COST EXAM 2

Eiffel's Café bakes croissants that are sold to local restaurants and grocery stores in the Athens, Georgia area. When 730 croissants are baked, the average cost is $0.70. When 876 croissants are baked, the average cost is $0.65. What is the total cost when 660 croissants are baked?

$483.

What is the present value of $1 received five years from now (rounded to two decimal places) if the discount rate is 12%?

$0.57.

Chicken Company has a pre-tax net cash inflow of $1,200,000. The company can claim depreciation expense of $500,000 this year, and is subject to a combined income tax rate of 26%. What is the after-tax cash inflow for the year?

$1,018,000.

During a recent fiscal year, Creek Company reported income of $121,000, a contribution margin ratio of 20% and total contribution margin of $360,000. Total variable costs must have been:

$1,440,000

Music Corporation recorded sales of $2,235,245 for the most recent year. The company's breakeven sales point (in dollars) is $1,650,000, and its margin of safety ratio (MOS%) at the current sales level is 26%. What sales (in dollars) would be needed to increase the company's MOS% to 38%?

$2,661,290.

Shock Company manufactures computer monitors. The following is a summary of its basic cost and revenue data: Per UnitPercentSales price$ 480100Variable costs31265Unit contribution margin$ 16835 Assume that Shock Company is currently selling 600 computer monitors per month and monthly fixed costs are $80,000. If an $18,000 increase in the advertising budget would increase monthly sales by $60,000, the new level of operating income (πB) for Shock Company would be:

$23,800.

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures: Highest Lowest Cost per month: 38,000 30,000 Machine hours: 46,000 26,000 Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:

$235,200.

Genie Company can produce two types of lamps, the Enlightner and Foglighter. The data on the two lamp models are as follows: EnlightnerFoglighterSales volume in units500400Unit sales price$ 300$ 400Unit variable cost200240Unit contribution margin$ 100$ 160 It takes one machine hour to produce each product. Total fixed costs for the manufacture of both products are $90,000. Demand is high enough for either product to keep the plant operating at maximum capacity. Assuming that sales mix in terms of dollars remains constant, what is the breakeven point in dollars?

$244,737.

Hammer Company is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow: MonthMaintenance CostMachine HoursJanuary$ 4,200480February3,000320March3,600400April2,820300May4,350500June2,960310July3,030320August4,470520September4,260490October4,050470November3,300350December3,160340Sum$ 43,2004,800Average$ 3,600$ 400Average cost per hour$ 9.00a (intercept)$ 684.65b (coefficient)7.2884Standard error of the estimate34.469R-squared0.99724t-value for b60.105 At 400 hours of activity, Hammer management can be approximately two-thirds confident that the maintenance costs will be in the range of

$3,565.54 to $3,634.48.

Cotton Company produces and sells socks. Variable costs are budgeted at $4 per pair, and fixed costs for the year are expected to total $90,000. The selling price is expected to be $6 per pair. The sales dollars required to make an after-tax profit (πA) for Cotton Company of $15,000, given an income tax rate of 40%, are calculated to be:

$345,000.

Crown Company, which needs 10,000 units of a certain part to be used in its production cycle, can make or buy the part. If Crown buys the part from Utica Company, Crown could not use the released facilities in another manufacturing activity within the coming year. 60% of the fixed overhead applied will continue regardless of which decision option is chosen. The following per-unit cost information to make the part by Crown is available: Direct materials$ 6Direct labor24Variable overhead12Fixed overhead applied15 $ 57Cost to buy the part from Utica Company$ 53 In deciding whether to make or buy the part, Crown's total relevant cost to make the part would be:

$480,000.

When deciding whether to discontinue a segment of a business, managers should focus on:

The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.

Hammer Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Hammer's combined income tax rate, t, is 40%.Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars)? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.

$79,800.

No More Standing is a retailer of office chairs located in San Francisco, California. Due to increased market competition, the CFO of No More Standing has grown worried about the firm's upcoming income stream. The CFO asked you to use the company financial information provided below. Sales price$ 73.00Per-unit variable costs: Invoice cost40.45Sales commissions17.45Total per-unit variable costs$ 57.90Total annual fixed costs: Advertising$ 54,500Rent77,000Salaries225,000Total annual fixed costs$ 356,500 The annual breakeven point, in dollar sales, is

1,723,477

Plant Company is contemplating the purchase of a new piece of equipment for $45,000. Plant is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated accounting rate of return (ARR) on this project (rounded to two decimal points), based on the initial investment is:

2.67%.

