Deck 5: Accounting for Inventory

Question 1

The method of evaluating long-term capital investments that finds the number of years it will take before the cash inflows from a project equal the amount of the original investment is the

A) Payback method
B) Net present value method
C) Internal rate of return method
D) Accounting rate of return method

Answer 1

A

Question 2

The Hughes Corp. plans to sell its products for $200 each. Its variable cost per unit = $195, and its fixed costs for the year = $100,000. What level of sales will Han need to make a profit of $250,000?

A) 5,000 units
B) 20,000 units
C) 50,0000 units
D) 70,000 units

Answer 2

D

Question 3

The Han Corp. plans to sell its products for $100 each. Its variable cost per unit = $90, and its fixed costs for the year = $200,000. What level of sales will Han need to break even?

A) 1,000 units
B) 15,000 units
C) 20,0000 units
D) 25,000 units

Answer 3

C

Question 4

The Hancock Corp. plans to sell its products for $100 each. Its variable cost per unit = $80, and its fixed costs for the year = $100,000. What level of sales will Hancock need to break even?

A) 1,000 units
B) 5,000 units
C) 10,0000 units
D) 20,000 units

Question 5

Gao Corp. produced 2,000,000 units this year, at a variable cost of $3 per unit. Its fixed costs are $1,200,000 per year. It sold all 2,000,000 units produced at $5 per unit. Its total contribution margin for the year was

A) Zero
B) 2400000
C) 2800000
D) 4000000

Question 6

Freire Corp. produced 200,000 units this year, at a variable cost of $3 per unit. Its fixed costs are $120,000 per year. It sold all 200,000 units produced at $5 per unit. Its profits for the year were

A) Zero
B) 280000
C) 400000
D) 880000

Question 7

Let Q = quantity produced, P = selling price per unit, VC = variable cost per unit, and TFC = total fixed cost. Which of the following equations is correct?

A) Profit = Q × (P - VC) + TFC
B) Profit = Q × (P - VC) - TFC
C) Profit = Q × (P - VC - TFC)
D) Profit = Q × (P - VC + TFC)

Question 8

Fan Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 5,000 units in a day, at a cost of $180,000, and its low production was 4,000 units, at a cost of $160,000. Its fixed costs equal

A) Zero
B) 50000
C) 80000
D) 100000

Question 9

Chi Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 50,000 units in a day, at a cost of $1,000,000, and its low production was 30,000 units, at a cost of $700,000. Its fixed costs are

A) Zero
B) 100000
C) 250000
D) 400000

Question 10

Coda Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 5,000 units in a day, at a cost of $180,000, and its low production was 4,000 units, at a cost of $160,000. Its variable cost per unit is

A) Zero
B) 10
C) 15
D) 20

Question 11

Chen Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 50,000 units in a day, at a cost of $900,000, and its low production was 30,000 units, at a cost of $600,000. Its variable cost per unit is

A) Zero
B) 10
C) 15
D) 20

Question 12

Alpert Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 100,000 units in a day, at a cost of $900,000, and its low production was 25,000 units, at a cost of $525,000. The equation that best describes this relation is

A) Cost = $5 × Volume
B) Cost = $400,000 + $5 × Volume
C) Cost = $100,000 + $6 × Volume
D) Cost = $300,000 + $6 × Volume

Question 13

The Li Corp. plans to sell its products for $25 each. Its variable cost per unit = $15, and its fixed costs for the year = $10,000. What level of sales will Li need to make a profit of $200,000?

A) 1,000 units
B) 20,000 units
C) 21,0000 units
D) 30,000 units

Question 14

Which of the following is typically not considered relevant to short-term managerial decisions?

A) Past, fixed costs
B) Future outlay costs
C) Opportunity costs
D) Salvage value of items that will be disposed of

Question 15

The method of evaluating long-term capital investments that finds the discount rate that makes the net present value of the future inflows from a project exactly equal to the amount invested is the

A) Payback method
B) Net present value method
C) Internal rate of return method
D) Accounting rate of return method

Question 16

The Gideon Corp. is considering closing all of its Pennsylvania stores. Financial factors that are relevant to this decision would include

A) Lost sales from the closed stores
B) Incremental costs involved in closing the stores
C) Avoidable occupancy costs related to these stores
D) All of the above

Question 17

The Jonah Corp. is considering dropping one of its product lines. Which of the following factors would not be relevant to making this decision?

