the overhead cost per unit to be assigned to X and Z, respectively, areA. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectivelyB. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively

10. Zeta Co. is preparing its profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given as follows:

Wall mirrors Special windowsUnits produced 25 25Material moves per product line 5 15Direct labor hours per unit 200 200Budgeted materials handling costs P50,000Under each of the systems of costing, how much materials handling costs should be allocated to one unit of wall mirrors?

A. B. C. D.

Based on direct labor hours P1,000 P 500 P2,000 P5,000Under activity-based costing P 500 P1,000 P1,500 P2,500

Life-Cycle Costing11. Richards, Inc. developed the following budgeted life-cycle income statement for two proposed

products. Each product’s life cycle is expected to be two years.Product X Product Y Total

Sales P200,000 P200,000 P400,000Cost of goods sold ( 120,000) (130,000) ( 250,000)Gross Profit P 80,000 P 70,000 P150,000Period expenses:Research & development ( 70,000)Marketing ( 50,000)Life-cycle income P 30,000

A 10% return on sales is required for new products. Because the proposed products did not have a 10% return on sales, the products were going to be dropped.Relative to Product Y, Product X requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product X and 30 percent of the marketing costs are traceable to Product X.If research and development costs and marketing costs are traced to each product, life-cycle income for Product Y would beA. P35,000 C. P12,000B. P20,000 D. P7,000

Cost Behavior12. The following cost functions were developed for manufacturing overhead costs:

Manufacturing Overhead Costs Cost FunctionElectricity P100 + P20 per direct labor hourMaintenance P200 + P30 per direct labor hourSupervisors’ salaries P10,000 per monthIndirect materials P16 per direct labor hour

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If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated manufacturing overhead costs would beA. P109,300 C. P76,300B. P99,000 D. P10,366

Cost-Volume-Profit Analysis13. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell

100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, what must the total fixed costs be?A. P80,000 C. P240,000B. P90,000 D. P600,000

14. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. The selling price should beA. P1.60 C. P2.40B. P2.10 D. P2.50

15. The following relates to Gloria Corporation, which produced and sold 50,000 units during a recent accounting period:

Sales P850,000Fixed manufacturing costs 210,000Variable manufacturing costs 140,000Fixed selling and administrative expense 300,000Variable selling and administrative expense 45,000Income tax rate 40%

For the next accounting period, if production and sales are expected to be 40,000 units, the company should anticipate a contribution margin per unit ofA. P1.00 C. P3.10B. P13.30 D. P7.30

16. Madden, Company has projected its income before taxes for next year as shown below. Madden is subject to a 40% income tax rate.

Sales (160,000 units) P8,000,000Cost of salesVariable costs P 2,000,000Fixed costs 3,000,000 5,000,000Income before taxes P 3,000,000

Madden’s net assets are P36,000,000. The peso sales that must be achieved for Madden to earn a 10 percent after tax return on assets would beA. P8,800,000 C. P12,000,000

B. P16,000,000 D. P6,880,000

17. The following data relate to Homer Company which sells a single product:Unit selling price P 20.00Purchase cost per unit 11.00Sales commission, 10% of selling price 2.00Monthly fixed costs P80,000

The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5 percent commission plus P20,000 per month in salary. They now receive only commission.The change in compensation plan should change the monthly breakeven point byA. 1,071 Increase C. 1,538 IncreaseB. 1,071 Decrease D. 1,538 Decrease

18. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows. The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00 per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of additional fixed costs associated with this new product. A corporate fixed charge of P20,000 currently absorbed by other products will be allocated to this new product.How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is 40%)A. 10,700 C. 20,000B. 12,100 D. 28,300

19. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to 10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price were reduced to P9 per unit, the profit would beA. P3,000 C. P5,000B. P4,000 D. P6,000

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20. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a 10% increase over last year. For the company to increase income by P15,000 in the coming year, the marginal contribution margin rate must beA. 20% C. 40%B. 30% D. 70%

21. Wilson Co. prepared the following preliminary forecast concerning product G for next year assuming no expenditure for advertising:

Selling price per unit P 10Units sales 100,000Variable costs P600,000Fixed costs P300,000

Based on a market study in December of this year, Wilson estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent on advertising. Assuming that Wilson incorporates these changes in its forecast, what should be the operating income from product G?A. P175,000 C. P205,000B. P190,000 D. P365,000

22. Shoes, Unlimited 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 21 and are typical of the company’s many sales outlets:

Selling price P 800Variable expenses:Invoice costs P360Sales commission 140

500Fixed expenses per year:Rent P1,600,000Advertising 3,000,000Salaries 1,400,000Total P6,000,000

The company is considering paying the store manager a P60 commission on each pair of shoes sold in excess of break-even point. If this change were made, what will be the store’s before tax profit or loss assuming 23,500 pairs of shoes are sold in a year?A. P(360,000) C. P840,000B. P2,930,000 D. P1,330,000

23. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and will continue whether or not production ceases. Depreciation on the equipment is P20,000 a year. If production is stopped, the equipment can be sold for P18,000, if production continues, however, it will be useless at the end of 1 year and will have no salvage value. The selling price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break even on a cash flow basis isA. 4,500 units C. 1,800 unitsB. 5,000 units D. 36,000 units

Questions 24 through 28 are based on the Statement of Income of Davao, Inc. which represents the operating results for the current fiscal year ending December 31. Davao had sales of 1,800 tons of product during the current year. The manufacturing capacity of Davao’s facilities is 3,000 tons of product. Consider each question’s situation separately.

Sales P900,000Variable costsManufacturing P315,000Selling costs 180,000 Total variable costs 495,000 Contribution margin P405,000Fixed costsManufacturing P 90,000Selling 112,500Administration 45,000 Total fixed costs 247,500 Net income before income taxes P157,500Income taxes (40%) (63,000)Net income after income taxes P 94,500

24. The breakeven volume in tons of product for the year isA. 420 C. 1,100B. 495 D. 550

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25. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same levels and amounts next year, the after-tax net income that Davao can expect for the next year isA. P135,000 C. P110,25B. P283,500 D. P184,500

26. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all of Davao’s costs would be at the same levels and rates as last year. What net income after taxes would Davao make if it took this order and rejected some business from regular customers so as not to exceed capacity?A. P297,500 C. P252,000B. P211,500 D. P256,500

27. Without prejudice to your answers to previous questions, and assume that Davao plans to market its product in an new territory. Davao estimates that an advertising and promotion program costing P61,500 annually would need to be undertaken for the next two or three years. In addition , a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Davao’s current after-tax income of P94,500?A. 307.5 C. 1,095B. 273.33 D. 1,545

