ACC Exam 2 Practice Questions

Tyler Sailmakers manufactures sails for sailboats. The company has the capacity to produce 15,000 sails per year, but is currently producing and selling 10,000 sails per year. The following information relates to current production: Sale price per unit $250 Variable costs per unit: Manufacturing $165 Marketing and administrative $50 Total fixed costs: Manufacturing $750,000 Marketing and administrative $200,000 If a special sales order is accepted for 5,000 sails at a price of $225 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A. Increase by $1,125,000 B. Decrease by $50,000 C. Increase by $50,000 D. Increase by $150,000

Increase by $50,000 Variable Mfg. Cost $ 165 Variable Marketing $ 50 Total Variable $ 215 NOW Sales Price $ 225 Less Total Variable Cost 215 = Contribution Margin $ 10 Times units sold x 5,000 = Additional Profit $ 50,000

The income statement for Sweet Dreams Company is divided by its two product lines, blanketsand pillows, as follows: Sales revenue: (Blankets): $620,000 (Pillows): $300,000 Total: $920,000 Variable expenses: 465,000 240,000 Total: 705,000 Contribution margin: 155,000 60,000 Total: 215,000 Fixed expenses: 76,000 76,000 Total: 152,000 Operating income (loss): $79,000 $(16,000) Total: $63,000 If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, then dropping the pillows should result in which of the following? A. Increase in total operating income of $25,000 B. Decrease in total operating income of $5,000 C. Increase in total operating income of $5,000 D. No change in total operating income

Increase in total operating income of $5,000 Loss of CM = (60,000)Save FC 50,000Inc CM 15,000 ( 3,000 x $5)Inc OI 5,000

Eric, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce the subcomponents are: The unit costs to produce are: Direct Materials: $60 Direct Labor: $100 Variable manufacturing overhead: $75 Fixed manufacturing overhead: $90 Total Unit Cost: $325 Due to a labor strike, Eric is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. If Eric purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost? A. $20,000 more B. $10,000 less C. $30,000 less D. $20,000 less

$10,000 less Cost will be $250 ´ 2,000 = $500,000 if purchased from the outside supplier, and ($60 + $110 + $75) ´ 2,000 = $490,000 if manufactured, so profit is $10,000 less if purchased from the outside supplier.

JED Industries manufactures 10,000 components per year. The manufacturing cost per component was determined to be as follows: Direct materials$240,000Direct labor360,000Variable manufacturing overhead80,000Fixed manufacturing overhead 280,000 Total$960,000 An outside supplier has offered to sell the component for $84. Assume JED Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from the outside supplier. If JED purchases the component from the supplier instead of manufacturing it, the effect on income would be a A. $320,000 increase B. $160,000 increase C. $120,000 decrease D. $80,000 decrease

$120,000 decrease SUPPORTING CALCULATIONS: Make: Direct materials$240,000Direct labor360,000Variable overhead80,000Avoidable fixed overhead 40,000Total cost to make$720,000 Buy: Purchase price (10,000 components ´ $84)$840,000 $840,000 - $720,000 =$120,000decrease in income

Tyler Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit. Sales volume (units)5,000 6,000 Cost of Sales $419,000 $502,800 Selling and Admintrative costs $186,000 $202,200 The best estimate of the total contribution margin when 5,300 units are sold is: A. $230,020 B. $146,810 C. $32,330 D. $51,410

$146,810 VC per unit:[705,000 (502,800 + 202,200) - 605,500(419,000 + 186,000)] / 6,000 - 5,000 = $99.50$127.20 (SP) -$99.50 (VC) = $27.70 (CM) x 5,300 (units) = $146,810

Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $90,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $170,000? A. $438,120 B. $170,000 C. $221,950 D. $268,120

$268,120 The machine's positive net present value means that the present value of the $90,000 annual cash inflows exceeds the purchase price by $170,000. The present value of the annual cash flows discounted at 10% is $438,120 ($90,000 x 4.868); therefore the purchase price of the machine is $268,120 ($438,120 - $170,000).

