Exam: 061684RR - The Impact of Management Decisions and Other Topics
Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may
1. Kava Inc. manufactures industrial components. One of its products, which is used in the construction of
industrial air conditioners, is known as K65. Data concerning this product are given below:
Per Unit
Selling price $180
Direct materials $29
Direct labor $5
Variable manufacturing overhead $4
Fixed manufacturing overhead $21
Variable selling expense $2
Fixed selling and administrative expense $17
The above per unit data are based on annual production of 4,000 units of the component. Direct labor can
be considered to be a variable cost. (Source: CMA, adapted)
The company has received a special, one-time-only order for 500 units of component K65. There would
be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed
selling and administrative expenses of the company wouldn't be affected by the order. Assuming that Kava
has excess capacity and can fill the order without cutting back on the production of any product, what is
the minimum price per unit on the special order below which the company shouldn't go?
A. $38
B. $59
C. $180
D. $78
2. The Clemson Company reported the following results last year for the manufacture and sale of one of its
products known as a Tam.
Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The
operating results reported above for last year are expected to continue in the foreseeable future if the
Sales (6,500 Tams at $130 each) $845,000
Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net operating loss $(55,000)
product isn't dropped. The fixed manufacturing overhead represents the costs of production facilities and
equipment that the Tam product shares with other products produced by Clemson. If the Tam product
were dropped, there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other
product lines. If the company discontinues the Tam product line, the change in annual operating income (or
loss) should be a
A. $70,000 increase.
B. $55,000 decrease.
C. $90,000 decrease.
D. $65,000 decrease.
3. A weakness of the internal rate of return method for screening investment projects is that it
A. doesn't consider the time value of money.
B. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
C. doesn't take into account all of the cash flows from a project.
D. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.
4. A company's current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written off, this would
A. increase the acid-test ratio.
B. increase net working capital.
C. decrease the acid-test ratio.
D. decrease the current ratio.
Financial statements for Larkins Company appear below:
5. Larkins Company's return on common stockholders' equity for Year 2 was closest to:
A. 25.9%.
B. 26.9%.
C. 23.5%.
D. 24.4%.
6. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?
A. -$20,900
B. $11,900
C. -$1,400
D. -$7,600
7. Centerville Company's debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are $170,000, and working capital is $80,000. Centerville's long-term liabilities must be
A. $30,000.
B. $80,000.
C. $90,000.
D. $120,000.
8. The net present value method assumes that the project's cash flows are reinvested at the
A. simple rate of return.
B. payback rate of return.
C. discount rate used in the net present value calculation.
D. internal rate of return.
9. Brittman Corporation makes three products that use the current constraint-a particular type of machine.Data concerning those products appear below:
Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?
IP NI YD
Selling price per unit $183.57 $207.74 $348.15
Variable cost per unit $144.42 $155.04 $269.50
Minutes on the constraint 2.90 3.40 5.50
A. $39.15 per unit
B. $78.65 per unit
C. $15.50 per minute
D. $13.50 per minute
10. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
What would be the impact on the company's overall net operating income of buying part N19 from the outside supplier?
A. Net operating income would decline by $21,900 per year.
B. Net operating income would decline by $10,700 per year.
C. Net operating income would decline by $60,700 per year.
D. Net operating income would increase by $25,000 per year.
11. VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company's acid-test ratio would most likely
A. decrease.
B. increase.
C. be unchanged.
D. be impossible to determine without more information.
12. Larkins Company's earnings per share of common stock for Year 2 was closest to:
A. $7.21.
B. $25.00.
C. $17.50.
D. $16.83.
13. Products A, B, and C are produced from a single raw material input. The raw material costs $90,000,
from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period.
Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be
A. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B. processed further, since this will increase profits by $2,500 each period.
C. sold at the split-off point, since further processing will result in a loss of $2,500 each period.
D. processed further, since this will increase profits by $12,500 each period.
14. The net cash provided by (used by) investing activities for the year was
A. $92.
B. ($92).
C. ($77).
D. $77.
15. The net cash provided by (used by) operations for the year was
A. $52.
B. $117.
C. $112.
D. $30.
16. An increase in the market price of a company's common stock will immediately affect its
A. debt-to-equity ratio.
B. earnings per share of common stock.
C. dividend payout ratio.
D. dividend yield ratio.
17. Larkins Company's return on total assets for Year 2 was closest to:
A. 15.3%.
B. 17.0%.
C. 13.6%.
D. 16.0%.
Financial statements for Larkins Company appear below:
18. Larkins Company's book value per share at the end of Year 2 was closest to:
A. $23.33.
B. $10.00.
C. $76.67.
D. $70.00.
19. (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment:
_______ years.
Year Cash Inflows
1 $120,000
2 60,000
3 40,000
4 40,000
5 40,000
Total $300,000
Assuming that the cash inflows occur evenly over the year, the payback period for the investment is
