Deck 14: Differential Analysis,profitability Analysis and Capital Budgeting

Question 1

The time value of money concept is given consideration in long-range investment decisions by:

A)Investing only in short term projects
B)Assigning greater value to more immediate cash flows
C)Assuming equal annual cash flow patterns
D)Using the payback method and at least one other method to make an evaluation

Answer 1

B

Question 2

Figures for Lakes Company are: $$\begin{array} { l r r } & \text { Product A } & \text { Product B } \\\text { Selling price per unit } & \$ 44 & \$ 52 \\\text { Variable cost per unit } & \underline { 36 } & \underline { 28 } \\\text { Contribution margin } & \$ \underline { 8 } & \$ \underline { 24 }\end{array}$$ It requires one labour hour to produce one unit of Product A and four labour hours to produce one unit of Product B.Assume overall demand is greater than the company's capacity to produce.If labour is the constraining factor the company should concentrate production on:

A)Product B,since it has the highest contribution margin per unit
B)Product B,since it has the highest price
C)Product A,since it has the highest contribution margin per labour hour
D)Product B,since it has the lowest costs

Answer 2

Product A,since it has the highest contribution margin per labour hour

Question 3

Top managers of Arctic Cruises are alarmed at the firm's latest income statement which shows a continuing decline in profits.In approaching this situation what is the first step management should take?

A)Make key personnel changes in the marketing department
B)Do a better job of scheduling entertainment on the ships
C)Train the ships employees in more courteous behaviour to customers
D)Define the problem with an emphasis on the objective to be accomplished

Answer 3

D

Question 4

Hot Chocolate Manufacturing Company provides the following information.
$\begin{array} { l c } \text { Sales } & \$ 100,000 \\\text { Operating profit } & 9,000 \\\text { Average operating assets } & 60,000 \\\text { Shareholders' equity } & 25,000 \\\text { Minimum required rate of return } & 10 \%\end{array}$
Calculate the return on investment.

A)22%
B)12%
C)23%
D)15%

Question 5

Assume the total manufacturing costs are $9000 and that two products result.Information about these two products is: $$\begin{array} { c c c } \text { Product } & \text { Quantity } & \text { Net sales value } \\\text { A } & 6000 & \$ 7000 \\\mathrm {~B} & 4000 & 3000\end{array}$$ For inventory costing purposes what is the amount of joint costs that should be assigned to Product A on a per unit basis?

A)$0.75
B)$0.90
C)$1.00
D)$1.05

Question 6

What amount must be deposited today at 6% to grow to $900 in three years?

A)$405.70
B)$755.64
C)$817.22
D)$456.79

Question 7

A cost which differs between alternative courses of action is a:

A)Relevant cost
B)Sunk cost
C)Controllable cost
D)Non-joint cost

Question 8

A sunk cost is:

A)A cost which may be saved by not adopting an alternative
B)A cost that cannot be changed and is therefore not relevant to decision making
C)A potential benefit forgone
D)A fixed cost

Question 9

The information below is provided by the Talbot Cleaning Supply Company:
$\begin{array} { l r } \text { Sales } & \$ 200,000 \\\text { Operating profit } & 14,000 \\\text { Average operating assets } & 80,000 \\\text { Equity } & 50,000 \\\text { Minimum required rate of return } & 12 \%\end{array}$
Calculate residual profit.

A)$8,000
B)$4,400
C)$5,000
D)$4,000

Question 10

The decision to process a joint product further is influenced by:

A)The amount of fixed overhead which has been absorbed by the product
B)The amount of costs already incurred for the product
C)The costs of further processing
D)Common costs allocated to the product

Question 11

Which of these is not relevant in the evaluation of a make-or-buy decision?

A)Quality control
B)Alternative uses of the unused capacity c.Unavoidable costs
D)Potential adverse effects on business relationships

Question 12

If $100 is invested at 6%,which calculation will provide the answer to how much will it grow to at the end of three years?