Shock Company manufactures computer monitors. The following is a summary of its basic cost and revenue data: Per UnitPercentSales price$ 800100Variable costs52065Unit contribution margin$ 28035 Assume that Shock Company is currently selling 792 computer monitors per month and monthly fixed costs are $208,000.If an $23,760 increase in the advertising budget would increase monthly sales by $100,000, the new level of operating income (πB) for Shock Company would be:

25,000

Carver Packing Company reports total contribution margin of $72,900 and income of $24,300 for the current month. In the next month, the company expects sales volume to increase by 7%. The degree of operating leverage and the expected percent change in income, respectively, are:

3.0 and 21%

Hammer Company is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow: MonthMaintenance CostMachine HoursJanuary$ 4,200480February3,000320March3,600400April2,820300May4,350500June2,960310July3,030320August4,470520September4,260490October4,050470November3,300350December3,160340Sum$ 43,2004,800Average$ 3,600$ 400Average cost per hour$ 9.00a (intercept)$ 684.65b (coefficient)7.2884Standard error of the estimate34.469R-squared0.99724t-value for b60.105 Based on the data derived from the regression analysis, 420 maintenance hours in a month mean that maintenance costs should be budgeted to the nearest dollar at

3746

Assume that sales are predicted to be $3,300, the expected contribution margin is $1,155, and a net loss of $200 is anticipated. The break-even point in sales dollars is:

3871

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $250,000 to $280,000 and would decrease the current variable costs of $75 by $10 per unit. The selling price of $130 is not expected to change. Forrester's current break-even sales are $530,000 and current break-even units are 10,500. If Forrester purchases this new equipment, the revised contribution margin ratio would be:

50%

Cotton Company produces and sells socks. Variable costs are budgeted at $4 per pair, and fixed costs for the year are expected to total $90,000. The selling price is expected to be $6 per pair. The sales units required for Cotton Company to make an after-tax profit (πA) of $15,000, given an income tax rate of 40%, are:

57,500

Food Harvesting Corporation is considering purchasing a machine for $1,809,750. The machine is expected to generate a constant after-tax income of $104,025 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value. What is the payback period for the new machine?

6.35 years.

Leeks Company's product has a contribution margin per unit of $12.60 and a contribution margin ratio of 20.0%. What is the selling price of the product?

63

In the current year, Comfy Couch Company expected to sell 12,000 leather sofas. Fixed costs for the year were expected to be $8,400,000; unit sales price was budgeted at $4,600; and unit variable costs were expected to be $2,200. Comfy Couch Company's margin of safety ratio (MOS %) is (rounded to two decimal places):

70.83%.

During the current year, Mute Corporation expected to sell 24,000 telephone switches. Fixed costs for the year were expected to be $12,144,000, the unit sales price was budgeted at $3,200, and unit variable costs were budgeted at $1,440. Mute's margin of safety ratio (MOS %) is:

71.25%.

Genie Company can produce two types of lamps, the Enlightner and Foglighter. The data on the two lamp models are as follows: EnlightnerFoglighterSales volume in units500400Unit sales price$ 300$ 400Unit variable cost200240Unit contribution margin$ 100$ 160 It takes one machine hour to produce each product. Total fixed costs for the manufacture of both products are $90,000. Demand is high enough for either product to keep the plant operating at maximum capacity. Assuming that sales mix in terms of units remains constant, what is the breakeven point in total units?

711

The following information pertains to Corn Corporation: Selling price per unit $ 670Variable cost per unit$ 250Total fixed costs$ 327,600Income tax rate35% How many total units must be sold to obtain an after-tax profit (πA) of $47,775? (

955 units.

A boat, costing $108,000 and uninsured, was wrecked the very first day it was used. This boat can either be disposed for $11,000 cash and be replaced with a similar boat costing $110,000, or rebuilt for $98,000 and be brand new as far as operating characteristics and looks are concerned. A relevant cost analysis of the decision to replace the boat shows:

A $1,000 cost advantage associated with the decision to fix the old boat.

In applying the Capital Asset Pricing Model (CAPM) to estimate a firm's cost of equity capital, the beta coefficient (β) in the model represents

A measure of the sensitivity of the firm's stock return to fluctuations in the returns of the overall market.