A) The sunk cost of advertising that created the brand identity of the product
B) The impact of discontinuing the product on the company's overall reputation
C) The lost revenue from no longer selling these products
D) Interdependencies in costs and production with the company's other products

Question 18

The Matt Truck Corp. is considering whether to continue to make steering wheels for its trucks, or whether to buy the steering wheels from an outside supplier. It can buy the gears from outside suppliers at $190 per unit. It needs 50,000 units each year. The company has the following manufacturing costs: raw materials = $130 per unit; direct labor = $20 per unit; variable overhead = $30 per unit; avoidable fixed costs of $200,000 per year and non-avoidable fixed costs of $500,000 per year. The e

A) Decrease profits by $300,000
B) Decrease profits by $200,000
C) Increase profits by $200,000
D) Increase profits by $300,000

Question 19

The Ruth Bicycle Corp. is considering whether to continue to make gears for its bicycles, or whether to buy the gears from an outside supplier. It can buy the gears from outside suppliers at $12 per unit. It needs 100,000 units each year. The company has the following manufacturing costs: raw materials = $6 per unit; direct labor = $1 per unit; variable overhead = $2 per unit; avoidable fixed costs of $200,000 per year and non-avoidable fixed costs of $300,000 per year. The effect of stopping pr

A) Decrease profits by $300,000
B) Decrease profits by $100,000
C) Increase profits by $100,000
D) Increase profits by $300,000

Question 20

The David Corp. makes and sells 50,000 suitcases each year. The total fixed costs are $1,000,000. It has variable labor costs of $25 per unit; direct materials costs of $40 per unit; and variable overhead costs of $15 per unit. Its normal selling price is $120 per item. Assuming it does not have a capacity problem, what would be the effect on profits of accepting a special order of 10,000 suitcases, at a price of $90 per suitcase?

A) Profits would decrease by $100,000
B) Profits would increase by $100,000
C) Profits would increase by $250,000
D) Profits would decrease by $250,000

Question 21

The Molly Corp. makes and sells 400,000 desks each year. The total fixed costs are $40,000,000. Its variable costs are: labor of $90 per desk; direct materials of $300 per desk; and variable overhead of $60 per desk. It normally sells its desks at $600 each. Assuming that it does not have a capacity problem, what would be the effect on its profits if it accepted a special order to make an additional 100,000 desks for $400 each?

A) Profits would decrease by $15,000,000
B) Profits would decrease by $5,000,000
C) Profits would increase by $1,000,000
D) Profits would increase by $5,000,000

Question 22

The Nightingale Corp. makes and sells 200,000 chairs each year. The total fixed costs are $10,000,000. Its variable costs are: labor of $60 per chair; direct materials of $200 per chair; and variable overhead of $40 per chair. It normally sells its chairs at $500 per chair. Assuming that it does not have a capacity problem, what would be the effect on its profits if it accepted a special order to make an additional 100,000 chairs for $310 each?

A) Profits would decrease by $4,000,000
B) Profits would be unaffected
C) Profits would increase by $1,000,000
D) Profits would increase by $4,000,000

Question 23

Which types of costs are typically not "avoidable" costs in a decision to accept a special order to make 10,000 units of product in a factory?

A) Opportunity costs of not filling some regular orders, due to capacity constraints
B) Outlay costs for materials for the special order
C) Past costs for buying the land where the factory is located
D) Outlay costs for variable overhead related to the extra 10,000 units

Question 24

The Specialty T-shirt Company is now operating at capacity. It is considering taking in a special order to make 5,000 "Spring Break" T-shirts, which it can sell at $30 each. If it makes these shirts, it will have to make 5,000 fewer regular T-shirts, which sell at $10 each. The reduction in revenue due to making fewer regular t-shirts is an example of

A) Opportunity cost
B) Sunk cost
C) Outlay cost
D) Irrelevant cost

Question 25

The Martin Car Company is considering whether to continue to make the tires for its cars, or to buy tires from Swift Corp. Which of the following would be considered a "sunk cost" with regard to this decision?

