ACCT 230 Exam 3

The internal rate of return is the discount rate that results in a net present value of _____ for the investment.

zero; 0

T or F A differential cost is a variable cost.

False

Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?

Simple rate of return

T or F A capital project involves a commitment of money and will generally affect the business for a long period of time.

True

T or F Segment margin is a better measure of the long-run profitability of a segment than contribution margin.

True

T or F The contribution margin is the difference between sales revenue & variable costs.

True

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is _____.

deducted from the cost of the new equipment

Absorption and variable costing net income are usually different due to the accounting for ______.

fixed manufacturing overhead

A capital investment project's payback period is the;

length of time it takes for the project to recover its initial cost from the net cash inflows generated

The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications.

long-term

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) __________ _______ decision.

special order

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) _____ cost.

sunk

Less dependence on suppliers is an advantage of ______.

vertical integration

Isolating relevant costs is desirable because ______. - managers prefer to see all costs and benefits associated with a decision - all information needed for the total cost approach is rarely available - critical information may be overlooked with the total cost approach - irrelevant costs may be used incorrectly in the analysis

- all information needed for the total cost approach is rarely available - critical information may be overlooked with the total cost approach - irrelevant costs may be used incorrectly in the analysis

Calderon Kitchen Supplies is planning to invest $210,000 in a new product. If the present value of the cash inflows is $266,700, the project profitability index is ______.

1.27 $266,700 ÷ $210,000 = 1.27

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

What involves increasing the capacity of a bottleneck?

Relaxing the constraint

T or F When common fixed costs are allocated, a segment may look less profitable than what they really are.

True

T or F In a net present value calculation you would use the present value of an annuity table $1 table to compute the present value of annual cost savings.

True; The present value of an annuity table can be used for annual inflows or outflows or annual cost savings.

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. The unit product cost using variable costing is ______ per unit.

Unit product cost = $22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.

Financial statement users need to be aware of changes in inventory levels when using ________ costing.

absorption

A company must make a volume trade-off decision when they ______.

do not have enough capacity to satisfy all product demand must trade off units of one product for units of another

The difference between reported net income on variable costing and absorption costing income statements is based on how

fixed overhead is accounted for

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

If the internal rate of return is _____.

greater than the hurdle rate the project is acceptable. less than the hurdle rate the project should be rejected.

The payback method measures:

how quickly investment dollars will be recovered.

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant

The payback method ______.

is not a true measure of investment profitability does not consider the time value of money ignores all cash flows that occur after the payback period

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

keep

Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10% Option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, ______.

option B is the preferred choice

When planning a road trip, the ______ is a sunk cost and should be ignored.

original cost

Variable costing treats fixed manufacturing overhead as a(n) _______ cost.

period

The costs provided by a well-designed activity-based costing system are Blank______ relevant to a decision.

potentially

When planning a trip and deciding to drive your car or take the train, gasoline is a(n) _____ cost.

relevant

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

When computing the simple rate of return, the initial investment should be reduced by any ________ value realized from the sale of the old equipment.

salvage, residual, or scrap

Assigning common fixed costs to segments impacts ______.

segment margin only

Net Cash Flows Formula

Cash Revenues - Cash Expenses

T or F THE UNIT PRODUCT COST UNDERABSORPTION COSTING DOES NOT INCLUDEFIXED MANUFACTURING OVERHEAD COST.

False

If a cost is a common cost of the segment on a segmented income statement, the cost should:

Not be allocated to the segments.

T or F The book value of old equipment is not a relevant cost in decision-making.

True

T or F The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.

True

T or F A 12% internal rate of return is more desirable than a 10% internal rate of return.

True; the high the internal rate of return the more desirable.

When demand for products exceeds the production capacity, a(n) __________ __________- ________ decision must be made.

Volume Trade-Off

Synonyms for differential costs include ______ cost.

avoidable incremental

To screen out undesirable investments, ______ use(s) the cost of capital.

both the net present value and internal rate of return methods

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ______.

constraint

A traceable fixed cost ______.

is incurred because of the existence of the segment.

When using net present value to compare projects, the total cost approach; is the most flexible method available to compare projects cannot be used when more than two alternatives are being considered isolates cash flows that are relevant from those that are not includes all cash inflows and outflows under each alternative

is the most flexible method available to compare projects includes all cash inflows and outflows under each alternative

Absorption costing treats fixed manufacturing overhead as a _____ cost.

product

When a manager increases the capacity of the bottleneck, it is called ________ or elevating the constraint.

relaxing

Costs and benefits that always differ between alternatives are ______ costs and benefits.

relevant

A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.

special

The concept that a dollar today is worth more than a dollar a year from now is called the ______ ______ of money

time value

The number of units produced does not affect net operating income when using ______ costing.

variable

Current assets minus current liabilities is called ______ ____.

working capital

Management of Cantell Co. is considering a project that would require an initial investment of $47,000. No other cash outflows would be required. The present value of the cash inflows would be $55,930. The profitability index is closest to:

0.19 Profitability Index = NPV / Initial Investment = $55,930 - $47,000 / $47,000 = $0.19

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 1.2, the present value of the campaign's future cash flows is $________.