28. Without prejudice to preceding questions, assume that Davao estimates that the per ton selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs will not change. What sales volume in pesos will be required to earn an after-tax net income of P94,500 next year?A. P1,140,000 C. P825,000B. P1,500,000 D. P1,350,000

Standard Costing & Variance Analysis29. Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of

finished product contains 2 yards of cloth. However, there is unavoidable waste of 20% calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 per yard. The standard direct material cost for cloth per unit of finished product is:A. P4.80 C. P7.00B. P6.00 D. P7.50

30. The following information relates to Ore Company’s 2003 manufacturing activities:Standard direct labor hours per unit 2Number of units produced 5,000Standard variable overhead per standard direct labor hours P3Actual variable overhead P28,000Unfavorable overhead efficiency variance P 1,500

The number of actual direct labor hours areA. 10,500 C. 10,000B. 11,000 D. 12,400

Questions 31 & 32 are based on the following information.Rainbow Company uses a standard cost system. Information about its direct labor costs for Product Lux for the month of January follows:

Standard hours allowed for actual production 1,500Actual hourly rate paid P61.00Standard hourly rate P60.00Labor efficiency variance, Favorable P6,000

31. How many direct labor hours were actually worked during the month of January?A. 1,400 C. 1,402B. 1,498 D. 1,600

32. How much was the direct labor rate variance?A. P1,400 F C. P1,400 UB. P1,600 F D. P1,600 U

33. STA Company uses a standard cost system. The following information pertains to direct labor costs for the month of June:

Standard direct labor rate per hour P10.00Actual direct labor rate per hour P 9.00Labor rate variance P12,000 favorableActual output 2,000 unitsStandard hours allowed for actual production 10,000 hours

How many actual labor hours were worked during March for STA Company?A. 10,000 C. 8,000B. 12,000 D. 10,500

34. If annual overhead costs are expected to be P1,000,000 and 200,000 total labor hours are anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours isA. P6.25 C. P25.00B. P5.00 D. P4.00

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35. ABC had a P28,000 favorable volume variance, a P25,000 unfavorable variable overhead spending variance, and P12,000 total overapplied overhead. The fixed overhead budget variance wasA. P9,000 favorable C. P9,000 unfavorableB. P26,000 favorable D. P26,000 unfavorable

36. Given for the variable factory overhead of X Products Inc.: P39,500 actual input at budgeted rate, P41,500 flexible budget based on standard input allowed for actual output, P2,500 favorable flexible budget variance. Compute the spending variance:A. P500 U C. P500 FB. P2,000 F D. P2,000 U

37. Bacon had a P28,000 unfavorable volume variance, a P5,000 unfavorable fixed overhead budget variance, and P22,000 total underapplied overhead. The variable overhead spending variance wasA. P11,000 favorable C. P11,000 unfavorableB. P1,000 favorable D. P23,000 unfavorable

38. Acme had a P22,000 favorable fixed overhead budget variance, a P15,000 unfavorable variable overhead spending variance, and P2,000 total overapplied overhead. The volume variance wasA. P13,000 overapplied C. P5,000 overappliedB. P13,000 underapplied D. P5,000 underapplied

39. Aldorp had a P10,000 unfavorable fixed overhead budget variance, a P6,000 unfavorable variable overhead spending variance, and a P2,000 favorable volume variance. The total overhead wasA. P14,000 overapplied C. P18,000 overappliedB. P14,000 underapplied D. P18,000 underapplied

40. Fidelity Company uses a flexible budget system and prepared the following information for the year: Fidelity operated at 80 percent of capacity during the year, but applied factory overhead based on the 90 percent capacity level. Assuming that actual factory overhead was equal to the budgeted amount of overhead, how much was the overhead volume variance for the year?

Percent of Capacity 80 Percent 90 PercentDirect labor hours 24,000 27,000Variable factory overhead P54,000 P60,750Fixed factory overhead P81,000 P81,000Total factory overhead rate pre DLH P5.625 P5.25

A. P9,000 U C. P9,000 FB. P15,750 U D. P15,750 F

41. Using the information presented below, calculate the total overhead spending variance.Budgeted fixed overhead P10,000Standard variable overhead (2 DLH at P2 per DLH) P4 per unitActual fixed overhead P10,300Actual variable overhead P19,500Budgeted volume (5,000 units x 2 DLH) 10,000 DLHActual direct labor hours (DLH) 9,500Units produced 4,500

A. P500 U C. P1,000 UB. P800 U D. P1,300 U

42. STA Company’s standard fixed overhead cost is P3 per direct labor hour based on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours per unit. During 2001, STA produced 55,000 units of product, incurred P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct labor. What are the fixed overhead variances?

A. B. C. D.Fixed OH spending (budget) variance P15,000 U P33,000 U P15,000 U P33,000 UFixed OH Volume variance P30,000 F P30,000 F P18,000 F P18,000 F

Questions 43 and 44 are based on the following information.Raff Co.’s monthly normal volume is 50,000 units (100,000 direct labor hours.) Raff Co.’s standard cost system contains the following overhead costs:

Variable P6 per unitFixed 8 per unit

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The following information pertains to the month of MarchUnits actually produced 38,000Actual direct labor hours worked 80,000Actual overhead incurred:

Variable P250,000Fixed 384,000

43. For March, the unfavorable variable overhead spending variance wasA. P6,000 C. P12,000B. P10,000 D. P22,000

44. For March, the fixed overhead volume variance wasA. P96,000 U C. P80,000 UB. P96,000 F D. P80,000 F

45. Smile Corporation uses a standard cost system. Information for the month of April is as follows:

Actual manufacturing overhead costs (P13,000 is fixed) P40,000Direct labor:Actual hours worked 12,000 hoursStandard hours allowed 10,000 hoursAverage actual labor cost per hour P9

The factory overhead rate is based on a normal volume of 12,000 direct labor hoursStandard cost data at 12,000 direct labor hours was:

Variable factory overhead P24,000Fixed factory overhead 12,000 Total factory overhead P36,000

What are the following overhead variances?A. B. C. D.

Variable OH Spending P3,000 U P3,000 U P7,000 U P7,000 UVariable OH Efficiency P2,000 U P4,000 U P2,000 U P4,000 UFixed OH Spending P4,000 U P1,000 U P1,000 U P4,000 U

Questions 46 thru 48 are based on the following information.Edney Company employs standard absorption system for product costing. The standard cost of its product is as follows:

Raw materials P14.50Direct labor (2 DLH x P8) 16.00Manufacturing overhead (2 DLH x P11) 22.00

The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours. Edney planned to produce 25,000 units each month during the year. The budgeted annual manufacturing overhead is

Variable P3,600,000Fixed 3,000,000

During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000 fixed and 315,000 variable. The total manufacturing overhead applied during November was P572,000.