A)$100 x 2.6730
B)$100 / 0.8396
C)$100 x 0.9434 x 3
D)$100 / 2.6730)x 3

Question 13

Mabelle Lighting reports the following data from this year's master budget: $$\begin{array} { l c c } & \text { Per Unit } & \text { Total } \\\text { Variable manufacturing cost } & \$ 12 & \\\text { Fixed manufacturing cost } & \$ 3 & \$ 24000 \\\text { Fixed selling and administrative expense } & \$ 1 & \$ 8000\end{array}$$ Mabelle's capacity is 10 000 units per year,and the normal selling price is $20 per unit.A one-time-only order for 1000 units has been received at a special price of $17 per unit.The order would not disturb regular business.If the order is accepted,overall profit will increase by:

A)$1000
B)$2000
C)$3000
D)$5000

Question 14

How does depreciation affect net cash flows?

A)Reduces cash inflows
B)Increases cash outflows
C)Reduces taxation payable
D)Increases taxation payable

Question 15

The point in the production process at which joint products become separate products is called the:

A)Constraint point
B)Split-off point
C)Differential point
D)Acceptance point

Question 16

Dripping Tap Co currently has idle plant capacity and wishes to make as large a profit as possible.It could use some of its facilities to produce 10 000 units of a new product that could be sold through its existing sales network.The new product would have the following $$\begin{array} { l c } \text { 1. estimated costs: } & \text { Per unit } \\\text { Materials } & \$ 8 \\\text { Labour } & 12 \\\text { Variable factory overhead } & 5 \\\text { Variable selling \& administrative costs } & 1\end{array}$$ Assume the fixed factory overhead for the plant is $10 000 per month and the fixed selling and administrative costs are $2000 per month.What is the minimum price that the firm could charge for this product without reducing overall profits?

A)$20
B)$25
C)$26
D)$60

Question 17

Which of these is not a reason why capital budgeting decisions must be carefully considered:

A)They involve large sums of money
B)Resources are committed for long periods
C)Cash flows must be discounted
D)Because they are long-term there is greater risk that external conditions may alter

Question 18

Return on investment equals:

A)Profit margin x return on equity
B)Asset turnover x residual profit
C)Selling price x cost of investment
D)Profit margin x asset turnover

Question 19

Chemco produces a number of joint products.At the split-off point there are 100 units of A,400 units of B and 500 units of c.Total joint costs are $1000.Other information,per unit,is as follows:
$\begin{array}{lrrr}&A&B&C\\&\$&\$&\$\\\text { Selling price at split-off point } & 6 & 8 & 7 \\\text { Selling price if processed further } & 12 & 11 & 10 \\\text { Cost to process further } & 4 & 4 & 3\end{array}$
Which products,if any,should be processed further?

A)B and C
B)A
C)A and B
D)A,B and C

Question 20

The difference in total costs between two alternatives is referred to as the:

A)Direct cost
B)Incremental cost
C)Opportunity cost
D)Sunk cost

Question 21

The cost of capital is:

A)The cost of borrowing from a bank
B)The cost involved in issuing new shares
C)The rate of interest on government bonds
D)The weighted average of the cost of obtaining funds in the form of debt and/or equity

Question 22

When e________ capacity exists a special order may be attractive even though a lower than normal selling price is involved.

Question 23

Which of these is not an advantage of the payback method of capital budgeting?

A)It can be used to separate investments when other methods show similar returns
B)A quick payback period reduces the risk of the investment
C)The sooner cash is recovered the sooner it can be reinvested d.It looks at returns over the whole life of the investment

Question 24

Select the incorrect statement concerning the return on average investment method of capital budgeting.

A)It measures profit in the same way as the income statement
B)It is easy to use
C)It distinguishes between investments requiring an immediate payment of cash and those where payment is in the future
D)It considers profits over the useful life of the investment

Question 25

Aston Advertising is considering the purchase of a special purpose machine for $22,000.It is expected to have a useful life of ten years with no salvage value.The firm's accountant estimates savings in cash operating costs of $5,000 per year.Compute the pay-back period.

A)4.6 years
B)4.4 years
C)6.2 years
D)5.6 years

Question 26

Hot Rocks Corporation estimates that it can save $2,800 a year in cash operating costs for the next ten years if it buys a special purpose machine at a cost of $11,000.No residual value is expected.The firm's minimum desired rate of return is 12%.Compute the net present value.