A) The cost per unit it would pay to buy tires from Swift Corp
B) The costs it had incurred two years ago to design its own tires
C) The variable labor costs it incurs in making its own tires
D) The labor costs it incurs in making its own tires

Question 26

Allen Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 10,000 units in a day, at a cost of $80,000, and its low production was 3,000 units, at a cost of $38,000. The equation that best describes this relation is

A) Cost = $10,000 + $6 × Volume
B) Cost = $7 × Volume
C) Cost = $20,000 + $6 × Volume
D) Cost = $38,000 + $6 × Volume

Question 27

The method of estimating cost relationships that finds the best statistical relation between cost and one or more independent variables is called

A) High-low estimation
B) Examination of scatter diagrams
C) Correlation analysis
D) Regression analysis

Question 28

A graph with the amount of some cost driver on the "x" axis and the cost of production on the "y" axis that is a straight horizontal, with $5,000 of costs at all levels of production, including zero production, would indicate which type of cost relationship?

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable costs
D) Step costs

Question 29

The IMA's term to describe a situation where one resource can be substituted for another in production, without affecting the costs of the other resources used in production of the outputs, is

A) Traceability
B) Interchangeability
C) Responsiveness
D) Avoidability

Question 30

The IMA's term for the correlation between a particular managerial objective's output quantity and the input quantities required to produce that output is

A) Divisibility
B) Traceability
C) Homogeneity
D) Responsiveness

Question 31

The word that refers to an attribute of any two or more resources that can be substituted without affecting the costs of the other resources that are required to carry out the activities to which these resources are devoted is

A) Responsiveness
B) Avoidability
C) Interchangeability
D) Divisibility

Question 32

The word that refers to a characteristic of an input that allows for the input (and its costs) to be eliminated as a result of a decision is

A) Avoidability
B) Traceability
C) Interdependence
D) Homogeneity

Question 33

"A monetary measure of consuming a resource or its output to achieve a specific managerial objective or making a resource or its output available and not using it" is a definition of which of the following terms?

A) Capacity
B) Interdependence
C) Cost
D) Avoidability

Question 34

The method of evaluating long-term investment decisions that involves dividing the average earnings from the investment by the amount of the investment is called the

A) Payback method
B) Internal rate of return method
C) Accounting rate of return method
D) Net present value method

Question 35

The method of evaluating long-term investment decisions that involves computing the present value of the future inflows, and subtracting the cost of the investment, is called the

A) Payback method
B) Internal rate of return method
C) Accounting rate of return method
D) Net present value method

Question 36

The method of evaluating long-term investment decisions that involves computing the interest rate at which the present value of future inflows exactly equals the cost of making the investment is called the

A) Payback method
B) Internal rate of return method
C) Accounting rate of return method
D) Net present value method

Question 37

Rochester Company makes a product called Z3 as part of its manufacturing process.The variable costs of making Z3 are as follows:
Direct materials $8
Direct labor $12
Variable overhead $20
The Toronto Corp. has offered to sell 10,000 units of Z3 to Rochester at a price of $40 per unit. If Rochester agrees to this deal, Rochester will also be able to reduce its fixed costs by $50,000. Rochester should:

A) Make Z3: The savings are $50,000.
B) Make Z3: The savings are $100,000.
C) Buy Z3: The savings are $100,000.
D) Buy Z3: The savings are $50,000.
E) There is no difference in profits between making or buying Z3.

Question 38

An outlay cost is not relevant if it

A) Does not differ among alternatives
B) Is under $10,000 or less than 1% of sales
C) Is not an opportunity cost
D) Is not a cash outlay

Question 39

Relevant costs are best described as

A) Future costs that differ between alternatives
B) Opportunity costs
C) Out of pocket costs
D) Future costs

Question 40

A manager is trying to model the costs of producing shirts. The company has two different models of machines that are used for sewing the shirts together. The manager needs to know if these two types of machines should be considered the same, or different, when computing the amount of labor needed to make the shirts. The concept involved here is best described as

A) Variability
B) Capacity
C) Interchangeability
D) Interdependence

Question 41

The Long Company pays its workers differently, depending on how long they have been employed. However, skill levels are similar for all the workers. A manager is trying to decide whether to consider all workers the same, and to use an average wage rate for purposes of a cost model. The concept involved here is best described as

A) Homogeneity
B) Interdependence
C) Responsiveness
D) Traceability

Question 42

A graph with the amount of some cost driver on the "x" axis and the cost of production on the "y" axis that is a straight line, with an upward slope, starting with $5,000 of costs at zero levels of production, would indicate which type of cost relationship?