46. The variable manufacturing overhead variances for November areA. B. C. D.

Spending P9,000 U P6,000 F P4,000 U P 9,000 FEfficiency P3,000 U P9,000 U P1,000 F P12,000 U

47. The fixed manufacturing overhead variances for November areA. B. C. D.

Spending P10,000 F P10,000 U P6,000 F P 4,000 UVolume P10,000 f P10,000 F P3,000 U P22,000 F

48. The total variance related to efficiency of the manufacturing operation for November is:A. P9,000 U C. P21,000 UB. P12,000 U D. P12,000 U

Questions 49 thru 53 are based on the following information.The following data are actual results for Roadtrek company for October:

Actual output 9,000 casesActual variable overhead P405,000Actual fixed overhead P122,000Actual machine time 40,500 machine hours

Standard cost and budget information for Roadtrek Company follows:Standard variable overhead rate P9.00 per MHStandard quantity of machine hours 4 hours per caseBudgeted fixed overhead P1,440,000 per yearBudgeted output 10,000 cases per month

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49. The variable overhead spending variance for the month of October isA. P40,500 U C. P45,000 UB. P81,000 U D. P81,000 F

50. The overhead efficiency variance isA. P4,500 U C. P4,500 FB. P40,500 U D. P40,500 F

51. The amount of fixed overhead controllable variance isA. P2,000 U C. P42,500 UB. P2,000 F D. P42,500 F

52. The amount of fixed overhead volume variance isA. P12,000 F C. P21,000 FB. P12,000 U D. P21,000 U

53. The amount variable overhead volume variance isA. Zero C. P12,000 FB. P9,000 U D. P2,250 U

Absorption Costing & Variable Costing54. Which of the following statements is true for a firm that uses variable (direct) costing?

A. The cost of a unit of product changes because of changes in the number of units manufactured.

B. Profits fluctuate with salesC. An idle facility variation is calculatedD. Product costs include “direct” (variable) administrative costs.

55. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change byA. P0.25 C. P0.75B. P0.12 D. P0.10

Relevant Costing56. An important concept in decision making is described as the contribution to income that is

forgone by not using a limited resources in its best alternative use. This concept is calledA. Marginal cost C. Potential costB. Opportunity costs D. Relevant cost

57. If revenues are P210,000 under alternative A and P216,000 under alternative B, and costs are P190,000 for A and P204,000 for B, then using the basic approach in incremental analysis, incremental revenues, costs, and net income, in comparing B to A are respectivelyA. P6,000, P(14,000), P(8,000) C. P6,000, P14,000, P8,00B. P(6,000), P14,000, P8,000 D. P(6,000), P(14,000), P(8,000)

58. For the year ended April 30, 2003, Leba Company incurred direct costs of P800,000 based on a particular course of action. Had a different course of action been taken, direct costs would have been P650,000. In addition, Leba’s fixed costs during the fiscal year were P110,000.The incremental (decremental) costs was:A. P40,000 C. P(40,000)B. P150,000 D. P(150,000)

59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of Product B each week by incurring a common variable costs of P400,000. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint product. Data gathering there two products are as follows:

Product A Product BSelling price per pound without further Processing P 12.00 P 9.00Selling price per pound with further Processing P 15.00 P 11.00Total separate weekly variable costs of Further processing P50,000 P45,000

To maximize Wallace Company’s manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week areA. P45,000 C. P95,000B. P50,000 D. P0

60. Blue & Company sells a product for P20 with variable cost of P8 per unit. Blue could accept a special order for 1,000 units at P14. If Blue accepted the order, how many units could it lose at the regular price before the decision become unwise?A. 1,000 units C. P500 unitsB. P200 units D. 0 units

61. Geary Manufacturing has assembled the following data pertaining to two popular products.Blender Electric mixer

Direct materials P 6 P 11May 9, 2004 Page 8 of 22


Direct labor 4 9Factory overhead @ P16 per hour 16 32Cost if purchased from an outside supplier 20 38Annual 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 shouldA. produce 25,000 electric mixers, and purchase all other units as neededB. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as

neededC. produce 20,000 blenders and purchase all other units as neededD. purchase all units as needed

62. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is determined as follows:

Product X Product YRevenue P 130 P80Variable costs 70 38Contribution margin P 60 P42

Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce resource. 42,000 machine hours are available during the year. Product X requires 6 machine hours per unit while product Y requires 3 machine hours per unit.How many units of X and Y should Hingis Corporation produce?

A. B. C. D.Product X 16,000 8,000 7,000 3,000Product Y - 0 - 4,000 - 0 - 8,000

63. Wagner sells product A at a price of P21 per unit. Wagner’s cost per unit based on the full capacity of 200,000 units is as follows:

Direct materials P 4Direct labor 5Overhead (2/3 of which is fixed) 6

P15A special order offering to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner has sufficient existing capacity to manufacture the additional unitsTo achieve an increase in operating income of P40,000. Wagner should charge a selling price of

A. P14 C. P16B. P15 D. P18

64. Yardley Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:

Variable costs P56,250Fixed costs 45,000

The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-house design will be done. Instead, the special job will require the use of external designers costing P13,750. What is the minimum acceptable price of the job?A. P63,050 C. P101,250B. P70,000 D. P108,200

65. MC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units:

Direct materials P 4Direct labor 12Variable manufacturing overhead 6Fixed manufacturing overhead 8

The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units.If the firm is at capacity and the special order is accepted, the effect on operating income would beA. a P20,000 increase C. a P4,000 increaseB. a P16,000 decrease D. P0

66. Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata’s pretax profit?A. increase of P48,000 C. increase of P6,000B. decrease of P48,000 D. increase of P6,000

67. Pili Company plans to discontinue a segment with a P32,000 segment margin. Common expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were closed. The effect of closing down the segment on Pili Company’s before tax profit would beA. P12,000 decrease C. P12,000 increaseB. P 7,000 decrease D. P 7,000 increase

68. Division B earns a contribution margin of P200,000 and has a divisional margin of P70,000. If Division B is closed, all of the direct divisional expenses and P110,000 of common expenses

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can be eliminated. These facts indicate that closing the division will cause the firm’s operating income toA. increase by P90,000 C. increase by P40,000B. decrease by P90,000 D. decrease by P40,000

69. Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed expenses of Division X include P30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses:

Net sales P100,000Variable manufacturing costs 60,000Gross profit P 40,000Fixed expenses (direct and allocated) 50,000Loss from operations P (10,000)

What would be the effect on the firm’s operating income if Division X were discontinued?A. increase of P10,000 C. decrease of P100,000B. decrease of P40,000 D. decrease of P10,000

70. Condensed monthly operating income data for Cosmo Inc. for November 2000 is presented below. Additional information regarding Cosmo’s operation follows the statement.