At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401st unit sold contribute to profit? A. $10 B. $0 C. $5 D. $15

$5 Break-even point (units) = Fixed expenses ¸Contribution margin per unitSubstituting:400=$2,000 / Contribution margin per unitContribution margin per unit = $5

If the contribution margin ratio is 32%, target operating income is $60,000, and the sales revenue needed to achieve the target operating income is $400,000, what are total fixed expenses? A. $188,000 B. $128,000 C. $19,200 D. $68,000

$68,000 S- VC= CM - FC = P.32(400,000) - FC = $60,000128,000 - FC = $60,000128,000 - 60,000 = 68,000FC

Kyle Manufacturing produces two types of products - Card Games and Puzzles. The following information is available related to each product: Card Games Puzzles Sales price per unit$6.00$15.00Variable costs per unit 2.00 3.50 60% of the products sold are Card Games and 40% are Puzzles (3:2).If total fixed costs are $24,500, how many Puzzles need to be sold in order for the company to break-even? A. 1,400 B. 852 C. 3,500 D. 1,265

1,400 WACM = $4(.6) + 11.5(.4) = $2.40 + $4.60 =$7BE in total units = 24,500/7 = 3,500 unitsPuzzles portion = 3,500 x .4 = 1,400 units

The Silverside Company is considering investing in two alternative projects: Project 1Project 2Investment$500,000$260,000Useful life (years)88Estimated annual net cash inflows for useful life$110,000$45,000Residual value$32,000$16,000Depreciation methodStraight-lineStraight-lineRequired rate of return12%10% What is the accounting rate of return for Project 1? A. 33.70% B. 10.30% C. 22.00% D. 15.60%

10.30% (Annual net cash flow - depreciation) / Investment = Accounting rate of return($110,000 - ((500,000 - 32,000) / 8)) / 500,000($110,000 - 58,500) / 500,000 = 10.30%

Spencer Corporation has a single product whose selling price is $10. At an expected sales level of $1,000,000, the company's variable expenses are $600,000 and its fixed expenses are $300,000. The marketing manager has recommended that the selling price be increased by 20%, with an expected decrease of only 10% in unit sales. What would be the company's net operating income if the marketing manager's recommendation is adopted? A. $240,000 B. $180,000 C. $132,000 D. $290,000

240,000 Sales in units = $1,000,000 ¸ $10 = 100,000 unitsVariable expense per unit = $600,000 ¸100,000 units = $6 per unitProposed new selling price = $10 ´ (1 + .20) = $12Proposed new contribution margin per unit = $12 - $6 = $6New sales units = 100,000 units - (10% ´100,000) = 90,000 units

Given breakeven sales in units of 28,000 and a unit contribution margin of $4, how many units must be sold to reach a target operating income of $4,000? A. 1,000 B. 27,000 C. 16,000 D. 29,000

29,000 FC @ BE = CM @ BEFC = 28,000 x 4 = $112,000FC + TP / CM = $112,000 + 4,000 / $4 = 29,000

Last month Kelly Company had a $30,000 loss on sales of $250,000. Fixed costs are $60,000 a month. What sales revenue is needed for Kelly to break even? A. $220,000 B. $166,667 C. $500,000 D. $280,000

500,000 Contribution margin ratio is ($60,000 - $30,000)/$250,000 = 12%. Break-even sales is $60,000/0.12 = $500,000.

