MGAB03 Managerial Accounting – Final Exam Review Questions
Question 1:
Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti
Products' East Division, felt that he had to see the numbers before he made a move. His
division's return on investment (ROI) had led the company for three years, and he don't want any
letdown.”
Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are
evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the
highest ROI. Operating results for the company's East Division for last year are given below:
Sales
$21,000,000
Variable expenses
13,400,000
Contribution margin
7,600,000
Fixed expenses
5,920,000
Operating income
$ 1,680,000
Divisional operating assets$ 5,250,000
The company had an overall ROI of 18% last year (considering all divisions). The new product
line that headquarters wants Grenier's East Division to add would require an investment of
$3,000,000. The cost and revenue characteristics of the new product line per year would be as
follows:
Sales
$9,000,000
Variable expenses65% of sales
Fixed expenses $2,520,000
Required:
1. Compute the East Division's ROI for last year; also compute the ROI as it would appear if
the new product line is added.
2. If you were in Grenier's position, would you accept or reject the new product line? Explain.
3. Why do you suppose headquarters is anxious for the East Division to add the new product
line?
4. Suppose that the company's minimum required rate of return on operating assets is 15% and
that performance is evaluated using residual income.
1. Compute East Division's residual income for last year; also compute the residual
income as it would appear if the new product line is added.
2. Under these circumstances, if you were in Grenier's position, would you accept or
reject the new product line? Explain.
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MGAB03 Managerial Accounting – Final Exam Review Questions
Question 2:
Gerbig Company's Electrical Division produces a high-quality transformer. Sales and cost data
on the transformer follow:
Selling price per unit on the outside market $40
Variable costs per unit
$21
Fixed costs per unit (based on capacity)
$9
Capacity in units
60,000
Gerbig Company has a Motor Division that would like to begin purchasing this transformer from
the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each
year from another company at a cost of $38 per transformer. Gerbig Company evaluates its
division managers on the basis of divisional profits.
Required:
1. Assume that the Electrical Division is now selling only 50,000 transformers each year to
outside customers.
1. From the standpoint of the Electrical Division, what is the lowest acceptable
transfer price for transformers sold to the Motor Division?
2. From the standpoint of the Motor Division, what is the highest acceptable transfer
price for transformers acquired from the Electrical Division?
3. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 10,000 transformers from the
Electrical Division to the Motor Division? Why or why not?
4. From the standpoint of the entire company, should a transfer take place? Why or
why not?
2. Assume that the Electrical Division is now selling to outside customers all of the
transformers it can produce.
1. From the standpoint of the Electrical Division, what is the lowest acceptable
transfer price for transformers sold to the Motor Division?
2. From the standpoint of the Motor Division, what is the highest acceptable transfer
price for transformers acquired from the Electrical Division?
3. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 10,000 transformers from the
Electrical Division to the Motor Division? Why or why not?
4. From the standpoint of the entire company, should a transfer take place? Why or
why not?
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MGAB03 Managerial Accounting – Final Exam Review Questions
Question 3:
Eastbay Hospital has an auxiliary generator that is used when power failures occur. The
generator is worn out and must be either overhauled or replaced with a new generator. The
hospital has assembled the information presented below.
If the company keeps and overhauls its present generator, then the generator will be usable for
eight more years. If a new generator is purchased, it will be used for eight years, after which it
will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction
in annual operating costs, as shown below.
The hospital computes depreciation on a straight-line basis. All equipment purchases are
evaluated using a 16% discount rate.
Present
GeneratorNew Generator
Purchase cost new
$16,000
$20,000
Remaining book value
$ 9,000
—
Overhaul needed now
$ 8,000
—
Annual cash operating costs
$12,500
$ 7,500
Salvage value now
$ 4,000
—
Salvage value eight years from now $ 3,000
$ 6,000
Required:
(Ignore income taxes.)
1. Should Eastbay Hospital keep the old generator or purchase the new one? Use the totalcost approach to net present value in making your decision.