42,000

Under variable costing, costs that are treated as period costsinclude: A. Only fixed manufacturing costs. B. Both variable and fixed manufacturing costs. C. All fixed costs. D. Only fixed selling and administrative costs.

C. All fixed costs.

The term _______ ______ is used to describe how managers plan significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of new products.

Capital Budgeting

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: A. The variable manufacturing cost of the component. B. The total manufacturing cost of the component. C. The fixed manufacturing cost of the component. D. Zero.

D. Zero.

Moon Co. is considering a capital budgeting project that would require an initial investment of $200,000. The investment would generate annual cash inflows of $64,000 for the life of the project which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $10,000. The company's discount rate is 9%. The net present value of the project is closest to: a. $14,376. b. $66,000. c. $214,376. d. None of the above.

NPV = Present value of cash inflows- Present value of cash outflows Present value of cash inflows = Annual cash inflows *PVAF(9%,4years) + Salvage value ( 9%,4 year) = 64000*3.24+10000*0.708 = 207360+7080 i.e 214440 Present value of cash outflows =200000 NPV = 214440-200000 i.e 14440 NPV is closest to 14376

T or F A segment is any portion or activity of an organization about which a manager seeks revenue, cost, or profit data.

True

T or F The salary of the division manager normally cannot be traced to the division and should not be considered a traceable fixed cost of the division.

False; It would be a traceable fixed cost of the division.

T or F Property taxes at the manufacturing plant used to produce cans of Diet Coke would be a common fixed cost of the Coca Cola Company.

False; It would be traceable fixed cost of Diet Coke.

T or F The segment margin is the difference between sales and total variable cost.

False; It's the difference between the contribution margin and traceable fixed cost.

True or False Two projects are being considered by Fox Promotions. Project A has a payback period of 3 years Project B has a payback period of 4 years. Therefore, in ranking the two projects, Project B is more desirable than project A based on the payback method.

False; The lower the payback time the more desirable as it measures how quickly the original investment is recooped.

T or F A traceable fixed cost is one that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

True

T or F Common fixed costs should be ignored when deciding whether or not to drop a product line or segment.

True

T or F Salvage value would be treated as a cash inflow when computing the net present value.

True

T or F The initial cost of an investment would be treated as a cash outflow when computing the net present value.

True

T or F The net present value method assumes that cashflows from a project are immediately reinvested at a rate of return equal to the discount rate

True

T or F The payback period is the length of time it takes for an investment to recoup its initial cost out of the cash receipts it generates.

True

T or F The profitability index, the internal rate of return, and the net present value all consider the time value of money.

True

T or F The salary paid to a store manager is a traceable fixed expense of the store.

True

In a decision to accept a special order with a special price which of the follow would not be relevant in the decision-making process? a. Variable overhead costs. b. Direct labor costs. c. Factory rent. d. Direct material costs.

c. Factory rent.

Future cash flows expected from investment projects ___.

can be difficult to estimate

Allocated common fixed costs:

can make a product line or segment appear unprofitable.

Another term for the minimum required rate of return is the cost of _____.

capital

A postaudit involves ______.

checking whether expected results are actually realized

One of the great dangers in allocating common ________ costs is that such allocations can make a product line look less profitable than it really is.

fixed

When making a volume trade-off decision, managers should ignore ______.

fixed costs

When units produced exceed units sold, net income will generally be ______ costing.

higher under absorption costing than under variable

To maximize total contribution margin when a constrained resource exists, produce the products with the ______.

highest contribution margin per unit of the constrained resource

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ________ __________ showing the effects of either keeping or dropping the product line.

income statement

In an equipment capital budgeting decision, recovering the original investment means that the _____.

investment has generated enough cash inflows to completely cover the cost of the equipment.

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is ______.

investment required ÷ annual net cash inflow

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

irrelevant

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.

irrelevant

In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.

isolate relevant costs from irrelevant costs

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called ______ costs.

joint

The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as ______ costs.

joint

Which of the following situations would an opportunity cost be relevant?

In both a make or buy decision and a special order/special price decision.

An increase in cost between two alternatives is a(n) ______ cost.

Incremental, differential, or relevant

What may be an advantage of making a part rather than buying it?

Less dependence on outside suppliers A smoother flow of parts and materials for production

Preference decisions are also called ______ decisions.

rationing ranking

For which of the following decisions are opportunity costs relevant? a. Make or buy decision. b. Keep or drop a production line decision. c. Both a make or buy decision and a keep or drop a product line decision.