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable costs
D) Step costs

Question 43

A graph with the amount of some cost driver on the "x" axis and the cost of production on the "y" axis that is a straight line, with an upward slope, starting at the origin, would indicate which type of cost relationship?

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable costs
D) Step costs

Question 44

The type of cost relationship that exists when costs remain the same at certain levels of output, and then jump to higher levels when the level of a cost driver increases past certain points, is

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable cost relationship
D) Step cost relationship

Question 45

The type of cost relationship that exists when costs include both a fixed portion and a portion that varies in a straight-line manner with the level of a cost driver (within some relevant range of output) is:

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable cost relationship
D) Step cost relationship

Question 46

The type of cost relationship that exists when costs vary in a straight-line manner with the level of a cost driver (within some relevant range of output) is

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable cost relationship
D) Step cost relationship

Question 47

The type of cost relationship that exists when costs do not vary, regardless of the level of a cost driver (within some relevant range of output), is

A) Fixed responsiveness
B) Proportional responsiveness
C) Semi-variable cost relationship
D) Step cost relationship

Question 48

A company is considering opening a new factory to produce a new product. It would take the best workers from its current factory in order to start the new one. The impact of starting the new factory on the productivity of workers at the old factory is an example of the concept of

A) Homogeneity
B) Divisibility
C) Interdependence
D) Interchangeability

Question 49

A company currently produces both regular and deluxe models of a particular product. The deluxe model requires the company to buy special metal trim for decoration. If the company stops producing the deluxe model, it will no longer need to buy the metal trim. In considering whether to stop producing the deluxe model, the trim is best characterized as

A) A capacity cost
B) An avoidable cost
C) An interchangeable cost
D) A fixed cost

Question 50

Every car that Volkswagen sells has four wheels. The relation between the number of wheels that Volkswagen must buy and the number of cars it sells is an example of the concept of

A) Interchangeability
B) Capacity
C) Responsiveness
D) Interdependence

Question 51

When a law firm sends bills to its clients, it is able to list on its bills the amounts of hours worked by each particular lawyer on that case, and the billing rates of these lawyers. This ability to associate the particular lawyers' work with the bill is an example of

A) Traceability
B) Homogeneity
C) Divisibility
D) Avoidability

Question 52

A factory manager is not sure how to associate the fixed value of the real estate taxes for the factory with the changes in the amounts of a particular product produced during the year. The concept most relevant to this problem is

A) Interchangeability
B) Homogeneity
C) Variability
D) Interdependence

Question 53

Which of the following statements about sunk costs is true?

A) Sunk costs do not differ between decision alternatives.
B) Sunk costs are the results of past decisions.
C) Sunk costs are never relevant to decisions, except for tax considerations.
D) All of the above

Question 54

The method of evaluating long-term capital investments that expresses the average future increased profits as a percentage of the initial investment is the

A) Payback method
B) Net present value method
C) Internal rate of return method
D) Accounting rate of return method

Question 55

A likely advantage of a participatory budget process (compared to a top-down budget process) is

A) Speed
B) Avoiding budgetary slack
C) Better acceptance of budget targets by lower-level managers
D) Avoiding conflict between lower-level managers in the setting of targets

Question 56

The budgeting approach that focuses on relating levels of particular inputs to expected levels of production is best described as

A) The participatory approach
B) The incremental approach
C) The zero-based approach
D) The input-output approach

Question 57

The budgeting approach that forces management to justify all spending in an area, and does not assume that prior budgets should be followed, is best described as

A) The incremental approach
B) The zero-based approach
C) The input-output approach
D) The top-down approach

Question 58

The budgeting approach that focuses on what is likely to change during the coming year is best described as

A) The incremental approach
B) The zero-based approach
C) The input-output approach
D) The Du Pont approach

Question 59

Budgets help companies with which of the following?