2. Redo (1) above, this time using the incremental-cost approach.
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MGAB03 Managerial Accounting – Final Exam Review Questions
Question 4:
The owner of a small mining supply company has requested for a cash budget for June. After
examining the records of the company, you find the following:
a. Cash balance on June 1 is $ 830.
b. Actual sales for April and May are as follows :
c. Credit sales are collected over a three month period. 50 percent in the month of sale, 30
percent in the second month, and 15 percent in the third month. The sales collected in the
third month are subject to a 1 percent late fee, which is paid by those customers in addition to
what they owe. The remaining sales are uncollectible.
d. Inventory purchase average 75 percent of a month’s total sales. Of those purchases, 20
percent are paid for in the month of purchase. The remaining 80 percent are paid for in the
following month.
e. Salaries and wages total $ 8,700 per month, including a $ 4,500 salary paid to the owner.
f. Rent is $ 1,340 per month.
g. Taxes to be paid in June are $ 5,500.
The owner also tells you that he expects cash sales of $ 15,000 and credit sales of $ 50,000 for
June,. No minimum cash balance is required. The owner of the company does not have access to
short term loans.
Required:
(1) Prepare a cash budget for June. Include supporting schedules for cash collection and cash
payments.
(2) Did the business show a negative cash balance for June ? Assuming that the owner has no
hope of establishing a line of credit for the business, what recommendations would you give
the owner for dealing with a negative cash balance ?
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MGAB03 Managerial Accounting – Final Exam Review Questions
Question 5:
Franklin Products Limited manufactures and distributes a number of products to retailers. One of
these products, SuperStick, requires four kilograms of material D236 in the manufacture of each
unit. The company is now planning raw materials needs for the third quarter—July, August, and
September. Peak sales of SuperStick occur in the third quarter of each year. To keep production
and shipments moving smoothly, the company has the following inventory requirements:
1. The finished goods inventory on hand at the end of each month must be equal to 8,000
units plus 20% of the next month's sales. The finished goods inventory on June 30 is
budgeted to be 22,000 units.
2. The raw materials inventory on hand at the end of each month must be equal to 40% of
the following month's production needs for raw materials. The raw materials inventory on
June 30 for material D236 is budgeted to be 129,000 kilograms.
3. The company maintains no work in process inventories.
A sales budget for SuperStick for the last six months of the year follows.
July
August
September
October
November
December
Budgeted Sales in Units
60,000
75,000
105,000
53,000
30,000
15,000
Required:
1. Prepare a production budget for SuperStick for the months July, August, September, and
October.
2. Examine the production budget that you prepared. Why will the company produce more
units than it sells in July and August and fewer units than it sells in September and
October?
3. Prepare a direct materials purchases budget showing the quantity of material D236 to be
purchased for July, August, and September and for the quarter in total.
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MGAB03 Managerial Accounting – Final Exam Review Questions
Question 6:
The engineering department of an automotive supplier has developed a $600,000 machine for
assembling school bus recliners. The machine has been used to produce only one batch of 1,000
units so far (prototypes). The company will amortize the $600,000 initial machine investment
evenly over 5 years, after which production of recliners will be stopped. The company’s
expected annual costs will be direct materials, $300,000, direct labour, $120,000 and variable
manufacturing overhead, $240,000. Variable manufacturing overhead varies with direct
manufacturing labour costs. Fixed manufacturing overhead, exclusive of amortization, is
$90,000 annually, and fixed marketing and administrative costs are $45,000 annually.
A Japanese manufacturer of special purpose machines informs the engineering department
manager that in two weeks he can deliver a new machine that is ideally suited for assembling
recliners. This new machine is clearly more superior because it reduces the use of direct material
by 10% and produces twice as many units per hour. It will cost $500,000 and will have zero
terminal disposal price at the end of the five years.
Production and sales of 25,000 units per year (sales of $1,200,000) will be the same whether the
company uses the old machine or the new machine. The current disposal price of the internally
developed machine is $60,000. Its terminal value in four years will be $30,000.
Required
1. Assume that the required rate of return is 16%. Using the net present value method, show
whether the new machine should be purchased.
2. What is the role of the book value of the old machine in the analysis?
3. What is the payback period of the new machine?
4. As the manager who developed the $600,000 old machine, you are trying to justify not
buying the new $500,000 machine. You question the accuracy of the expected cash
operating savings. By how much these cash savings fall before the point of indifference- the
point where the net present value of investing in the new machine reaches zero?
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