Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
The exam is extensive, so please show all your calculations clearly to obtain the most points. I do
give partial credit.
True/ False: Worth 2 points each, total 20 Points.
Please circle your answer
1. True False Future costs that do not differ among the alternatives are not relevant in a
decision.
2. True False Sunk costs are considered to be avoidable costs.
3. True False The book value of a machine, as shown on the balance sheet, is relevant
in a decision concerning the replacement of that machine by another machine.
4. True False Vertical integration is the involvement by a company in more than one of
the steps from securing basic raw materials to the production and distribution of a
finished product.
5. True False When a company has a production constraint, the product with the highest
contribution margin per unit of the constrained resource should be given highest
priority.
6. True False Preference decisions attempt to determine which of many alternative
investment projects would be the best for the company to accept.
7. True False Projects with shorter payback periods are always more profitable than
projects with longer payback periods.
8 True False The simple rate of return focuses on accounting net operating income
rather than on cash flows.
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
9 True False One criticism of the payback method is that it ignores cash flows that occur
after the payback point has been reached.
10. True false In preference decisions, the profitability index and internal rate of return
methods may produce conflicting rankings of projects.
Multiple Choices: Worth 2 points each, Please circle (or Highlight in a dark color) your
answer, total 20 Points
1. Which of the following are valid reasons for eliminating a product line?
I. The product line's contribution margin is negative.
II. The product line's traceable fixed costs plus its allocated common corporate costs are
less than its contribution margin.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
2. When there is a production constraint, a company should emphasize the products
with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
3. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.
4. Scherer Corporation is preparing a bid for a special order that would require 720 liters
of material U48N. The company already has 560 liters of this raw material in stock that
originally cost $6.30 per liter. Material U48N is used in the company's main product and
is replenished on a periodic basis. The resale value of the existing stock of the material
is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter.
What is the relevant cost of the 720 liters of the raw material when deciding how much
to bid on the special order?
A. $4,592
B. $4,788
C. $4,456
D. $4,176
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
5. Cong Inc. has some material that originally cost $68,400. The material has a scrap
value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800.
What would be the incremental effect on the company's overall profit of reworking and
selling the material rather than selling it as is as scrap?
A. -$69,100
B. -$700
C. -$29,400
D. -$39,000
6. The capital budgeting method that recognizes the time value of money by discounting
cash flows over the life of the project, using the company's required rate of return as the
discount rate is called the:
A. simple rate of return method.
B. the net present value method.
C. the financing method.
D. the payback method.
7. Which one of the following statements about the payback method of capital budgeting
is correct?
A. The payback method does not consider the time value of money.
B. The payback method considers cash flows after the payback has been reached.
C. The payback method uses discounted cash flow techniques.
D. The payback method will lead to the same decision as other methods of capital
budgeting.
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
8. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000.
The equipment will provide a cost savings of $15,000 per year for ten years, after which
it will have a $3,000 salvage value. If the required rate of return is 14%, the equipment's
net present value is:
A. $8,240
B. $(8,240)
C. $23,888
D. $9,050
9. (Ignore income taxes in this problem.) Sable Corporation is considering the purchase
of a machine that would cost $330,000 and would last for 5 years. At the end of 5 years,
the machine would have a salvage value of $50,000. By reducing labor and other
operating costs, the machine would provide annual cost savings of $76,000. The
company requires a minimum pretax return of 12% on all investment projects. The net
present value of the proposed project is closest to:
A. -$56,020
B. -$6,020
C. -$48,764
D. -$27,670
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
10.