Redwood Corporation is considering two alternative investment proposals with the following data: Proposal X Proposal Y Investment$830,000$510,000Useful life8 years8 yearsEstimated annual netcash inflows for 8 years$135,000$83,000Residual value$50,000$-Depreciation methodStraight-lineStraight-lineRequired rate of return16%9% How long is the payback period for Proposal X? Group of answer choices12.00 years6.00 years6.15 years10.00 years

6.15 years Payback = Investment / annual cash flow$830,000 / $135,000 = 6.15 years

Adam Corp produces three products, and is currently short on machine hours since one of its two machines is down - only 360 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows: Selling Price: A $5 B $3 C $5 Variable cost per unit: A $3.50 B $2 C $2 Machine hours per unit: A .75 B .25 C 1 Demand: A 300 B 400 C 210 How many of each product should be sold while the machine is down to maximize profit? A. 200 of Product A, 0 of Product B, and 210 of Product C B. 66 of Product A, 400 of Product B, and 210 of Product C C. 300 of Product A, 400 of Product B, and 210 of Product C D. 0 of Product A, 1,440 of Product B, and 0 of Product C

66 of Product A, 400 of Product B, and 210 of Product C The contribution margin per machine hour is $2 for A, $4 for B, and $3 for C. Profit will be maximized by prioritizing B, then C, then A. Filling the 400 demand for B will leave 360 - 400 ´ .25 = 260 machine hours. Filling the 210 demand for C will leave 260 - 210 ´ 1 = 50 machine hours, which allows for production of 50/.75 = 66 units of A.

All else being equal, which of the following would not cause the contribution margin to decrease? A. A decrease in the sales price per unit. B. A decrease in sales volume. C. A decrease in variable costs per unit. D. An increase in total variable costs.

A decrease in variable costs per unit.

Which of the following is true regarding the contribution margin ratio of a single product company? A. If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales. B. The contribution margin ratio increases as the number of units sold increases. C. The contribution margin ratio multiplied by the variable expense per unit equals the contribution margin per unit. D. As fixed expenses decrease, the contribution margin ratio increases.

A. If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales.

To maximize net income in a situation involving scarce resources, a company should: A. Manufacture products that generate the greatest overall contribution margin per unit of scarce resource B. Do none of the above C. Manufacture products that generate overall contribution margin D. Manufacture products that sell for the highest price

A. Manufacture products that generate the greatest overall contribution margin per unit of scarce resource

At the breakeven point, contribution margin equals revenue. True/False

False

Both the payback period and the accounting rate of return do not consider the profitability of a project over its life span. True/False

False

If the net present value of an investment is zero, the investment earns less than the minimum required rate of return. True/False

False

If there is little or no relationship between the cost and the volume, the data points on a scatter plot will appear almost as a straight line. True/False

False

In order to use the payback period model, the proposed investment must have even cash inflows. True/False

False

What will happen to the net present value (NPV) of a project if the discount rate is increased from 8% to 10%? A. NPV will increase. B. NPV will decrease. C. The discount rate change will not affect NPV. D. We cannot determine the direction of the effect on NPV from the information provided.

NPV will decrease.

It costs Michelle, Inc. $35 per unit to manufacture 1,000 units per month of a product that it can sell for $50 each. Alternatively, Michelle could process the units further into a more complex product, which would cost an additional $30 per unit. Michelle could sell the more complex product for $75 each. How would processing the product further affect Michelle's profit? A. Profit would increase by $25,000 B. Profit would increase by $5,000 C. Profit would decrease by $25,000 D. Profit would decrease by $5,000

Profit would decrease by $5,000 Incremental revenue $25,000 - Incremental cost $30,000 = $(5,000).

Both the payback period and the accounting rate of return ignore the time value of money. True/False

True

Future costs that differ across alternatives are relevant costs. True/False

True

In deciding the optimal mix of products that use a constrained resource, it is important to determine the contribution margin per unit of scarce resource. True/False

True

Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes. True/False

True

The two major categories of capital investment decision models are nondiscounting models and discounting models. True/False