A) Planning
B) Communicating objectives
C) Coordinating activities
D) All of the above

Question 60

Ralph Corp. is considering whether to invest $10 million in the jam business or in the peanut butter business. If Ralph invests in jam, it will receive inflows for six different years of $2.5 million each. If it invests in peanut butter, it will receive inflows of $3 million each in years 1, 2, and 3, and $1 million each in years 4, 5, and 6. Which method of evaluating investments will consider the two different investment possibilities to be equally attractive?

A) Net present value
B) Internal rate of return
C) Accounting rate of return
D) Payback period

Question 61

Jackie Corp. is considering investing $10 million in a project. It expects to receive net inflows for the project as follows: $3 million each in years 1 and 2; $2 million each in years 3 and 4; and $1 million each in years 5, 6, and 7. The payback period for this project is

A) 7 years
B) 2 years
C) 4 years
D) 6 years

Question 62

Tony Corp. plans to invest $1 million in a project. It expects to sell the project at the end of three years, for proceeds equal to approximately $1,158,000. Which of the following is closest to the internal rate of return?

A) 0.01
B) 0.05
C) 0.1
D) 0.116

Question 63

The Gregor Corp. is considering making an investment of $100 million. It expects that at the end of two years, it will sell the investment for $121 million. There will be no other inflows or outflows. The internal rate of return on this investment would be

A) $21 million
B) $10.5 million per year
C) 0.21
D) 0.1

Question 64

The Neils Corp. is considering making an investment in a project of $10,000,000. It expects to receive six payments of $2,500,000 each. Its discount rate is 6%. A table shows that the present value of an annuity of six payments of $1 each, at 6%, has a value of 4.91732. The net present value of this investment opportunity is approximately

A) Zero
B) 2293300
C) 5000000
D) 12293500

Question 65

The Gideon Corp. is considering making an investment in a project of $1,000,000. It expects to receive five payments of $300,000 each. Its discount rate is 8%. A table shows that the present value of an annuity of five payments of $1 each, at 8%, has a value of 4.1002. The net present value of this investment opportunity is approximately

A) Zero
B) 230600
C) 500000
D) 1230600

Question 66

A likely advantage of a top-down budgetary process (compared to a participatory budget process) is
(A) Better utilization of information known by lower-level managers
(B) Better acceptance of the goals by lower-level managers
(C) Lower budgetary slack
(D) Lower, more realistic and achievable production goals

Question 67

Factors that may affect the appropriate discount rate to use for determining the net present value of a capital investment project include

A) The riskiness of the investment
B) Expectations of inflation
C) Market rates of interest
D) All of the above

Question 68

The payback period method of evaluating capital investments explicitly considers the time value of money.

Question 69

In general, when fixed operating costs become a larger percentage of a company's operating costs, operating leverage increases.

Question 70

One implication of cost-volume-profit analysis is that companies with higher per-unit contribution margins will have higher break-even points.

Question 71

One implication of cost-volume-profit analysis is that companies with lower fixed costs have lower break-even points.

Question 72

One implication of cost-volume-profit analysis is that, when companies have significant fixed costs, total profits will always change proportionately with levels of output.

Question 73

One assumption of "cost-volume-profit" analysis is that costs are either fixed or proportional within some relevant range of production.

Question 74

The level of production at which costs exactly equal revenues is called the "break-even point."

Question 75

If the Henry Corp. produced 4,000,000 units this year, at a variable cost of $4 per unit and with fixed costs of $1,000,000, and sold all 4,000,000 items at $5 each, its total contribution margin for the year would equal $3,000,000.

Question 76

If the Gu Corp. produced 3,000,000 units this year, at a variable cost of $3 per unit and with fixed costs of $1,000,000, and sold all 3,000,000 items at $5 each, its total contribution margin for the year would equal $6,000,000.

Question 77

The "unit contribution margin" equals the selling price per unit minus the per-unit variable costs.

Question 78

The high-low estimation method of determining costs works well, even if the low production day was one that was affected by non-typical events.

Question 79

One potential problem in using regression analysis to find the relation between inputs and costs is that extreme observations can produce misleading regression results.

Question 80

In general, when a company has high operating leverage, and its sales increase, profits increase proportionally faster than sales.