Total Hall Store Town StoreSales P200,000 P80,000 P120,000Less Variable costs 116,000 32,000 84,000Contribution margin P 84,000 P48,000 P 36,000Less direct fixed expense 60,000 20,000 40,000Store segment margin P 24,000 P28,000 P ( 4,000)Less common fixed expenses 10,000 4,000 6,000Operating income P 14,000 P24,000 P (10,000)

One-fourth of each store’s direct fixed expenses would continue through December 31, 2001, if either store were closed. Management estimates that closing the Town Store would result in a ten percent decrease in Hall Store. Hall Store would not affect Town Store sales. The operating results for November 2000 are representative of all months.A decision of Cosmo, Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo’s operating income during 2001 ofA. P4,000 C. (P800)B. (P10,800) D. (P6,000)

71. Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity. Peluso’s plant manager is considering making the headlights now being purchased for P1,100 each, a price that is not expected to change in the near future. The Peluso plant has the equipment and labor force required to manufacture the headlights. The design engineer

estimates that each headlight requires P400 of direct materials and P300 of direct labor. Peluso’s plant overhead rate is 200 percent of direct labor costs, and 40 percent of the overhead is fixed cost. A decision by Peluso Company to manufacture the headlights will result in a gain (loss) for each headlight ofA. P(200) C. P40B. P160 D. P280

Questions 72 thru 74 are based on the following information:Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture one unit of KJ37 is presented below.

Direct materials P1,000Materials handling (20% of direct material cost) 200Direct labor 8,000Manufacturing overhead (150% of direct labor) 12,000

Material handling represents the direct variable costs of the Receiving department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part No. KJ137 at a unit price of P15,000.

72. If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of KJ37 wouldA. increase by P4,800 C. decrease by P3,200B. decrease by P6,200 D. increase by P1,800

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73. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If Leland decided to purchase the 10 units from Scott Supply, Leland’s monthly cost for KJ37 wouldA. increase P48,000 C. decrease P7,000B. increase P23,000 D. decrease P57,000

74. Assume that Leland does not wish to commit to a rental agreement but could use idle capacity to manufacture another product that would contribute P52,000 per month. If Leland elects to manufacture KJ37 in order to maintain quality control, Leland’s opportunity cost isA. P18,000 C. P4,000B. (P20,000) D. (P48,000)

Responsibility Accounting & Transfer Pricing75. A management decision may be beneficial for a given profit center, but not for the entire

company. From the overall company viewpoint, this decision would lead toA. goal congruence C. suboptimizationB. centralization D. maximization

76. Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company U had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are expected for ROI of Company L and Company U, respectively?

A. B. C. D.Company L 50% increase 125% increase 225% increase 125% increaseCompany U 9% decrease 9% decrease no change no change

77. The manager of the Queen Division of Pusoy Company expects the following results in 2004 (pesos in millions):Sales P49.60Variable costs (60%) 29.76Contribution margin P19.84Fixed costs 12.00Profit P 7.84Investment:

Plant equipment P19.51Working capital 14.88

P34.39ROI P7.84/P34.39 22.80%The division has a target ROI of 30 percent, and the manager has asked you to determine how much sales volume the division would need to reach that. He states that the sales mix is relatively constant so variable costs should be close to 60 percent of sales, fixed cost and plant and equipment should remain constant, and working capital (cash, receivables, and

inventories) should vary closely with sales in the percentage reflected above. The peso sales that the division needs in order to reach the 30 percent ROI target isA. P19,829,032 C. P57,590,322B. P44,373,871 D. P59,510,000

78. Ace Division of Card, Inc. expects the following result for 2004:Unit sales 70,000Unit selling price P 10Unit variable cost P 4Total fixed costs P 300,000Total investment P 500,000

The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. Houston Division has capacity of 75,000 units and the foreign customer will not accept fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and investment by P40,000.At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that Houston could sacrifice and still maintain its expected residual income?A. 2,333 C. 2,667B. 3,333 D. 3,667

79. Family Company has two division, Ma and Pa. Information for each division is as follows:Ma Pa

Net earnings for division P20,000 P65,000Asset base for division P50,000 P300,000Target rate of return 15% 18%Operating income margin 10% 20%Weighted average cost of capital 12% 12%

What is the Economic Value Added for Ma and Pa, respectively?A. P20,000, P36,000 C. P12,500, P11,000B. P14,000, P29,000 D. P20,000, P29,000

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

Market price of subassembly P50Variable cost of subassembly P20Excess capacity (in units) 1,000

Assembling DivisionNumber of units needed 900

What is the natural bargaining range for the two divisions?A. Between P20 and P50 C. Any amount less than P50B. Between P50 and P70 D. P50 is the only acceptable price

81. Pacific Company has three plants: one located in Malaysia, one in India and another plant located in the Philippines. Both plants manufactures a component used in a finished product manufactured in the Philippine plant. Currently, both plants are operating at 70 percent capacity. In Malaysia the income tax rate is 42% while in India the tax rate 35%; in the Philippines, the corporate income tax rate is 40%.The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs to manufacture the component are as follows:

Direct materials P10Direct labor 20Variable overhead 5Fixed overhead 25

Which transfer price would be in the best interest of the overall corporation?A. B. C. D.

Malaysia P35 P 35 P100 P100India P35 P100 P100 P 35

82. The Engine Division provides motors for the Auto Division of a company. The standard unit costs for Engine Division are as follows:

Direct materials 10,000Direct labor 20,000Variable Overhead 5,000Fixed Overhead 2,500Market price P45,500

What is the best transfer price to avoid transfer price problems?A. P45,500 C. P35,000B. P30,000 D. P37,500

83. To avoid waste and maximize efficiency when transferring products among divisions in a competitive economy, a large diversified corporation should base transfer prices on:A. Full cost C. variable costsB. replacement cost D. market price

Product Pricing Decision84. Garden Corp. had the following information:

Revenues P500,000Cost of goods sold:Direct materials P100,000Direct labor 75,000Overhead 125,000 300,000Gross profit P200,000Selling and admin expenses 75,000Operating income P125,000

What are the mark up based on:A. B. C. D.

