Hashemite University
Faculty of Economic and Administrative Sciences
Department of Accounting
Course: Managerial Accounting, Dr Husam Al-Khadash
- Final
exam A
Student Name:_____________________________Student No.: …………………Seat No……………
Question 1:
(8 Marks)
Management is considering purchasing an asset for $20,000 that would have a useful life of 5
years and no salvage value. For tax purposes, the entire original cost of the asset
would be depreciated over 5 years using the straight-line method. The asset would
generate annual net cash inflows of $13,000 throughout its useful life. The project
would require additional working capital of $5,000, which would be released at the
end of the project. The company's tax rate is 40% and its discount rate is 8%.
Required:
What are the following amounts?
Present value of Net annual cash inflows .....................................................
Present value of Depreciation tax shield .......................................................
Present value of Working capital released ....................................................
Net present value ...........................................................................................
Note: The following table presents the present value of $1 cash flows and the present
value of series of $1 cash flows.
Periods
1
2
3
4
5
6
7
8
9
10
6%
0.943
0.89
0.84
0.792
0.747
0.705
0.665
0.627
0.592
0.558
8%
0.926
0.857
0.794
0.735
0.681
0.63
0.583
0.54
0.5
0.463
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
6%
0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.209
6.801
7.359
8%
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.746
6.246
6.709
10%
0.909
1.735
2.486
3.169
3.79
4.354
4.867
5.334
5.758
6.144
12%
0.893
1.69
2.402
3.038
3.605
4.112
4.564
4.968
5.329
5.651
14%
0.877
1.647
2.322
2.914
3.433
3.889
4.288
4.639
4.946
5.216
Question 2 ( 8 marks)
Jerston Company has an annual plant capacity of 3,000 units. Data concerning this product
are given below:
Annual sales at regular selling prices .......................................................................
2,500 units
Manufacturing costs:
Variable .................................................................................................................
$20 per unit
Fixed (annual) .......................................................................................................
$75,000
Selling and administrative expenses:
Variable (sales commissions)................................................................................
$6 per unit
Fixed (annual) .......................................................................................................
$15,000
The company has received a special order for 500 units at a selling price of $45 each.
final exam form A 2010.docPage 1 of 5
Regular sales would not be affected, and sales commissions on the 500 units would
be reduced by one-third. This special order would have no impact on total fixed costs.
Required:
1-Uisng full costing what is the total coat per unit at the level of the capacity
2- What is the net advantage of accepting the order
Question 3: (34 Marks)
Answer the following multiple-choice questions:
1. When the level of activity increases within the relevant range, how does each of the following
change?
Average cost Total variable Fixed cost
per unit
cost
per unit
A)
Increases
Increases
Increases
B)
Increases
No change
Increases
C)
Decreases
No change
Decreases
D)
Decreases
Increases
Decreases
2. Shipping costs at Fisheries Inc. are a mixed cost with variable and fixed cost components. Records
indicate the company shipped 6,000 tons of halibut for $5,000 in March and 9,000 tons for
$7,400 in April. Assuming that this activity is within the relevant range, the expected shipping
cost for shipping 7,800 tons would be:
A) $6,240.
B) $9,750.
C) $6,440.
D) $6,200.
3. Given the cost formula Y = $15,000 + $2X, total cost at an activity level of 8,000 units is expected
to be:
A) $23,000.
B) $31,000.
C) $15,000.
D) $16,000.
4. Northern Pacific Fixtures Company sells a single product for $28 per unit. If variable expenses are
65% of sales and fixed expenses total $9,800, the break-even point will be:
A) $15,077.
B) $18,200.
C) $9,800.
D) $28,000.
5. Arthur Company has a margin of safety percentage of 25%. The break-even point is $300,000 and
the variable expenses are 45% of sales. Given this information, the net operating income is:
A) $75,000.
B) $55,000.
C) $15,000.
D) $41,250.
6. Brown Company has sales of 2,000 units at $70 per unit. Variable expenses are 40% of the selling
price. If total fixed expenses are $44,000, the degree of operating leverage is:
A) 0.79.
B) 1.40.
C)
3.50.
D) 2.10.
7. Which of the following represents the normal sequence in which the indicated budgets are prepared?
A) Direct Materials, Cash, Sales
B) Production, Cash, Income Statement
C) Sales, Balance Sheet, Direct Labor
D) Production, Manufacturing Overhead, Sales
8. Budgeted production needs are determined by:
A) adding budgeted sales in units to the desired ending inventory in units and deducting the
beginning inventory in units from this total.
B) adding budgeted sales in units to the beginning inventory in units and deducting the
desired ending inventory in units from this total.
C) adding budgeted sales in units to the desired ending inventory in units.
D) deducting the beginning inventory in units from budgeted sales in units
9. When there is a production constraint, a company should emphasize the products with:
final exam form A 2010.docPage 2 of 5
A)
B)
C)
D)
the highest unit contribution margins.
the highest contribution margin ratios.
the highest contribution margin per unit of the constrained resource.
the highest contribution margins and contribution margin ratios.