A)$6,289.66
B)$4,314.00
C)$2,850.29
D)$4,820.56

Question 27

A piece of equipment costing $108,000 is expected to generate $16,000 annually in cash inflows during its life of 6 years.The payback in years is:

A)6.25 years
B)6.75 years
C)9.60 years
D)2.34 years

Question 28

An increase in the discount rate:

A)Will reduce present values
B)Will have no effect on net present value
C)Will increase present values
D)May either increase or decrease present values,depending on the state of the economy

Question 29

O____________________ costs are the potential benefits forgone by rejecting one alternative and accepting another.

Question 30

Anton Wine Company is considering a project with annual after-tax cash flows of $4,000 per year for 5 years.The company's cost of capital is 5%.Using the net present value method,what is the maximum amount that the company should invest?

A)$16,316
B)$14,556
C)$17,318
D)$13,434

Question 31

Return on investment is a function of profit margin and a_______ turnover.

Question 32

Porter Trucking is considering purchasing a new asset with an initial cost of $50 000 and an estimated annual income of $19 000.Cash operating expenses are expected to be $10 000 per year.Straight-line depreciation will be used over the five-year life of the asset and salvage value of $10 000 is to be considered in computing depreciation.Assuming that the income tax rate is 40%,what is the amount of annual tax savings from depreciation? Assume the straight-line depreciation method is used for both accounting and tax purposes.

A)$3200
B)$4000
C)$4800
D)$6000

Question 33

Milam Company requires a 12% return on all investments.How much will the company be willing to pay for machine A if the machine will pay $8000 per year for 10 years?

A)$2576
B)$8000
C)$45 202
D)$80 000

Question 34

Equipment A costing $100,000 is expected to generate $15,000 annually in cash inflows during its life of 7 years.Equipment B costing $150,000 is expected to generate $22,000 annually in cash inflows during its life of 8 years.Equipment C costing $80,000 is expected to generate $16,000 annually in cash inflows during its life of 6 years Rank the three investments in terms of payback period.

A)A1,B2,C3
B)B1,A2,C3
C)C1,A2,B3
D)C1,B2,A3

Question 35

The most common method of allocating joint product costs is on the basis of the products' relative s________ value.

Question 36

The statement concerning the internal rate of return method of capital budgeting that is true is:

A)The interest rate that will discount future cash flows so that their present value is exactly equal to the cost of the investment is the cost of capital
B)When the internal rate of return method is employed a direct relationship will exist between the interest rate chosen and the present value of future cash flows.
C)When the net present value is equal to zero,the cost of capital discount rate)and the internal rate of return are equal.
D)The internal rate of return is the discount rate that will produce a positive net present value for the investment

Question 37

The A Justed Company is evaluating an investment proposal using the payback method.Cash inflows are expected to be $3000 in year 1,$5000 in year 2,$4000 in year 3,and $6000 in year 4.The initial investment required is $6000.Assuming even cash inflows within each year what is the payback period?

A)1.33 years
B)1.6 years
C)2 years
D)3 years

Question 38

Which of these is not true for the payback method of investment analysis?

A)It does not consider the time value of money
B)It does not consider project profitability
C)It is relatively simple to calculate
D)The longer the payback period the better

Question 39

The point in the production process at which the joint products become separate products is called the s__________-______ point.

Question 40

Data for Federated Products are: $$\begin{array} { l r } \text { Investment in new machinery } & \$ 19000 \\\text { Net annual cash inflows } & 2800 \\\text { Salvage value of the new machinery } & 6000 \\\text { Life of the new machinery } & 10 \text { years }\end{array}$$ Compute the net present value of the machine assuming the cost of capital is 8% ignore taxes.

A)$5134
B)$212)
C)$212
D)$2567

Question 41

The ___________ period is the length of time required to recover the cost of an investment from the net cash flows it generates.

Question 42

The internal rate of return method compares the discount rate that produces a net present value of z_____ with the required rate of return for an investment.

Question 43

C___________ b___________ is the process used to evaluate capital expenditure in a rational and systemic way.

Question 44

The net present value i_______ is calculated as the present value of net cash inflows divided by the cost of the investment.

Question 45

N_______ p__________ value is the difference between the discounted expected future net cash flows and the cost of the investment.

Question 46

C________ of c___________ is the firm's average cost of obtaining funds in the form of debt and/or equity.