accounting 2303 exam 4

If Z-Corp builds a pen that is in a very competitive market. They can only sell for $2 each. If they want a $1 desired profit, what does their cost need to be?

1 using target costing method

If we are looking at a machine with an incremental net operating income after all expenses of $10,000 and an initial investment of $50,000, what is the simple rate of return?

20%

Deciding to discontinue a product line will result in:

A possible change in contribution margin depending on which costs are avoidable due to the decision.

Constrained resources can be defined as:

A resource that is limited in quantity, time or space.

Question Farmer Jane is contemplating buying her seeds next year instead of processing them from her own production each year. She invested $15,000 in a dryer to dry seeds, and that piece of equipment has no resale value or use if she decides to purchase her seeds. This cost would be:

A sunk cost. It happened, and she can get it back, so it is not relevant to the decision to make or buy.

In a make or buy decision, direct labor and materials will:

Always be relevant to the decision, since they are directly related to the making of the product.

The fact that $10,000 now is worth more than $10,000 eight years from now is important because;

Capital budgeting typically involves projects that will last for many years, so the time value of money is crucial to decisions.

A request for a special order comes in, that would take 20% of your manufacturing time for the next three weeks. Your regular production is already taking 90% of the available manufacturing time. Should you consider the special order?

Consider the special order if they are willing to pay a premium price so that you can pay your staff overtime to produce it.

You have been tasked with reviewing adding on to your manufacturing facility to create space for an additional product line. What question should you ask yourself first?

Could we increase capacity, thus income, by expanding our manufacturing space?

ABC is looking at two pieces of equipment. Machine A costs $25,000 and has an annual net cash flow of $5,000 from $12,500 in sales. Machine B has a cost of $50,000 and will generate sales of $25,000 a year with an annual net cash flow of $10,000. Using the payback method, which machine should ABC invest in?

Either one will pay back in the same timeframe.

Your supervisor has brought you three capital project possibilities and has asked you to analyze them. Where would you start?

Evaluate each one to see if they meet your minimum company requirements for return on investment.

Different people and businesses will make different decisions based on their own needs. An opportunity cost may be:

Important to one person or business and not to another. Using space for employee fitness might be more important than income gained on an additional product line.

Sunk costs are always:

Irrelevant to future decisions as they happened, and there is nothing we can do to recoup the investment.

The costs and revenues that remain constant in all decision scenarios are:

Irrelevant, sunk or unavoidable costs.

Sometimes it can be tempting to exaggerate a proposal that is really important to you as a manager. The postaudit helps by:

Keeping managers accountable in their proposals since they know the outcomes will be reviewed

A $10,000 investment in equipment today needs to be evaluated from a time value of money perspective so you can:

Know how long it will take to get back your initial investment and at what interest rate.

You have reviewed two potential investment options and both look promising. Investment A shows more promise with the IRR, while investment B shows more promise with the NPV method. If you can only choose one, what will you do?

NPV should be chosen over IRR if they conflict, so choose B. NPV should be chosen over IRR if they conflict, so choose B.

Qualitative costs of decisions are:

Non-monetary costs such as time or health benefits derived.

Joint costs are the cost that will:

Occur no matter what you decide to do with your raw material. These costs get it to the point where it will be saleable.

Price takers must:

Price their products using the target costing method, since their product has many substitutes and the pricing is set by the market.

A final product would sell for $80 after an additional separate processing cost of $40. The intermediate product could be sold for $25. This product should be:

Processed further, since the final selling price plus the cost of further processing still creates a higher net profit than selling the intermediate product.

Even when looking at opportunity costs, we also need to keep in mind:

Relevant costs, since not all costs will come in to play when looking at missed opportunities.

The net profit or loss of a final product can be calculated:

Sales value after all processing-sales value at the split point-cost of further processing= net profit of the final product.

You are ¾ of the way to the airport in a cab to catch a flight. You get a text message that tells you your flight is cancelled and you won't be able to get a different flight until tomorrow. What should you do?

Tell the cab driver to turn around. The cost of the cab is now a sunk cost, since you don't need to go to the airport now.

Using your present value of an annuity in arrears table, compute the NPV for the following potential investment: Initial cost $5,000, life of equipment: 5 years, annual cash inflow: $1,500, salvage value:0, required rate of return 10%.

The NPV is positive, so this is a good investment.

