Question 1

A company is considering two alternatives: Alternative X (Revenue: $$100,000, Variable Costs: 50$$,000, Fixed Costs: $$20,000) and Alternative Y (Revenue: 120$$,000, Variable Costs: $$50,000, Fixed Costs: 25$$,000). Which of the following are relevant in choosing between the two alternatives?

Accepted Answer

Revenues, variable costs and fixed costs.

Question 2

When a company wants to maximize profits while working under a constraint, it should focus on the products with the highest:

Accepted Answer

contribution margin per unit of constrained resource.

Question 3

Micro Corp produces and sells 20,000 units of Product X per month. Sales are $$450,000, variable expenses are 380$$,000, traceable fixed expenses are $$80,000, and common fixed expenses allocated to Product X are 20$$,000. If all traceable fixed expenses could be avoided by discontinuing Product X, but none of the common fixed expenses are avoidable, what is the monthly financial advantage (disadvantage) of eliminating the division?

Accepted Answer

$10,000

Question 4

Dinno Corp makes three products (X, Y, Z) with a bottleneck in cutting machine time (700 hours/month). Data per unit: X (Sales price: $$20, Variable cost: 8$$, Machine hours: 1.5), Y (Sales price: $$16, Variable cost: 10$$, Machine hours: 0.5), Z (Sales price: $$25, Variable cost: 20$$, Machine hours: 1.0). In what order should Dinno focus on the products to maximize profits under the constraint?

Accepted Answer

Y, X, Z

Question 5

Jordan Corporation produces Products X and Y from a joint process (joint costs: $$200,000). At split-off: X (2,000 units, 38/$$unit), Y (2,000 units, $$52/unit). If processed further: X (55/$$unit, $$20,000 extra cost), Y (70/$$unit, $38,000 extra cost). Which products should be processed further?

Accepted Answer

Product X: Yes; Product Y: No

Question 6

Cook Corporation has two divisions, East and West. If the West Division (Net operating loss: $$75,000, traceable fixed costs: 180$$,000, common corporate costs: $170,000) is eliminated and its traceable fixed costs are avoided, what would be the overall company net operating income (loss)?

Accepted Answer

($60,000)

Question 7

Gallerani Corporation receives a special order for 6,000 units of product A90 at $$21.20 each. The unit product cost is 16.20 ($$including $$3.60 fixed overhead). The special order increases variable costs by 4.20 $$per unit and requires a $21,000 investment in molds (no salvage value). Fixed overhead is unaffected. What is the annual financial advantage (disadvantage) of accepting the order?

Accepted Answer

($18,600)

Question 8

Draper Corporation is considering dropping its Doombug toy (Sales: $$150,000, Variable expenses: 120$$,000, Fixed expenses: $$40,000, Net loss: 10$$,000). If dropped, $$8,000 of fixed costs are avoidable and other toys would increase contribution margin by 16$$,000. What is the financial advantage (disadvantage) from discontinuing Doombugs?

Accepted Answer

$14,000

Question 9

Silver Corporation makes and sells an item at a volume of 8,000 units/month (capacity). Unit costs: Direct materials $$4, Direct labor 5$$, Variable overhead $$2, Fixed overhead 8$$, Variable S&A $$1, Fixed S&A 6. $$Present sales: 7,000 units/month. A foreign customer offers to buy 1,000 units at $20 each. Fixed costs are unaffected. What is the financial advantage (disadvantage) of accepting the order?

Accepted Answer

$1,000

Question 10

Elly Industries makes 30,000 units of part MR24 monthly (variable cost: $$11/unit, fixed cost: 150$$,000/month). If purchased, 40% of fixed costs would remain. What is the maximum supplier price per unit at which Elly would be indifferent between making and buying?

Accepted Answer

$13

Question 11

Which of the following is true when using the net present value method to evaluate investments?

Accepted Answer

An assumption of the net present value method is that cash flows can be immediately reinvested at a rate of return equal to the discount rate used to evaluate the project.

Question 12

The average rate of return that a company pays its long-term creditors and shareholders for the use of funds is referred to as the company’s:

Accepted Answer

cost of capital.

Question 13

Lee Corporation is considering a project requiring a $$400,000 investment, lasting 8 years, with annual net operating income of 140$$,000 (including $$43,000 depreciation). Salvage value is 56$$,000. What is the payback period?

Accepted Answer

2.9 years

Question 14

McDougal Products considers equipment costing $$365,000, 10-year life, 65$$,000 salvage value. Annual revenues: $$210,000; expenses: salaries 100$$,000, depreciation $$30,000, maintenance 20$$,000. What is the payback period?

Accepted Answer

4.1 years

Question 15

Pool Corp evaluates a 5-year project: Initial investment $$500,000, annual net cash inflow 140$$,000, salvage value $$14,000, working capital required 50$$,000 (recovered at end). Discount rate is 12%. Using present value factors (5 years, 12%: PV of annuity = 3.605, PV of $1 = 0.567), what is the net present value?

Accepted Answer

($9,012)

Question 16

Croce, Inc. is considering equipment with a 7-year life. Discount rate is 8%. The net present value (excluding salvage value) is $$-515,967. What salvage value (rounded to nearest dollar) would make the investment financially attractive? (7-year PV factor at 8%: 0.583)$$

Accepted Answer

$41,277

Question 17

Joetz Corporation considers an investment: $$30,000 equipment, 6$$,000 annual cash inflows for 15 years, no salvage value, 10% required return. PV of annuity for 15 years at 10% is 7.606. What is the net present value?

Accepted Answer

$15,636

Question 18

Using the same data as the previous question, what is the internal rate of return (IRR) for the investment? (PV of annuity for 15 years: 17% = 5.324, 18% = 5.092, 19% = 4.876, 20% = 4.675)

Accepted Answer

19%

Question 19

The profitability index and the internal rate of return:

Accepted Answer

will sometimes result in different preference rankings for investment projects.

Question 20

Perkins Corporation is considering four investment proposals:
A: $$80,000 investment, 96$$,000 PV of cash flows
B: $$100,000 investment, 150$$,000 PV
C: $$60,000 investment, 84$$,000 PV
D: $$75,000 investment, 120$$,000 PV
Rank the projects from most to least profitable using the profitability index.

Accepted Answer

B, D, C, A

Business Statistics Study Guide: Relevant Cost Analysis, Profit Maximization, Capital Budgeting, and Investment Evaluation

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