Managerial Accounting 1 - Besser - Study Guide Test 4

Given the following data: Return on Investment ... 2.5% Turnover ... 2.5 Margin ... 10% Sales ... $100,000 Average Operating Assets ... $40,000 Minimum Required Rate of Return ... 18% The residual income would be:

$2,800 Margin = Net Op. Income / Sales .10 = NOI / 100,000 NOI = 100,000 x .10 NOI = 10,000 Residual Income = NOI - (Avg. Op. Assets x Min. Req. ROR) Residual Income = 10,000 - (40,000 x .18) Residual Income = 10,000 - 7,200 Residual Income = 2,800

Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The company's net operating income for the year was:

$60,000 ROI = Margin x Turnover .36 = M x 2.4 M = .36 / 2.4 M = .15 Margin = Net Op. Income / Sales .15 = NOI / 400,000 NOI = .15 x 400,000 NOI = 60,000

The management of Helberg Corporation is considering a project that would require an investment of $203,000, and would last for 6 years. The annual net operating income from the project would be $103,000, which includes depreciation of $30,000. The scrap value of the project's assets at the end of the project would be $23,000. The cash inflows occur evenly throughout the year. The payback period would be closest to:

1.5 years Cash Inflow = Net Op. Income + Depreciation Cash = 103,000 + 30,000 Cash = 133,000 Payback Period = Investment / Cash Inflow PP = 203,000 / 133,000 PP = 1.5

Given the following data: Average Operating Assets ... $250,000 Total Liabilities ... $100,000 Sales ... $600,000 Contribution Margin ... $150,000 Net Operating Income ... $30,000 Return on investment (ROI) would be:

12% ROI = Net Op. Income / Average Op. Assets ROI = 30,000 / 250,000 ROI = .12 = 12%

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $28,000, and will have a 6-year useful life and a $4,000 salvage value. Delivering prescriptions should increase gross revenues by at least $32,000 per year. The cost of these prescriptions to the pharmacy will be about $25,000 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:

4 years Cash Inflow = Revenues - Cost Cash = 32,000 - 25,000 Cash = 7,000 Payback Period = Investment / Cash Inflow PP = 28,000 / 7,000 PP = 4

A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and which is expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to:

4 years Payback Period = Investment / Cash Inflow PP = 72,000 / 18,000 PP = 4

For the past year, Allargando Company recorded sales of $500,000 and average operating assets of $250,000. What is the margin that Allargando Company needed to earn in order to achieve an ROI of 12%?

6.00% Turnover = Sales / Average Op. Assets T = 500,000 / 250,000 T = 2 ROI = Margin x Turnover .12 = M x 2 M = .12 / 2 M = 6%

Jason Corporation has invested in a machine that cost $80,000 that has a useful life of eight years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of five years. Given the data, the simple rate of return on the machine is closest to:

7.5% Payback Period = Investment / Cash Inflow 5 = 80,000 / Cash Cash = 16,000 Net Op. Income = Cash Inflow - Depreciation NOI = 16,000 - (80,000 / 8 years) NOI = 16,000 - 10,000 NOI = 6,000 Simple Rate of Return = Net Op. Income / Investment Simple ROR = 6,000 / 80,000 Simple ROR = .075 = 7.5%

Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision?

Absorption costing unit product costs

All other things being the same, which of the following would increase the residual income?

Decrease in average operating assets

A cost center is not a responsibility center

FALSE

A cost that can be avoided by choosing one alternative over another is not relevant for decision purposes

FALSE

A disadvantage of using ROI to evaluate performance is that it encourages the manager to REDUCE the investment in operating assets as well as increase net operating income

FALSE

An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision

FALSE

Discounted cash flow techniques DO NOT take into account recovery of initial investment

FALSE

For capital budgeting decisions, the simple rate of return method is superior to the net present value method

FALSE

Future costs that do not differ among the alternatives in a decision are avoidable costs

FALSE

In calculating the payback period where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be added to the cost of the new equipment

FALSE

Net operating income is income AFTER interest and taxes

FALSE

Operating assets include cash, accounts receivable, and inventory but not any depreciable fixed assets

FALSE

Return on investment is superior to residual income as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole

FALSE

The book value of old equipment is a relevant cost in a decision to replace that equipment (Ignore Taxes)

FALSE

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow at the END of the project

FALSE

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college?