What does the modified internal rate of return (MIRR) assume for the duration of the project?

All positive cash flows are reinvested at a particular rate of return.

A 15% internal rate of return (IRR) on a proposed capital investment indicates all of the following except:

An acceptable capital project if the cost of capital is 16 percent or higher.

What is another name for a relevant cost?

Avoidable cost.

When the net present value (NPV) of a project is calculated based on the assumption that the after-tax cash inflows occur at the end of the year when they actually occur uniformly throughout each year, the net present value (NPV) will:

Be slightly understated but probably usable.

What can the weighted average contribution margin ratio be used for?

Breakeven and profit planning for sales volume expressed in dollars (Y) rather than units (Q).

Regression analysis is better than the high-low method of cost estimation because regression analysis:

Can provide greater precision and reliability.

A useful concept for solving production-planning problems involving multiple products and limited resources is:

Contribution per unit of scarce resource.

Rings Company has three product lines, A, B, and C. The following financial information is available: ItemProduct Line AProduct Line BProduct Line CSales$ 30,000$ 45,000$ 12,000Variable costs$ 18,000$ 24,000$ 7,500Contribution margin$ 12,000$ 21,000$ 4,500Fixed costs: Avoidable$ 4,500$ 9,000$ 3,000Unavoidable$ 3,000$ 4,500$ 2,000Pre-tax operating income$ 4,500$ 7,500$ (500) Rings is thinking of dropping Product Line C because it is reporting an operating loss. Assuming the company drops Product Line C and does not replace it, pre-tax operating income for the firm will likely:

Decrease by $1,500

Which one of the following is true for the internal rate of return (IRR) method?

Depending on the pattern of after-tax cash flows, multiple IRRs for a given proposed investment are possible.

A cost is not relevant for decision making if it:

Does not differ for each option available to the decision maker.

****8In capital budgeting, the accounting rate of return (ARR) decision model:

Does not provide an unambiguous decision criterion (rule) regarding the acceptance of capital investment projects.

Research has shown that in framing capital investment decisions past (i.e., "sunk") costs or losses tend to:

Escalate commitment in making capital budgeting decisions.

High-low and regression cost estimation methods are alike in that they both:

Have an intercept term and a slope term.

Variable costs will generally be relevant for decision making because they:

Have not been committed and are likely to differ between decision alternatives.

Given two projects with the same total (i.e., project lifetime) cash flow returns (CFRs), the internal rate of return (IRR) method of capital budgeting would favor a proposal having yearly CFRs that were:

Heavier towards the beginning of a proposal's life.

High operating leverage represents increased risk associated with relatively:

High fixed cost in the firm's cost structure.

Which of the following is always true regarding the net present value (NPV) decision model?

If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach.

Cost-volume-profit (CVP) analysis is a technique available to management to understand better the interrelationships of several factors that combine to determine a firm's operating profit, πB. As with many such techniques, the accountant oversimplifies the real world by making assumptions. Which of the following is not a major assumption underlying a conventional CVP analysis?

In multi-product situations, the sales mix changes as volume changes.

In performing short-term cost-volume-profit (CVP) analysis for a new product or service, the decision-maker would:

Include only incremental fixed costs.

Which one of the following methods assumes (inherently, according to some) that all interim cash inflows generated by an investment earn a return equal to the internal rate of return (IRR) of the investment?

Internal rate of return method (IRR).

A relatively low margin of safety ratio (MOS%) for a product is usually an indication that the product:

Is riskier than a product with a higher margin of safety ratio.

Which of the following statements regarding cost of capital is not true?

It is used when calculating the internal rate of return (IRR) of a proposed investment.

Why might relevant costs analysis be bad for a company if used too frequently?

It overemphasizes short-term goals and neglects long-term goals.

Which costs are not traceable to individual products?

Joint productions costs.

A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:

Modified internal rate of return (MIRR) model.

When there are two or more cost drivers, regression is termed:

Multiple.

Simple regression analysis involves the use of:

One dependent variable, one independent variable

plit Corporation manufactures products X, Y, and Z from a joint production process. Joint costs are allocated to products based on relative sales values of the products at the split-off point. Additional information is as follows: XYZTotalUnits produced14,00010,0006,00030,000Allocated joint costs$ 204,000$ 90,000$ 66,000$ 360,000Sales value at split-off?150,000110,000600,000Additional costs for further processing38,00030,00022,00090,000Sales value if processed further348,000185,000147,000680,000 Based solely on a relevant cost analysis, which of the three products should be processed by Split beyond the split-off point?