True

If a trucking company was operating at capacity of service, but had an opportunity to fill a one-time high volume special order, which of the following ramifications could occur? A. questions from regular customers about commitment to service B. lost revenues from regular customers C. long-term revenue loss from customers who change service to competitors D. all of the above

all of the above

If company A has a higher degree of operating leverage than company B, then: A. company A has higher variable expenses B. company A is less risky C. company A's profits are more sensitive to percentage changes in sales D. company A is more profitable

company A's profits are more sensitive to percentage changes in sales

Selling price $150 per unit @ 100% Variable expenses $90 @ 60% Contribution margin $60 @ 40% The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes that an $11,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A. increase of $200 B. decrease of $11,000 C. decrease of $200 D. increase of $10,800

decrease of $200 180 increase in sales at $60 contribution margin is $10,800 less the increase in fixed costs of $11,000 equals $200 decrease in NOI

The Ajax Manufacturing Company produces four different tables: models T1, T2, T3, and T4. A limitation of 2,000 machine-hours per week prevents Ajax Manufacturing Company from meeting the sales demands for its products. The product information is as follows: Unit selling price: T1 $800 T2 $500 T3 $250 T4 $500 Unit variable costs: T1 $600 T2 $250 T3 $200 T4 $300 Unit contribution margin: T1 $200 T2 $250 T3 $50 T4 $200 Machine-hours per unit: T1 20 T2 40 T3 20 T4 40 Assume the maximum weekly demand for each product is as follows: T1: 80 units T2: 20 units T3: 70 units T4: 10 units Under these circumstances, how many units of each product should the company produce per week to maximize short-run profits? A. twenty units T2 and 70 units T3 B. eighty units T1 and 10 units T2 C. thirty units of T1 and 70 units T3 D. thirty units T1, 20 units T2, 70 units T3, and 10 units T4

eighty units T1 and 10 units T2 CM/MH: T1 = $200/20 = $10; T2 - $6.25; T3 $50/20 - $2.5; T4 $200/4 = 5Fill in Order: T1, T2, T4, T3, T1: 80 units x 20 = 1,600 MHT2: (2,000 MH avail - 1,600 MH for T1 = 400 MH left400 MH/40 MHs per unit = 10 units for T2

Which of the following BEST describes relevant costs? A. future costs that differ between competing decision alternatives B. present costs that differ between competing decision alternatives C. present costs with similar decision alternatives D. past costs that correspond solely on competing decision alternatives

future costs that differ between competing decision alternatives

A company has provided the following data: Sales 3,000 units Sales Price $70 per unit Variable Cost $50 per unit Fixed Cost $25,000 If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net operating income will: A. increase by $61,000 B. increase by $11,000 C. increase by $3,500 D. increase by $20,000

increase by $11,000 Proposed increase in contribution margin per unit = $20 ´ 10% = $2

Lyon Manufacturing Company produces products A, B, C, and D through a joint process. The joint costs amount to $100,000. Product Units Produced Sales Value at Split-Off Additional Costsof Processing Sales ValueAfter Processing A 1,500 $10,000 $2,500 $15,000 B 2,500 $30,000 $3,000 $35,000 C 2,000 $20,000 $4,000 $25,000 D 3,000 $40,000 $6,000 $45,000 If B is processed further, profits will: Group of answer choicesdecrease by $3,000.increase by $30,000.increase by $2,000.increase by $32,000.

increase by $2,000. $35,000 - $30,000 = $5,000 Inremental Rev. - $3,000 Incremental Costs = $2,000

If actual sales equal breakeven sales A. it is impossible to say anything about the margin of safety B. the margin of safety equals zero C. the margin of safety is negative D. the margin of safety is positive E. the margin of safety is negative or positive

the margin of safety equals zero

Last year, Danielle Company reported $750,000 in sales (25,000 units) and a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, the company's: A. contribution margin is 40% B. variable expense per unit is $9 C. variables expenses are 60% of sales D. break-even point is 24,000

variable expense per unit is $9 *Given**At the break-even point, fixed expenses = contribution margin, so we know that fixed costs are $500,000.Before going any further, it can be seen that variable expense per unit is $9.