Hal's lost wages at Burger Haven

Zemlya Corporation currently records $4,000 of depreciation each year on the computer that it uses for its major data processing needs. The computer currently has one more year of useful life left and it will have a salvage value of zero at the end of that year. Jennifer, one of the accountants at Zemlya, suggested that the computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the corporation's data processing needs. The computer currently requires $25,000 in annual operating costs in addition to the depreciation. The data processing firm would charge $10,000 per year for its services. If Zemlya decides to implement this change, what effect will this have on the corporation's net cash flow for the last year of the computer's useful life?

Increase of $18,000 Keep the Computer: Annual Op. Costs ... $25,000 Sell the Computer: Annual Op. Costs ... $0 Data Process Firm Services ... $10,000 Less: Sales Value Now ... ($3,000) Differential: Net Expense ... $18,000 If the computer is sold and the data processing firm is hired, data processing expense would be reduced by $18,000 and hence net cash flow would be increased by $18,000

Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?

It is consistent with how plant and equipment items are reported on the balance sheet

Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good way for using residual income instead of ROI is:

Managers are more likely to accept projects that are beneficial to the company

In a sell or process further decision, which of the following costs is relevant? I. A variable production cost incurred after split-off II. A fixed production cost incurred after split-off

Only I

Consider the following three conditions: I. An increase in sales II. An increase in operating assets III. A reduction in expenses Which of the conditions provide a way in which a manager can improve return on investment?

Only I and III

A cost that is relevant in one decision may not be relevant in another decision

TRUE

A profit center is responsible for generating revenue and for controlling costs

TRUE

An investment project with a project profitability index of less than one should ordinarily be rejected

TRUE

Average operating assets is used in the numerator to compute turnover in an ROI analysis

TRUE

Discounted cash flow techniques DOES take into account recovery of initial investment

TRUE

Fixed costs may or may not be relevant in decisions about whether a product should be dropped

TRUE

Fixed costs may or may not be sunk costs

TRUE

Margin equals net operating income divided by sales

TRUE

Net operating income is income BEFORE taxes

TRUE

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached

TRUE

Only future costs that differ between alternatives are relevant in decision making

TRUE

Opportunity costs are not usually recorded in the accounts of a business

TRUE

Preference decisions follow screening decisions and seek to rank investment proposals in order of their desirability

TRUE

Return on Investment (ROI) equals margin multiplied by turnover

TRUE

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment

TRUE

The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the replacement of that machine by another machine (Ignore Taxes)

TRUE

The payback method of making capital budgeting decisions does not give full consideration to the time value of money

TRUE

The project profitability index is used to compare the net present values of two investments that require different amounts of investment funds

TRUE

The required rate of return is the minimum rate of return that an investment project must yield to the acceptable

TRUE

The simple rate of return method does not take into account the time value of money

TRUE

When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow DURING the project

TRUE

When used in return on investment (ROI) calculations, operating assets do not include investments in land held for future use and investments in other companies

TRUE

In capital budgeting computations, discounted cash flow methods:

automatically provide for recovery of initial investment

In a make-or-buy decision, relevant costs include:

avoidable fixed costs

Contribution income statements are used to measure the performance of:

both profit centers and investment centers

When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on:

contribution margin per unit of the constraining resource

If taxes are ignored, all of the following items ARE included in a discount cash flow analysis

future operating cash savings future salvage value investment in working capital

Residual Income:

is the net operating income earned above a certain minimum required return on average operating assets

Two or more products produced from a common input are called:

joint products

Net operating income is defined as:

net income plus interest and taxes

The best capital budgeting method for ranking investment projects of different dollar amounts is the:

project profitability index

Opportunity costs are:

relevant in decision making