Cost of goods sold 66.7% 166.7% 66.7% 166.7%Prime costs 185.7% 42.9% 42.9% 185.7%Direct materials 400.0% 500.0% 400.0% 500.0%

Master Budget85. The method of budgeting which adds one month’s budget to the end of the plan when the

current month’s budget is dropped from the plan refers toA. Long-term budget C. Incremental budgetB. Operations budget D. Continuous budget

86. Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a growth in sales of 5 percent per month. The target ending inventory in units of the product is 80% of the next month’s estimated sales. There are 150,000 units in inventory as of the end of September. The production requirement in units of Batik for the quarter ending December 31 would beA. 670,560 C. 665,720B. 691,525 D. 675,925

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Questions 87 & 88 concern Paradise Company, which budgets on annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 2000 through June 30, 2001.

July 1, 2000 June 30, 2001Raw material* 40,000 50,000Work-in-process 10,000 10,000Finished goods 80,000 50,000

*Two (2) units of raw material are needed to produce each unit of finished product.

87. If Paradise Company plans to sell 480,000 units during the 200-2001 fiscal year, the number of units it would have to manufacture during the year would beA. 440,000 C. 510,000B. 480,000 D. 450,000

88. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by Paradise Company, the units of raw material needed to be purchased would beA. 1,000,000 units C. 1,020,000 unitsB. 1,010,000 units D. 990,000 units

89. The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000 in July, and P6,100,000 in August. On average, 30% of its sales are cash, 50% of credit sales are collected in one month, and 45% are collected in the second month. The remainder are written off to bad debt in the third month after sale. What are the expected cash inflow for August and expected receivable balance on August 31?

A. B. C. D.Cash Inflow P5,050,000 P4,084,000 P1,830,000 P5,071,000Aug 31 AR Balance P7,140,000 P6,093,500 P7,232,000 P6,279,000

90. Dolyar, Inc. prepared the following sales budget:Month Cash Sales Credit SalesFebruary P 80,000 P340,000March 100,000 400,000April 90,000 370,000May 120,000 460,000June 110,000 380,000

Collection pattern is: 40% percent in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. The company’s total budgeted collection from April to June amounts toA. P1,090,000 C. P1,468,500B. P1,325,500 D. P1,397,500

91. Beta Co. has the following sales forecasts for the selected three-month period in 2004April P120,000May 70,000June 80,000

Seventy percent of sales are collected in the month of the sale, and the remainder are collected in the following month.

Accounts receivable balance (April 1, 2004) P100,000Cash balance (April 1, 2004) 50,000

Minimum cash balance is P50,000. Cash can be borrowed in P10,000 increments from the local bank (assume no interest charges).What is the cash balance at the end of April, assuming that cash is received only from customers and that P200,000 out during April?A. P34,000 C. P54,000B. P50,000 D. P55,000

Capital Budgeting92. Which of the following would decrease the net present value of a project?

A. A decrease in the income tax rateB. A decrease in the initial investmentC. An increase in the useful life of the projectD. An increase in the discount rate

93. A weakness of the internal rate of return method for screening investment projects is that it:A. does not consider the time value of moneyB. implicitly assumes that the company is able to reinvest cash flows from the project at the

company’s discount rateC. implicitly assumes that the company is able to reinvest cash flows from the project at the

internal rate of returnD. fails to consider the timing of cash flows

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94. Sensitivity analysis, if used with capital projects,A. Is used extensively when cash flows are known with certaintyB. Measures the change in the discounted cash flows when using the discounted payback

method rather than the net present value method.C. Is a “what-if” technique that asks how a given outcome will change if the original estimates

of the capital budgeting model are changed.D. Is a technique used to rank capital expenditure requests.

95. If Sol Company expects to get a one-year loan to help cover the initial financing of capital project, the analysis of the project shouldA. offset the loan against any investment in inventory or receivable required by the project B. show the loan as an increase in the investmentC. show the loan as a cash outflow in the second year of the project’s lifeD. ignore the loan

96. Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Royal’s net cash investment at the time of purchase is the old grinder is sold and the new one purchased isA. P19,000 C. P17,400B. P15,000 D. P25,000

97. Flow Industries is analyzing a capital investment proposal for new machinery to produce a new product over the next 10 years. At the end of the 10 years, the machinery must be disposed of with a net zero book value but with a scrap salvage value of P20,000. It will require some P30,0000 to remove the machinery. The applicable tax rate is 35%. The appropriate “end of life” cash flow based on the foregoing information isA. inflow of P30,000 C. outflow of P10,000B. outflow of P6,500 D. outflow of P17,000

98. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax purposes will be P100,000 annually for six years. The new machine is expected to produce cash flow from operations, net of income taxes, of P150,000 a year in each of the next six years. The accounting (book value) rate of return on the initial investment is expected to beA. 8.3% C. 16.7%B. 12.0% D. 25.0%

99. Barf is considering a 10-year capital investment project with forecasted revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the equipment of the project is P23,000 and Barfield expects to sell the equipment for P9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of P7,000 at its inception and another P5,000 at the end of year 5. Using a 40% marginal tax rate, the expected net cash flow from the project in the tenth year isA. P32,000 C. P20,000B. P24,000 D. P11,000

100.Brand is considering, an investment in a new cheese-cutting machine to replace its existing cheese cutter. Information on the existing machine and the replacement machine follow:

Cost of the new machine P40,000Net annual savings in operating costs 9,000Salvage value now of the old machine 6,000Salvage value of the old machine in 8 years 0Salvage value of the new machine in 8 years 5,000Estimated life of the new machine 8 years

What is the expected payback period for the new machine?A. 4.44 years C. 8.50 yearsB. 2.67 years D. 3.78 years

101.Cause Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations, net of income taxes, of P20,000 in each of the five years. Cause’s expected rate of return is 10%. Information on present value and future amount factors is as follows:

1 2 3 4 5Present value of P1 at 10% .909 .826 .751 .683 .621Present value of an annuity of

P1 at 10% .909 1.736 2.487 3.170 3.791Future amount of P1 at 10% 1.100 1.210 1.33 1.464 1.611Future amount of an annuity

of P1 at 10% 1.000 2.100 3.310 4.641 6.105How much will the machine cost?A. P32,220 C. P75,820B. P62,100 D. P122,100

102.Janet Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs P450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage value is anticipated. Janet is subject to a 40% income tax rate. To meet the

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company’s payback goal, the sorter must generate reductions in annual cash operating costs ofA. P60,000 C. P150,000B. P100,000 D. P190,000

103.Moorman 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.How many units per year the firm must sell for the investment to earn 12 percent internal rate of return?A. 12,838 C. 8,225B. 10,403 D. 7,625

104.Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company’s 10% discount rate, the net present value of the cash flows associated with just the tangible costs and benefits is a negative P184,350. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?A. P18,435 C. P35,000B. P30,000 D. P37,236

Questions 105 thru 107 are based on the following information.A firm must choose between leasing a new asset of purchasing it with funds from a term loan. Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6% interest on the unpaid balance. Principal and interest are due at the end of each year for five years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400 with payments due at the beginning of each year. The corporate tax rate is 35% and the appropriate after tax cost of capital is 12%.