10.In a sell or process further decision, which of the following costs are relevant?
A variable production cost incurred prior to the split-off point.
I. 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.
11. The Kelsh Company has two divisions--North and South. The divisions have the following
revenues and expenses:
North
South
Sales .....................................................................................................................................
$900,000
$800,000
Variable expenses .................................................................................................................
450,000
300,000
Traceable fixed expenses ......................................................................................................
260,000
210,000
Allocated common corporate expenses ................................................................................
240,000
190,000
Net operating income (loss)..................................................................................................
$(50,000)
$100,000
Management at Kelsh is pondering the elimination of North Division. If North Division were
eliminated, its traceable fixed expenses could be avoided. The total common corporate
expenses would be unaffected. Given these data, the elimination of North Division would
result in an overall company net operating income of:
A) $100,000.
B) $150,000.
C) $(140,000.
D) $50,000.
12. Barrus Company makes 30,000 motors to be used in the productions of its power lawn mowers.
The manufacturing cost per motor at this level of activity is as follows:
Direct materials ....................................................................................................................
$9.50
Direct labor ...........................................................................................................................
$8.60
Variable manufacturing overhead ........................................................................................
$3.75
Fixed manufacturing overhead .............................................................................................
$4.35
This motor has recently become available from an outside supplier for $25 per motor. If
Barrus decides not to make the motors, none of the fixed manufacturing overhead would be
avoidable and there would be no other use for the facilities. If Barrus decides to continue
making the motor, how much higher or lower will the company's net operating income be than
if the motors are purchased from the outside supplier?
A) $36,000 lower.
B) $207,000 higher.
C) $94,500 higher.
D) $130,500 higher.
13. If the internal rate of return is used as the discount rate in computing net present value, the net
present value will be:
A) positive.
B) negative.
C)zero.
D) unknown.
Use the following to answer questions 14-15:
(Ignore income taxes in this problem.) Friden Company has just purchased a new piece of equipment
with the following characteristics:
Purchase cost of equipment ..................................................................................................
$27,000
Annual cost savings that will be provided by the equipment ................................................
$6,000
Life of the equipment ............................................................................................................
10 years
14.Assume straight-line depreciation and no salvage value. The payback period would be:
A) 4.5 years.
B) 10 years. C) 2.7 years.
D) 8.2 years.
final exam form A 2010.docPage 3 of 5
15.The simple rate of return would be approximately:
A) 22.2%.
B) 12.2%. C)
11.1%.
D) 10%.
16. Home Company will open a new store on January 1. Based on experience from its
other retail outlets, Home Company is making the following sales projections:
Cash Sales Credit Sales
January ...................
$60,000
$40,000
February .................
$30,000
$50,000
March .....................
$40,000
$60,000
April .......................
$40,000
$80,000
Home Company estimates that 70% of the credit sales will be collected in the month
following the month of sale, with the balance collected in the second month following
the month of sale. Based on these data, the balance in accounts receivable on January
31 will be:
a. $40,000
b. $28,000
c. $12,000
d. $58,000
17. At a sales level of $365,000, Lewis Company's gross margin is $20,000 less than
its contribution margin, its net operating income is $70,000, and its selling and
administrative expenses total $130,000 At this sales level, its contribution margin
would be:
a. $295,000
b. $180,000
c. $220,000 d. $200,000
Solutions
Question 1
What are the following amounts?
Present value of Net annual cash inflows .....................................................
Present value of Depreciation tax shield .......................................................
Present value of Working capital released ....................................................
Net present value ...........................................................................................
Question 2
Net advantage of accepting the order
Question 3
Q. No.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Answer
final exam form A 2010.docPage 4 of 5
Question 1
After-Tax
Tax
Cash
8%
Years Amount
Effect Flows
Factor
Cost of asset ..................................................................................................
Now $(20,000)
$(20,000) 1.000
Working capital needed.................................................................................
Now ( 5,000)
( 5,000) 1.000
Net annual cash inflows ................................................................................
1-5
13,000
0.60
7,800
3.993
Depreciation tax shield..................................................................................
1-5
4,000
0.40
1,600
3.993
Working capital released ...............................................................................
5
5,000
5,000
0.681
Net present value ........................................................................................... e
Question 2
TOTAL cost per unit is 45
Answer:
Incremental revenues (500 x $45) .................................................................
$22,500
Incremental costs:
Variable manufacturing (500 x $20) ..........................................................
(10,000)
Variable selling (500 x $6 x 2/3) ...............................................................
( 2,000)
Net advantage of accepting the order ............................................................
$10,500
Solutions:
Q3:
Q. No.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Answer D C
B
D
B
D
B
A
C
B
C
C
C
A
B
A
C
final exam form A 2010.docPage 5 of 5
Present
Value
$(20,000)
( 5,000)
51,905
6,388
3,403
$ 36,696