(Ignore income taxes in this problem) The management of Serpas Corporation is
considering the purchase of a machine that would cost $180,000, would last for 5
years, and would have no salvage value. The machine would reduce labor and
other costs by $46,000 per year. The company requires a minimum pretax return
of 13% on all investment projects. The net present value of the proposed project
is closest to:
A. $27,138
B. $50,000
C. -$18,218
D. -$33,565
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
Essay/ Short Problem: Worth 5 Points each Total 20 Points. Do your
work on a separate sheet of paper if needed. Clearly identify the Problem #
1. A study has been conducted to determine if Product A should be dropped. Sales of
the product total $200,000 per year; variable expenses total $140,000 per year. Fixed
expenses charged to the product total $90,000 per year. The company estimates that
$40,000 of these fixed expenses will continue even if the product is dropped. These
data indicate that if Product A is dropped, the company's overall net operating income
would increase OR decrease by what amount
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
2. Part E43 is used in one of Ran Corporation's products. The company's Accounting
Department reports the following costs of producing the 12,000 units of the part that are
needed every year.
An outside supplier has offered to make the part and sell it to the company for $14.70
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The allocated
general overhead represents fixed costs of the entire company. If the outside supplier's
offer were accepted, only $5,000 of these allocated general overhead costs would be
avoided. Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part E43 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
MAKE
Direct Materials
Direct Labor
Variable Overhead
Supervisor’s Salary
Depreciation of
Special Equipment
Allocated General
Overhead (Avoidable
only)
Outside Purchase
Price
Total Costs
BUY
$
$
$
$
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
3. (Ignore income taxes in this problem.) Hopis Inc. is considering the acquisition of a
new machine that costs $300,000 and has a useful life of 5 years with no salvage value.
The incremental net operating income and incremental net cash flows that would be
produced by the machine are:
The payback period of this investment is what?
4. (Ignore income taxes in this problem.) The management of Basler Corporation is
considering the purchase of a machine that would cost $440,000, would last for 7 years,
and would have no salvage value. The machine would reduce labor and other costs by
$88,000 per year. The company requires a minimum pretax return of 12% on all
investment projects.
Required:
Determine the net present value of the project. Show your work!
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
Problems: Worth 10 points each, Total 40 Points Do your work on a separate sheet of
paper if needed. Clearly identify the Problem #
1. Costs associated with two alternatives, code-named Q and R, being considered
by Cornier Corporation are listed below:
Required:
a. Which costs are relevant and which are not relevant in the choice between
these two alternatives?
b. What is the differential cost between the two alternatives?
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
2. The management of Therriault Corporation is considering dropping product U51Y.
Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $280,000 of the fixed
manufacturing expenses and $140,000 of the fixed selling and administrative expenses
are avoidable if product U51Y is discontinued.
Required:
What would be the effect on the company's overall net operating income if product
U51Y were dropped? Should the product be dropped? Show your work!
3.(Ignore income taxes in this problem.) Jim Bingham is considering starting a small c
atering business. He would need to purchase a delivery van and various equipment
costing $125,000 to equip the business and another $60,000 for inventories and other
working capital needs. Rent for the building used by the business will be $35,000 per
year. Jim's marketing studies indicate that the annual cash inflow from the business will
amount to $120,000. In addition to the building rent, annual cash outflow for operating
costs will amount to $40,000. Jim wants to operate the catering business for only six
years. He estimates that the equipment could be sold at that time for 4% of its original
cost. Jim uses a 16% discount rate.
Required:
Would you advise Jim to make this investment?
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
4. (Ignore income taxes in this problem.) James, Inc., is considering the purchase of a
machine that would cost $430,000 and would last for 6 years, at the end of which, the
machine would have a salvage value of $47,000. The machine would reduce labor and
other costs by $109,000 per year. Additional working capital of $4,000 would be needed
immediately, all of which would be recovered at the end of 6 years. The company
requires a minimum pretax return of 17% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
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Managerial Accounting BADM 225
Fall 2012
Exam 3, Chapters 7 - 9
Name____________________________________________________Date_________________
Extra Credit, Worth 10 Points All students should attempt the
extra credit problems. Credit is given for work done, so even a stab
will net you some points!
A. What was your favorite area covered of this course?
B. What should have been done differently? (not acceptable: no
exams, or even shorter ones)
C. Did it change your understanding of accounting in general?
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