Accounting Quiz 7 Multiple Choice Questions

Question 1

1. Figure 13-9.
   ` Four tests require the use of a radiological counting machine that can supply 6,000 hours per year. Information on the four lab tests are as follows:

	Test A	Test B	Test C	Test D
Charging rate	$50	$20	$80	$70
Variable cost	10	10	60	30
Machine hours	2	1	0.5	0.25

Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D?

		$20
		$40
		$10
		$160
		$100

2.5 points

Question 2

Figure 14-3.
Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value. The expected cash flows associated with the project are as follows:

	Cash	Cash Expenses &
Year	Revenues	Depreciation
1	$1,500,000	$900,000
2	$1,500,000	$900,000
3	$1,500,000	$900,000
4	$1,500,000	$900,000
5	$1,500,000	$900,000

Refer to Figure 14-3. What is the average annual income for this project?

		$900,000
		$1,500,000
		$600,000
		$700,000
		$300,000

2.5 points

Question 3

Which of the following is true of capital investment decision making?

		It is used only for independent projects.
		It is used only for mutually exclusive projects.
		It requires that funding for a project must come from sources with the same opportunity cost of funds.
		It is used to determine whether or not a firm should accept a special order.
		None of these.

2.5 points

Question 4

1. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials	$ 75,000
Direct labor	120,000
Variable manufacturing overhead	45,000
Fixed manufacturing overhead	60,000
Total	$300,000

An outside supplier has offered to sell the component for $12.75.

What is the effect on income if Vest Industries purchases the component from the outside supplier?

		$270,000 decrease
		$270,000 increase
		$30,000 decrease
		$30,000 increase

2.5 points

Question 5

Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true?

		budgeted product cost is $15,000
		$5,000 is pure profit
		all costs pertaining to the job total $15,000
		$5,000 includes fixed overhead, selling and administrative expense, and profit
		$5,000 includes selling and administrative expense, and profit

2.5 points

Question 6

Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The joint costs amount to $200,000.

			If Processed Further
	Units	Sales Value	Additional	Sales
Product	Produced	at Split-Off	Costs	Value
A1	3,000	$10,000	$2,500	$15,000
B2	5,000	30,000	3,000	35,000
C3	4,000	20,000	4,000	25,000
D4	6,000	40,000	6,000	45,000

1. 
   If Product B2 is processed further, profits will

		increase by $30,000.
		decrease by $3,000.
		increase by $32,000.
		increase by $2,000.

2.5 points

Question 7

Figure 14-2.
A company is considering two projects.

	Project A	Project B
Initial investment	$200,000	$200,000
Cash inflow Year 1	$50,000	$90,000
Cash inflow Year 2	$50,000	$90,000
Cash inflow Year 3	$50,000	$40,000
Cash inflow Year 4	$50,000	$30,000
Cash inflow Year 5	$50,000	$30,000

1. 
   
   Refer to Figure 14-2. What is the payback period for Project A?

		4.5 year
		2.5 years
		5 years
		3.5 years
		4 years

2.5 points

Question 8

Corrigan Company charges cost plus 25%. What is the price of an item with cost equal to $50?

		$50
		$200
		$62.50
		$60
		$12.50

2.5 points

Question 9

Figure 13-8.
Bonner Milling Company purchases logs and mills them into various grades of lumber. During the sawing and planning process, a considerable amount of sawdust is generated. Currently, Bonner sells the sawdust to a particle board manufacturer for $50 per truckload. Bonner is considering processing the sawdust into particle board itself. One truckload of sawdust can be made into 20 sheets of particle board selling for $8 per sheet. Further processing costs are $7 per board.

Refer to Figure 13-8. Should Bonner process the sawdust into particle board?

		Yes, income will increase by $20 per truckload of sawdust.
		Yes, income will increase by $110 per truckload of sawdust.
		Yes, income will increase by $50 per truckload of sawdust.
		No, income will decrease by $50 per truckload of sawdust.
		No, income will decrease by $30 per truckload of sawdust.