105.Which of the following is closest to the PV of the after-tax interest payment?A. P360 C. P640B. P453 D. P726

106.Which of the following is closes to the present value of cost if leasing the asset?A. P3,694 C. P3,849B. P3,779 D. P3,992

107.Which of the following is closest to the PV of cost of purchasing the new asset with a term loan?A. P3,777 C. P4,058B. P3,952 D. P4,153

Questions 108 through 110 are based on the following information:Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes, this machine will be depreciated P8,000 each year for five years. Logo estimates that this machine will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. Logo’s desired rate of return on its investments is 12%. At the following discount rates, the NPVs of the investment in this machine are:

Discount rate NPV 12% +P3,258 14% + 1,197 16% - 708 18% - 2,474

108.Logo’s accounting rate of return on its initial investment in this machine is expected to beA. 30% C. 12%B. 15% D. 10%

109.Logo’s expected payback period for its investment in this machine isA. 2.0 years C. 3.3 yearsB. 3.0 years D. 5.0 years

110.Logo’s expected IRR on its investment in this machine isA. 3.3% C. 12.0%B. 10.0% D. 15.3%

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111.Lawton Co. is expanding its manufacturing plant, which requires an investment of P4,000,000 in new equipment and plant modifications. Lawton’s sales are expected to increase by P3,000,000 per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% sales. What is the estimated total investment for this expansion?A. P3,400,000 C. P4,600,000B. P4,300,000 D. P4,000,000

112.Par Co. is reviewing the following data relating to an energy saving investment proposal:Investment P50,000Residual value at the end of 5 years 10,000Present value of an annuity of 1 at 12% for 5 years 3.60Present value of 1 due in 5 years at 12% 0.57

What would be the annual savings needed to make the investment realize a 12% yield?A. P8,189 C. P12,306B. P11,111 D. P13,889

113.Investor’s 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 4Initial cash outlay P200,000 P298,000 P248,000 P272,000Annual net cash inflows Year 1 P 65,000 P100,000 P 80,000 P 95,000 Year 2 70,000 135,000 95,000 125,000 Year 3 80,000 90,000 90,000 90,000 Year 4 40,000 65,000 80,000 60,000Net present value ( 3,798) 4,276 14,064 14,662Profitability 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 P600,000 Available Funds P300,000Available FundsA. Projects 2, 3 & 4 Projects 3 & 4 Project 3B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4C. Projects 1, 3 & 4 Projects 2 & 3 Project 2D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4

Questions 114 thru 117 are based on the following information.In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 2002. The following information is being considered by Gunning Industries: The new machine would be purchased for P160,000 in cash. Shipping installation, and testing

would cost an additional P30,000. The new machine is expected to increase annual sales by 20,000 units at a sales price of P40

per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year.

The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end or year 5.

Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value Gunning is subject to a 40% corporate income tax rate.Gunning uses the net present value method to analyze investments and will employ the following factors and rates:

Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10%1 .909 .9092 .826 1.7363 .751 2.4874 .683 3.1705 .621 3.791

114.Gunning Industries’ net cash outflow in a capital budgeting decision isA. P190,000 C. P204,525B. P195,000 D. P225,000

115.Gunning Industries’ discounted annual depreciation tax shield for the year 2002 isA. P13,817 C. P20,725B. P16,762 D. P22,800

116.The acquisition of the new production machine by Gunning will contribute a discounted net-of-tax contribution margin ofA. P242,624 C. P363,936B. P303,280 D. P454,920

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117.The overall discounted cash flow impact of Gunning’s working capital investment for the new production machine would beA. P(7,959) C. P(13,265)B. P(10,080) D. P(35,000)

Financial Statement Analysis118.Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0.

Using Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectivelyA. 115% and 125% C. 115% and 130%B. 115% and 109% D. 87% and 80%

119.A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the beginning of the period was P50,000 and at the end of the period was P70,000. Net income is P40,000. Inventory turnover isA. 5 times C. 1.75 timesB. 3.25 times D. 0.67 times

120.The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for the year was P20,000 and the company’s tax rate is 40%. The company’s net income is:A. P22,000 C. P42,000B. P54,000 D. P66,000

121.If the North Division of Alliance Products Company had an operating asset turnover of 4.2 and an operating income margin of 0.10, the return on investment would beA. 23.8% C. 42.0%B. 420.0% D. 4.2%

122.Selected data from Sheridan Corporation’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial.

Current ratio 2.0Quick ratio 1.5Current liabilities P120,000Inventory turnover (based on cost of sales) 8 timesGross profit margin 40%

Sheridan’s net sales for the year wereA. P800,000 C. P1,200,000B. P480,000 D. P672,000

123.Jade Corporation has a practical production capacity of a million units. The current year’s master budget was based on the production and sales of 700,000 units during the current year. Actual production for the current year was 720,000 units, while actual sales amounted to only 600,000 units. The units are sold for P20 each and the contribution margin ratio is 30%. The peso amount that best qualifies the Marketing Department’s failure to achieve budgeted performance for the current year is:A. P720,000 unfavorable C. P2,400,000 unfavorableB. P600,000 unfavorable D. P2,000,000 unfavorable

124.The gross profit of Rea Company for each of the years ended as indicated follow:2001 2000

Sales P792,000 P800,000Cost of goods sold 463,000 480,000Gross profit P328,000 P320,000

Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit due to change in the selling price?A. P8,000 C. P79,200B. P72,000 D. P88,000

125.Garfield Company, which sells a single product, provided the following data from its income statements for the years 2001 and 2000:

2001 2000Sales (150,000 units in 2001; 180,000 units in 2000) P750,000 P720,000Cost of goods sold 525,000 575,000Gross profit P225,000 P145,000

In an analysis of variation in gross profit between the two years, what would be the effects of changes in sales price and sales volume, respectively?A. P150,000 F; P120,000 U C. P180,000 F; P150,000 UB. P150,000 U; P120,000 F D. P180,000 U; P150,000 F

Working Capital Management126.Gear Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly.

Gear has the opportunity to invest the money of 24% per annum. The company spends, on the average, P40 for every cash conversion to marketable securities.What is the optimal cash conversion size?A. P60,000 C. P55,000 B. P45,000 D. P72,500

127.Lyman Company has the opportunity to increase annual sales P100,000 by selling to a new riskier group of customers. The uncollectible expense is expected to be 15% and collection

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costs will be 5%. The company’s manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lyman should accept this opportunity, the company’s after tax profits would increase byA. P6,000 C. P10,200B. P10,000 D. P14,400

128.The following information regarding a change in credit policy was assembled by the Willis Company. The company has a required rate of return of 10% and a variable cost ratio of 60%.