Only Y and Z

Operating at or near full capacity will require a firm considering a "special sales order" to potentially recognize the:

Opportunity cost from lost sales.

Plainfield Company manufactures part G for use in its production cycle. The full cost per unit for each of 10,000 units of part G manufactured per year by Plainfield are as follows: Direct materials$ 3Direct labor15Variable overhead6Fixed overhead8 $ 32 Verona Company has offered to sell Plainfield 10,000 units of part G for $30 per unit. If Plainfield accepts Verona's offer, the released facilities could be used to save $45,000 in relevant costs in the manufacture of part H. In addition, $5 per unit of the fixed overhead applied to part G would be eliminated. Based solely on a short-term financial analysis, which alternative is more desirable and by what amount? OptionAlternativeAmountA)Manufacture$ 10,000B)Manufacture$ 15,000C)Buy$ 35,000D)Buy$ 65,000E)Buy$ 10,000

Option C

Without knowing the required rate of return (i.e., discount rate) used for capital investment projects, a company will be able to calculate and evaluate a project's:

Payback period, and book rate of return.

Which of the following cost drivers pairs with product design cost as a cost to be estimated?

number of design elements

ontroller Incorporated produces two basic types of video games, Clash and Slash. Pertinent data follow (DLH = direct labor hour): ClashSlashSales price (per unit)$ 240$ 168Costs (per unit): Direct materials6731Direct labor3660Variable factory overhead (@ $15 per DLH)6030Allocated fixed factory overhead (based on DLHs)2412Marketing expenses (all variable)3524Total costs222157Operating income (per unit)$ 18$ 11 There is insufficient labor capacity (i.e., DLHs) in the plant to meet the combined demand for both Clash and Slash. Both products are produced through the same production departments. In view of the labor shortage, which of the two products is most profitable, and how much is the contribution margin, per DLH?

Slash, $11.50.

Which of the following statements regarding a joint production process is not true?

The allocation of joint (common) production costs to individual products helps management determine which products should be processed beyond the split-off point.

What can the margin of safety ratio measure?

The amount of planned (or actual) sales above the breakeven point.

In the situation where a firm produces multiple products and has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:

The contribution margin of each product per machine hour.

What two factors make up a relevant cost?

The cost differs among options and is discretionary.

Which of the following gives the capital asset pricing model (CAPM) equation in words?

The expected rate of return on a stock is equal to the risk-free rate plus the specific stock's beta coefficient times the market risk premium.

The 95% confidence range for a prediction of monthly manufacturing cost using the model is:

The range of +/− $47.06 × 2 = $94.12 around the predicted amount

Cost-volume-profit (CVP) analysis with multiple products assumes that sales will continue at the same mix of products, expressed in either sales units or sales dollars. This assumption is essential, because a change in the product mix will probably change:

The weighted-average contribution margin (per unit or ratio).

"Special sales orders," as this term is used in Chapter 11:

Typically come directly from the customer rather than through normal sales or distribution channels.

Fixed costs will often be irrelevant for short-term decision making because they:

Typically do not differ in total between decision alternatives being considered.

Especially for projects with long lives, estimation of revenues (or benefits), costs, and cash flows is a difficult task principally because of:

Uncertainty about future events.

Technology and complexity issues often lead management to simplify and to:

Use linear estimation methods.

The Lower 95% and Upper 95% shown in the output suggests that:

We can be 95% confident that the coefficients of the independent variables will be within the ranges specified.

In what situation does management make trade-offs about the quantity of each product to manufacture?

When demand exceeds production capacity.

When does depreciation expense become a relevant cost?

When tax effects are considered in decision making.

A retailer, in business for over 50 years, has developed the following regression model from the past 60 months of operating data: Monthly sales dollars = $50,000 + $4.70A + $30B − $1,000X Where: A = number of customers B = advertising dollars per month X = 1 if a winter month X = 0 if other months An appropriate interpretation of this model is that:

Within the relevant range, each additional customer will make an average purchase of $4.70 per month.

Which of the following costs is most likely to be classified as a variable cost?

direct materials

What is the hurdle rate for average-risk projects?

weighted-average cost of capital (WACC)