2.5 points

Question 10

Handy Hardware Store sets prices at cost plus 80% of cost. The cost of a cordless drill kit is $34. What price is charged by Handy Hardware for the cordless drill kit?

		$34.00
		$27.20
		$61.20
		$68.00
		$42.00

2.5 points

Question 11

Figure 14-2.
A company is considering two projects.

	Project A	Project B
Initial investment	$200,000	$200,000
Cash inflow Year 1	$50,000	$90,000
Cash inflow Year 2	$50,000	$90,000
Cash inflow Year 3	$50,000	$40,000
Cash inflow Year 4	$50,000	$30,000
Cash inflow Year 5	$50,000	$30,000

Refer to Figure 14-2. What is the payback period for Project B?

		2 years
		4.5 years
		3.5 years
		2.5 years
		3 years

2.5 points

Question 12

One disadvantage of the payback period is that

		it is sometimes used as a crude measure of risk.
		managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses, etc. may be based.
		it cannot be used for investments with unequal cash inflows.
		it cannot be used if the entire cost of the investment does not occur immediately.
		All of these.

2.5 points

Question 13

Which of the following costs is NOT relevant to a decision to sell a product at split-off or process the product further and then sell the product?

		joint costs allocated to the product
		the selling price of the product at split-off
		the additional processing costs after split-off
		the selling price of the product after further processing

2.5 points

Question 14

Buster Evans is considering investing $20,000 in a project with the following annual cash revenues and expenses:

	Cash	Cash
	Revenues	Expenses
Year 1	$ 8,000	$ 8,000
Year 2	$12,000	$ 8,000
Year 3	$15,000	$ 9,000
Year 4	$20,000	$10,000
Year 5	$20,000	$10,000

Depreciation will be $4,000 per year.

What is the accounting rate of return on the investment?

		15%
		35%
		70%
		75%
		None of these.

2.5 points

Question 15

Figure 13-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14, respectively. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time.

Refer to Figure 13-5. What is the amount of machine time for model P-4 in terms of percent of a machine hour?

		0.10
		0.20
		0.25
		0.30
		0.50

2.5 points

Question 16

The best person/group in a firm to perform a postaudit of a capital investment is usually

		the manager of that investment.
		the CEO.
		the board of directors.
		the internal audit staff.
		an external auditor.

2.5 points

Question 17

The following information pertains to an investment:

Investment	$140,000
Annual revenues	$ 96,000
Annual variable costs	$ 32,000
Annual fixed out-of-pocket costs	$ 20,000
Discount rate	12%
Expected life of project	8 years

1. 
   The present value of the annual cash flow (rounded) is

		$136,822.
		$152,538.
		$204,884.
		$218,592.

2.5 points

Question 18

Falkner Company is designing a portable DVD player aimed at families traveling with young children. The company believes that the product can be sold for $140; and it requires a 20% profit on new products. What is the target cost of the portable DVD player?

		$140
		$28
		$175
		$112
		$168

2.5 points

Question 19

A division manager was considering a project that required a significant initial investment. If accepted, the project could have a negative impact on certain financial ratios that the firm was required to maintain to satisfy debt contracts. To ensure that the ratios would notbe adversely affected by the investment, the manager would use which of the following capital investment models?

		payback period
		accounting rate of return
		net present value
		internal rate of return
		None of these.

2.5 points

Question 20

Figure 13-1.
Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $5 per carpet, direct labor is $10 per carpet, and one setup will be required at $800 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are working at Stein. Their wages will be paid whether or not the special order is accepted. Stein's policy is to avoid layoffs to the extent possible.

Refer to Figure 13-1. Which of the following is irrelevant to the special order decision?

		cost of yarn and backing
		direct labor cost
		machining and electricity cost
		$30 price
		all of these are relevant