A qualitative reason to eliminate a customer may be:

The customer annoys your front desk person with repeated phone calls, causing stress and tension for your front desk staff.

To use the IRR method, it is important to have the following information:

The initial cost of the investment, the useful life and the annual cost savings (net cash flow) and the minimum required rate of return for the project.

You are tasked with buying raw material for making shirts for Fancy T-Shirt Company. The vendors are offering 1 yard of fabric for $6 that will make one shirt with one hour of labor or 2 yards of fabric for $9 that will make 2 shirts with 3 hours of labor. What is your differential costs?

The price of the fabric and the cost of labor.

XYZ Corp has asked you to help them decide if they should add a product line. Looking at the space they have available for production, you note that they would need to discontinue one product to add another. What costs would be important for this decision?

The wages and benefits paid to employees, direct materials and labor for both the current and proposed product.

It can be cost effective to replace old equipment, even if new equipment is costly if:

There is an increase in efficiency and lower manufacturing costs that creates a good rate of return on the purchase.

XYZ Company just got a call for a large special order for their computer circuit boards.This company has requested a 20% discount since they will be ordering a large number at one time. The one issue is that they would like the circuit boards to be purple, rather than their typical green. This would require a special piece of equipment at a cost of $10,000 that may only be used once for this order. How should XYZ proceed?

They should evaluate their variable costs, space in their manufacturing facility and this additional fixed equipment cost and see if they will make a profit with the 20% discount.

Keeping a product line that is not profitable will:

Typically not a good decision, as many times, the saved costs will allow the business to develop other product lines or better use the space.

You have the opportunity to put $1,000 in an account at 5% guaranteed interest, or into an investment with the possibility of 20% return, but a high risk of losing part of your principal. What decision you make depends on:

Your level of risk aversion.

Deciding to discontinue a product line will result in:

a possible change in contribution margin depending on which costs are avoidable due to the decision

When making a decision to make or buy a component of our product. We will need to evaluate:

all the expenses of the company and determine which ones are relevant to the decision and which are not

Wages and supplies are typically _______ costs since they will change depending on the option we choose.

avoidable

Costs that will change or be eliminated depending on the decision we make are:

avoidable costs

When working on a decision between two options, only ______ matter in the analysis.

avoidable costs

You inherit $100,000 and are wondering what to do with the money. You decide to purchase a car with the entire $100,000! It is a great car, but it lost a little value when you drove it off the lot. What might have been a better way to use the money?

couldve have bought a house or invested it

Special order decisions are uniquely faceted. Some of the things to consider when contemplating a special order include:

do you have the time, resources, and manpower to complete a special order in a profitable way?

The time value of money is an important concept when planning capital budget expenditures because:

it is important from a cash flow perspective to know how long it will take for the initial investment to come back to your company and at what interest rate.

A differential cost is important because:

it is the cost that makes a difference between two choices

Mike's Bikes makes a bike that no one else in the marketplace can build. Due to this, Mike is able to use what type of pricing structure?

mike is a price maker and will use cross plus pricing because his product is unique

Your company purchased the latest and greatest machine a few years ago when you were considering adding a new product line. The product line flopped and you are sitting with this machine. What role does this machine play in the decision to add a new product to your line?

no role, it is a sunk cost

Farmer Jane is contemplating buying her seeds next year instead of processing them from her own production each year. She invested $15,000 in a dryer to dry seeds, and that piece of equipment has no resale value or use if she decides to purchase her seeds. This cost would be:

sunk cost

The internal rate of return method differs from the payback method because:

the IRR takes into account the time value of money

If you have the option of purchasing raw material for $8 per unit that requires one hour of labor, or raw material that costs $5 per unit but will require two hours of labor, what would your differential costs be?

the cost of materials and labor would both be part of the decision

The net present value method requires the following information:

the initial cost, life of project, annual cash flow, salvage value, and required rate of return

You are planning dinner with a group of friends. You are trying to decide whether to invite them all over for dinner you make at home, or taking them all to dinner at the corner bistro. What would be the avoidable costs if you make dinner at home?

the restaurant bill and cab ride to the restaurant

Non-monetary costs such as, ______can also be considered when making decisions.

time it takes or health benefits derived

Most businesses have one or more constrained resources. The best way to manage a constrained resource is:

use the constrained resource in the way that best improves profits