A. 1.67
B. 4.91
C. 2.50
D. 0.75
End of exam
20. A project profitability index greater than zero for a project indicates that
A. the discount rate is less than the internal rate of return.
B. the project is unattractive and shouldn't be pursued.
C. the company should reevaluate its discount rate.
D. there has been a calculation error.
Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may
1. Kava Inc. manufactures industrial components. One of its products, which is used in the construction of
industrial air conditioners, is known as K65. Data concerning this product are given below:
Per Unit
Selling price $180
Direct materials $29
Direct labor $5
Variable manufacturing overhead $4
Fixed manufacturing overhead $21
Variable selling expense $2
Fixed selling and administrative expense $17
The above per unit data are based on annual production of 4,000 units of the component. Direct labor can
be considered to be a variable cost. (Source: CMA, adapted)
The company has received a special, one-time-only order for 500 units of component K65. There would
be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed
selling and administrative expenses of the company wouldn't be affected by the order. Assuming that Kava
has excess capacity and can fill the order without cutting back on the production of any product, what is
the minimum price per unit on the special order below which the company shouldn't go?
A. $38
B. $59
C. $180
D. $78
2. The Clemson Company reported the following results last year for the manufacture and sale of one of its
products known as a Tam.
Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The
operating results reported above for last year are expected to continue in the foreseeable future if the
Sales (6,500 Tams at $130 each) $845,000
Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net operating loss $(55,000)
product isn't dropped. The fixed manufacturing overhead represents the costs of production facilities and
equipment that the Tam product shares with other products produced by Clemson. If the Tam product
were dropped, there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other
product lines. If the company discontinues the Tam product line, the change in annual operating income (or
loss) should be a
A. $70,000 increase.
B. $55,000 decrease.
C. $90,000 decrease.
D. $65,000 decrease.
3. A weakness of the internal rate of return method for screening investment projects is that it
A. doesn't consider the time value of money.
B. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
C. doesn't take into account all of the cash flows from a project.
D. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.
4. A company's current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written off, this would
A. increase the acid-test ratio.
B. increase net working capital.
C. decrease the acid-test ratio.
D. decrease the current ratio.
Financial statements for Larkins Company appear below:
5. Larkins Company's return on common stockholders' equity for Year 2 was closest to:
A. 25.9%.
B. 26.9%.
C. 23.5%.
D. 24.4%.
6. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?
A. -$20,900
B. $11,900
C. -$1,400
D. -$7,600
7. Centerville Company's debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are $170,000, and working capital is $80,000. Centerville's long-term liabilities must be
A. $30,000.
B. $80,000.
C. $90,000.
D. $120,000.
8. The net present value method assumes that the project's cash flows are reinvested at the
A. simple rate of return.
B. payback rate of return.
C. discount rate used in the net present value calculation.
D. internal rate of return.
9. Brittman Corporation makes three products that use the current constraint-a particular type of machine.Data concerning those products appear below:
Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?
IP NI YD
Selling price per unit $183.57 $207.74 $348.15
Variable cost per unit $144.42 $155.04 $269.50
Minutes on the constraint 2.90 3.40 5.50
A. $39.15 per unit
B. $78.65 per unit
C. $15.50 per minute
D. $13.50 per minute
10. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
What would be the impact on the company's overall net operating income of buying part N19 from the outside supplier?
A. Net operating income would decline by $21,900 per year.
B. Net operating income would decline by $10,700 per year.
C. Net operating income would decline by $60,700 per year.
D. Net operating income would increase by $25,000 per year.
11. VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company's acid-test ratio would most likely
A. decrease.
B. increase.
C. be unchanged.
D. be impossible to determine without more information.
12. Larkins Company's earnings per share of common stock for Year 2 was closest to:
A. $7.21.
B. $25.00.
C. $17.50.
D. $16.83.
13. Products A, B, and C are produced from a single raw material input. The raw material costs $90,000,
from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period.
Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be
A. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B. processed further, since this will increase profits by $2,500 each period.
C. sold at the split-off point, since further processing will result in a loss of $2,500 each period.
D. processed further, since this will increase profits by $12,500 each period.
14. The net cash provided by (used by) investing activities for the year was
A. $92.
B. ($92).
C. ($77).
D. $77.
15. The net cash provided by (used by) operations for the year was
A. $52.
B. $117.
C. $112.
D. $30.
16. An increase in the market price of a company's common stock will immediately affect its
A. debt-to-equity ratio.
B. earnings per share of common stock.
C. dividend payout ratio.
D. dividend yield ratio.
17. Larkins Company's return on total assets for Year 2 was closest to:
A. 15.3%.
B. 17.0%.
C. 13.6%.
D. 16.0%.
Financial statements for Larkins Company appear below:
18. Larkins Company's book value per share at the end of Year 2 was closest to:
A. $23.33.
B. $10.00.
C. $76.67.
D. $70.00.
19. (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment:
_______ years.
Year Cash Inflows
1 $120,000
2 60,000
3 40,000
4 40,000
5 40,000
Total $300,000
Assuming that the cash inflows occur evenly over the year, the payback period for the investment is
A. 1.67
B. 4.91
C. 2.50
D. 0.75
End of exam
20. A project profitability index greater than zero for a project indicates that
A. the discount rate is less than the internal rate of return.
B. the project is unattractive and shouldn't be pursued.
C. the company should reevaluate its discount rate.
D. there has been a calculation error.