Old Credit Policy New Credit PolicySales P3,600,000 P3,960,000Average Collection period 30 days 36 days

The pretax cost of carrying the additional investment in receivable, using 360-day year would beA. P5,760 C. P8,160B. P9,600 D. P960

129.The sales director of Lloyd Company suggested that certain credit terms be modified. He estimates the following effects: Sales will increase by at least 20% Accounts receivable turnover will be reduced to 8 times from the present turnover of 10

times Bad debts, now at 1% of sales will increase to 1.5%Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the desired rate of return is 20%. Fixed expenses amount to P150,000.Should the company allow revision of its credit terms?A. Yes, because income will increase by P64,800B. Yes, because losses will be reduced by P73,800C. No, because income will be reduced by P13,000D. No, because losses will be increased by P28,000

130.A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker P50.00 to locate a supplier and handle the ordering and delivery arrangements. Storage and handling costs are P0.02 per case per month. If each case costs P0.78 the most economical order quantity (rounded to the next whole number) isA. 884 cases C. 1,133 cases B. 625 cases D. 1,000 cases

131.Expected annual usage of a particular raw material is 2,000,000 units and the standard order size is 10,000 units. The invoice cost of each unit is P500, and the cost to place one purchase order is P80. The estimated annual order costs isA. P16,000 C. P32,000B. P100,000 D. P50,000

132.The Handy Company has the following information available concerning one of its inventory items:

Cost of placing an order P 32.00Unit of carrying cost per year P 4.00Annual unit demand 5,625Safety stock 100Average daily demand 25Normal lead time in days 10

The reorder point for the inventory item isA. 250 C. 350B. 600 D. 300

133.The G Corporation purchases 60,000 headbands per year. The average purchase lead time is 20 working days. Maximum lead time is 27 working days. The corporation works 240 days per year. The appropriate safety stock level and the reorder point for the company are:

A. B. C. D.Safety Stock 1,750 1,750 1,167 1,167Reorder Point 6,750 5,250 6,750 5,250

134.Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent per annum. The bank requires 10 percent of loan as compensating balance in its new checking account. The loan is payable at the end of 6 months. The effective interest rate of this loan isA. 28.21 percent C. 27.27 percent B. 14.29 percent D. 15.38 percent

135.The Manunuba Company was recently quoted terms on a commercial bank loan of 7% interest with 20% compensating balance. The term of the loan is one year. The effective cost of borrowing (rounded to the nearest hundredth) for each interest arrangements are:

A. B. C. D.Discounted interest 9.59% 8.75% 7.53% 7.53%Payable upon maturity 8.75% 9.59% 8.75% 9.59%

Cost of Capital & Risk

May 9, 2004 Page 18 of 22


136.For 2003, Bee Company increased earnings before interest and taxes by 17%. During the same period, net income after tax increased by 42%. The degree of financial leverage that existed during 2003 isA. 1.70 C. 2.47B. 4.20 D. 5.90

137.Mars Company plans to issue some P100 preferred stock with an 11 percent dividend. The stock is selling on the market for P97, and Mars must pay flotation costs of 5 percent of the market price. The company is under the 40 percent corporate tax rate.The cost of preferred stock for Mars Company isA. 7.16 percent C. 11.34 percentB. 6.80 percent D. 11.94 percent

138.ABC Corp. stock’s beta is .50. If the market return is 16%, and the risk-free rate is 6%, what is the required rate of return on ABC stock?A. 11% C. 13%B. 12% D. 14%

139.The following data are related to WXY stock:Required return on WXY common 15 percentBeta coefficient 1.5Risk-free rate 9.0 percent

The required market return isA. 13.0 percent C. 18.0 percentB. 25.0 percent D. 16.0 percent

140.The Taurus Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now sells for P36. New stock can be sold to net the firm P32.40 per share.What is the Taurus Company’s cost of retained earnings?A. 14.83 percent C. 15.81 percentB. 15.26 percent D. 9.69 percent

141.The Leonard Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now sells for P36. New stock can be sold to net the firm P32.40 per share.A. 14.83 percent C. 15.81 percentB. 15.26 percent D. 9.69 percent

142.Williams Co. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.

Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of P30 per bond would be received, and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is estimated to be 4.8%.

Williams can sell 8% preferred stock at P105 per share. The cost of issuing and selling the preferred stock is expected to be P5 per share.

Williams’ common stock is currently selling for P100 per share. The firm expects to pay cash dividends of P7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by P3 per share, and flotation costs are expected to amount to P5 per share.

Williams expects to have available P100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.

Williams’ preferred capital structure isLong-term debt 30%Preferred stock 20%Common stock 50%

What are the corresponding weighted-average cost of capital under each financing needs?A. B. C. D.

P200,000 6.5% 6.8% 4.5% 7.3%P1,000,000 6.8% 4.8% 6.5% 9.1%

Questions 143 & 144 are based on the following information.The earnings, dividends, and stock price of Larry Technics, Inc. are expected to grow at 7 percent per year after this year. Larry’s common stock sells for P23 per share, its last dividend was P2.00 and the company pay P2.14 at the end of the current year. Larry should pay P2.50 flotation cost.

143. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the average return on the market is 12 percent, what will be the firm’s cost of equity using the CAPM approach?A. 16.05 percent C. 15.00 percentB. 14.27 percent D. 14.00 percent

May 9, 2004 Page 19 of 22


144.Using the dividend growth model, what is the expected cost of retained earnings for Larry Technics, Inc.?A. 10.44 percent C. 16.30 percentB. 9.30 percent D. 17.44 percent

Quantitative Methods145.Reina, Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor

is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first batch take?A. 360 hours C. 140.63 hoursB. 57.6 hours D. 230.4 hours

146.A company is designing a new regional distribution warehouse. To minimize delays in loading and unloading trucks, an adequate number of loading docks must be built. The most relevant technique to assist in determining the proper number docks isA. Cost-volume-profit analysis C. PERT/CPM analysisB. Linear programming D. Queuing theory

147.Following is a table for two separate product lines, X and Y:Probability X Profit Y Profit 20% P5,000 P 500 70% 3,000 4,000 10% 6,000 8,000

The product line to obtain maximum utility for a risk-averse decision maker isA. X because it has the highest expected profit.B. Y because it has the highest dispersionC. Y because it has the highest expected profitD. X because it has the lowest dispersion

148.Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for P1. Dough assigns the following probabilities to selling additional boxes:

Additional sales Probability 60 .6100 .4

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?A. P28 C. P52B. P40 D. P68

149.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The probability of cold weather on a given day at this time is 60%.The expected payoff for either selling coffee or soft drinks and the expected payoff if the vendor has perfect information are

A. B. C. D.Coffee P1,360 P1,960 P2,200 P3,900Soft drinks P1,600 P1,600 P1,900 P1,900Perfect Information. P3,000 P2,200 P1,360 P1,960

150.A construction contractor has been invited to submit a bid on a large and complicated construction project. The preparation of the bid proposal will cost about P20,000. Management feels that if the company bids low enough to result in a net profit of P50,000, there would be a 60% chance of getting the job. If the company bids high enough to result in a P100,000 net profit, the chance of getting the contract would be only 20%. What should the company do?A. Bid only high enough to allow for P50,000 profit because the expected value of the payoff

is P22,000.B. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is

P4,000C. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is

P20,000.D. Make no bid.

151.Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large, complex projects by determining the critical path from a single time estimate for each event in a project. The critical path:A. Is the shortest path from the first event to the last event for a project.B. Is an activity within the path that requires the most number of time.C. Is the earliest time to complete the project.D. Is the maximum amount of time an activity may be delayed without delaying the total

project beyond its target time.

May 9, 2004 Page 20 of 22


152.Clara Building Corporation uses the critical path method to monitor construction jobs. The company is currently 2 weeks behind schedule on Job 181, which is subject to a P10,500-per-week completion penalty. Path A-B-C-F-G-H-I has normal completion time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be crashed:

Activities Cost to Crash 1 Week Cost to Crash 2 WeeksBC P 8,000 P15,000DE 10,000 19,600EF 8,800 19,500

Clara desires to reduce the normal completion time of Job 181 and, at the same time, report the highest possible income for the year. Clara should crashA. BC 1 week and EF 1 week C. EF 2 weeksB. BC 2 weeks D. DE 1 week and EF 1week

Information Systems153.A major advantage of obtaining a package of applications programs from a software vendor is

A. the likelihood of reducing the time span from planning to implementationB. the ability to more easily satisfy the unique needs of usersC. greater operating efficiency from the computerD. the assurance the programs will be written in a high-level language

Answer Key1. B 11. D 21. C 31. A 41. B2. B 12. A 22. B 32. B 42. A3. B 13. A 23. A 33. B 43. B4. B 14. D 24. B 34. A 44. A5. A 15. B 25. A 35. A 45. B6. B 16. C 26. C 36. C 46. B7. C 17. A 27. A 37. A 47. B8. C 18. D 28. D 38. D 48. C9. A 19. A 29. D 39. B 49. A10. A 20. B 30. A 40. A 50. B

51. A 61. A 71. C 81. B 91. C52. B 62. A 72. A 82. A 92. D53. A 63. C 73. B 83. D 93. C54. B 64. B 74. C 84. A 94. C55. A 65. B 75. C 85. D 95. D56. B 66. C 76. B 86. C 96. C57. A 67. B 77. C 87. D 97. B58. B 68. C 78. A 88. B 98. A59. A 69. D 79. B 89. D 99. B60. C 70. B 80. A 90. C 100. D

101. C 111. C 121. C 131. A 141. C102. D 112. C 122. A 132. C 142. A103. A 113. A 123. B 133. A 143. C104. B 114. D 124. D 134. D 144. D105. B 115. A 125. A 135. A 145. C106. A 116. D 126. C 136. C 146. D107. C 117. C 127. A 137. D 147. D108. D 118. A 128. A 138. A 148. C109. C 119. B 129. A 139. A 149. B110. D 120. C 130. D 140. A 150. C

151. C 152. D 153. A

May 9, 2004 Page 21 of 22


COMPREHENSIVE:1. Gasco Co. is a very large company with common stock listed on the Philippine Stock

Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding:

P150 million of 10 percent series 2013P50 million of 7 percent series 2007P75 million of 5 percent series 2004

The vice president of finance is planning to sell P75 million of bonds next year to replace the debt due to expire in 2004. Present market yields on similar Baa-rated bonds are 12.1 percent. Gasco also has P90 million of 7.5 percent noncallable preferred stock outstanding, and it has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced at P80 per share, and its dividend per share is P7.80.The company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8 percent and this will continue. The expected dividend is P1.90 per share, and the common stock is selling for P40 per share. The company’s investment banker has quoted the following flotation costs to Gasco: P2.50 per share for preferred stock and P2.20 per share for common stock.On the advice of its investment banker, Gasco has kept its debt at 50 percent of assets and its equity at 50 percent. Gasco sees no need to sell either common or preferred stock in the foreseeable future as it generated enough internal funds for its investment needs when these funds are combined with debt financing. Gasco’s corporate tax rate is 40 percent.

Compute the cost of capital for the following:1. Bond (debt)2. Preferred stock3. Common equity in the form of retained earnings4. New common stock5. Weighted average cost of capital

2. Andres Company has a single product called Kad. The company normally produces and sells 60,000 Kads each year at a selling price of P32 per unit. The company’s unit costs at this level of activity are given below:

Direct materials P10.00Direct Labor 4.50Variable manufacturing overhead 2.30Fixed manufacturing overhead 5.00 (P300,000 total)Variable selling expenses 1.20Fixed selling expenses 3.50 (P210,000 total)

A number of questions relating to the production and sales of Kads follow. Each question is independent.

1. Assume that Andres Company has sufficient capacity to produce 90,000 Kads each year without any increase in fixed manufacturing overhead costs. The company could increasein sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by P80,000. What would be the effect of the increase in both sales and fixed expenses on the company profit?

2. Assume again that Andres Company has sufficient capacity to produce 90,000 Kads each year. A customer in a foreign market wants to purchase 20,000 Kads. Import duties on the Kads would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling costs that would be associated with the order would be P3.20 per unit shipping costs. What is the breakeven price on this order?

3. The company has 1,000 Kads on hand that have some irregularities and are therefore considered to be “seconds”. Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit costs figure is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andres Company is unable to purchase more material for the production of Kads. The strike is expected to last for two months. Andres Company has enough material on hand to continue to operate at 30% of normal levels for the two-month period. As an alternative, Andres could close its plant down entirely for the two months. If the plant were closed, fixed overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. What would be the peso advantage or disadvantage of closing the plant for the two-month period?

5. An outside manufacturer has offered to produce Kads for Andres Company and to ship them directly to Andres’ customers. If Andres accepts this offer, the facilities that it uses to produce Kads would be idle; however, fixed overhead costs would be reduced by 75% to their present value. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. What the unit cost figure that is relevant for comparison to whatever quoted price is received from the outside manufacturer?

May 9, 2004 Page 22 of 22

0405 MAS Preweek Quizzer

Documents

product x

product inspections

materials p1

product y

product liability

product design

product lines

product recalls