Make or buy

Deciding what to do with a joint product at the split-off point is a ______ decision.

sell or process further

The net present value method assumes that the project's cash flows are reinvested at the: A. The discount rate used in the net present value calculation. B. Internal rate of return. C. The simple rate of return. D. The payback rate of return.

A. The discount rate used in the net present value calculation.

Under absorption costing, fixed manufacturing overhead costs:

Are deferred in inventory when production exceeds sales.

T or F Depreciation would be an example of a sunk cost.

False

The simple rate of return: a.Considers the time value of money. b.Considers cash flows only. c.Is not used for capital budgeting decisions. d.None of the above.

None of the above

All other things being equal, if a division's traceable fixed expenses increase:

the division's segment margin will decrease.

T or F A net present value of zero is acceptable.

True; A NPV of zero means the project would earn exactly the cost of capital.

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.

the total cost approach only

Segmented income statements ______.

may be prepared for activities at many levels in a company

T or F Variable manufacturing overhead costs are treated as period costs under both absorption and variable costing.

False

The Fun Fox Co. is considering the following three investment projects. Required: Compute the profitability index & net present value. Rank the projects based on the profitability index. Project Fox Investment Required $27,000 Present value of cash inflows $27,810 Internal Rate of Return 12% Project Fun Investment Required $44,000 Present value of cash inflows $49,720 Internal Rate of Return 18% Project EE Investment Required $72,000 Present value of cash inflows $72,480 Internal Rate of Return 10%

Profitability Index= Present Value Cash Inflow /investment FOX: $27,810 / $27,000 = 1.03 Ranking by PI: 3 FUN: $49,720/$44,000 = 1.13 Ranking by PI: 1 EE: $78,480/$72,000 = 1.09 Ranking by PI: 2

Which statement is true? The net present value method automatically provides for return of the original investment. The net present value method does not provide for return of the original investment. A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

The point in the manufacturing process at which joint products can be recognized as separate products is called the ______ point.

Split-Off

True or false: When calculating the payback period, any depreciation deducted in arriving at the project's net operating income must be added back to obtain the project's expected annual net cash inflow.

True

T or F In the initial screening process, a net present value of $0 would be acceptable.

True; A net present value of zero is acceptable as the project would be earning exactly the cost of capital.

True or false: The net present value can be used to determine whether a project should be accepted.

True; A project with a positive net present value should be accepted because it promises a return greater than the required rate of return.

T or F In capital budgeting decisions, a $10,000 decrease in annual cash outflows can be treated as if it is a$10,000 increase in annual cash inflows

True; Cash savings are considered cash inflows for the NPV computation.

The net present value of a project is ______.

Used in determining whether or not a project is an acceptable capital investment The difference between the present value of cash inflows and present value of cash outflows

The Matisse Co. produces a single product and has provided the following data for its most recent month of operations. Required: Compute the unit cost under VARIABLE costing. Compute the unit cost under variable costing. Direct labor - $47 per unit Direct materials - $50 per unit Variable MO - $2/unit Variable selling & admin expense - $8/Unit Fixed manufacturing overhead (total cost) - $31,000 Fixed selling and administrative expense (total cost) - $69,000

Variable Costing = DM + DL + Variable OH $50 + $47 + $2 = $99

Which of the following is NOT a common mistake made in preparing segmented income statements? Using inappropriate allocations bases. Computing contribution margin instead of gross margin. Arbitrarily dividing common costs among segments. Omitting costs that should be included.

Computing contribution margin instead of gross margin.

Because nonmanufacturing costs are not included as costs of a product, the use of _____ costing can lead to the omission of segment costs.

absorption

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States.

absorption

For external reporting, income statements are generally prepared using _______ costing, while _____ costing is used for internal decision-making purposes.

absorption variable

Fixed manufacturing overhead costs are included as part of Work in Process inventory under _____.

absorption costing only

Current assets minus current liabilities is called _______ ________.

working capital

The cost of capital is the ______.

average rate of return a company must pay its long-term creditors and shareholders for the use of their funds

A cost that can be eliminated by choosing one alternative over another is a(n) _____ cost.

avoidable

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.

avoidable

When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges.

be reduced by

What is NOT a common mistake made in preparing segmented income statements?

computing contribution margin instead of gross margin

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) _______.

constraint

Anything that prevents you from getting more of what you want is a(n) _______.

constraint

If some products must be cut back because of a constraint, produce the products with the highest ______.

contribution margin per unit of constrained resource

When a constraint exists, companies need to focus on maximizing ______.

contribution margin per unit of constraint

Product costs under absorption costing include ______. direct materials fixed manufacturing overhead variable manufacturing overhead direct labor fixed selling and administrative variable selling and administrative

direct materials fixed manufacturing overhead variable manufacturing overhead direct labor

Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, ______ the negative net present value excluding intangible benefits by the ______.

divide present value factor for an annuity

When there is a constrained resource, the best way to increase profits is to _____.

increase the capacity of the bottleneck

When analyzing an investment project, uncertain future cash flows ________.

may be estimated using computer simulations

T or F Opportunity costs are not found in accounting records because they are not relevant to decisions.

false

T or F The accounting depreciation of an existing asset is relevant to decisions.

false

If a cost is traced to a segment using activity-based costing, it ______ an avoidable cost of the segment.

may or may not be

In the context of the time value of money, one dollar today is worth ______ a dollar a year from now.

more than

Discontinuing a profitable segment results in ______. a reduction in the overall profits of the company reduced common fixed costs for the company the loss of the segment's revenues

the loss of the segment's revenues a reduction in the overall profits of the company

Effectively managing an organization's constraints is a key to increased _________.

profits

The Matisse Co. has a large number of potential investment opportunities that are acceptable. However, the Matisse Co. does not have enough investment funds to invest in all of them. Which calculation would be the best one for the Matisse Co. to use to determine which projects to choose?

project profitability index

The internal rate of return is ____.

the rate of return of an investment project over its useful life

When considering decision alternatives, both relevant and irrelevant costs are included when using the ______ cost approach.

total

All cash flows are included, and a net present value is computed for each alternative when using the ______ - ______ approach.

total - cost

Absorption costing is ______.

used by most companies for both internal and external reports required by GAAP and IFRS

The two broad categories into which capital budgeting decisions fall are ______ and ______ decisions.

screening preference

Deciding what to do with a joint product at the split-off point is a(n) _____ or ______ ______ decision.

sell or process further

T or F A profitability index of 1.5 is more desirable than a profitability index of 1.2.

True; The higher the profitability index the more desirable the investment opportunity.

A net present value decision that does not involve any revenues is known as a(n) ________ - ________ decision.

least - cost

When a capital budgeting decision does not involve any revenues, the most desirable alternative is the one with the ______.

least total cost from a present value perspective

The costs provided by a well-designed activity-based costing system are ______ relevant to a decision.

potentially

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

zero

T or F Factory overhead that would not change in a special order/special price would be relevant

False: It would not be relevant

T or F Depreciation would be treated as a cash outflow when computing the net present value

False; Depreciation does not involve cash so it is not considered in the NPV computation

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the ________ period.

payback

The two broad categories into which capital budgeting decisions fall are ______ decisions and ______ decisions.

preference, ranking, or rationing screening

T or F The profitability index, the internal rate of return, the simple rate of return, and the net present value all consider the time value of money

False; The simple Rate of Return does NOT consider the time value of money.

Preference decisions are sometimes called ________ decisions or __________ decisions.

rationing ranking

Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.

sunk

Irrelevant costs include ______. - future costs that differ between alternatives - sunk costs - future costs that do not differ between alternatives - all fixed costs

sunk costs future costs that do not differ between alternatives

Direct costing or marginal costing are other _____ terms for costing.

variable

T or F In a net present value calculation you would use the present value of an annuity table to compute the present value of a $30,000 salvage value received at the end of the project's life.

False; You would use the present value of a $1 table for a one time only amount.

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: a. 4 years. b. 8.3 years. c. 0.25 years. d. None of the above.

Pay-back period = Purchase value of asset / cost saving per year = $72000 / $18000 per year = 4 years

T or F Common fixed costs should not be allocated to segments.

True

T or F In a make or buy decision or a special order/special price decision, direct materials and direct labor are relevant costs.

True

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

The Matisse Co. has received an offer to buy a part, they are currently making, for $32 a unit. The current cost structure to make the part is included below. If the company buys the part only $3 for the plant supervisor, included in the fixed overhead, would be avoided. There is no other use for the factory space at this time. The Matisse Co.'s current needs are 10,000 parts a year. Direct labor - $9 per unit Direct materials - $15 per unit Variable manufacturing overhead $2 per unit Fixed overhead (Includes $3 per unit for supervisor) - $10 per unit Current Cost to make part - $36 per unit Compute the relevant costs/unit in a make or buy decision. Should the company make or buy the part from an outside supplier? Explain your answer based on cost savings.

DL + DM + Variable OH + Fixed OH = $29 $9 + $15 + $2 + $3 = $29 $7 of the fixed overhead (excluding the supervisor's salary) is not relevant as it will not be avoidable.

The Matisse Co. has received an offer to buy a part, they are currently making, for $32 a unit. The current cost structure to make the part is included below. If the company buys the part only $3 for the plant supervisor, included in the fixed overhead, would be avoided. There is no other use for the factory space at this time. The Matisse Co.'s current needs are 10,000 parts a year. Direct labor - $9 per unit Direct materials - $15 per unit Variable manufacturing overhead $2 per unit Fixed overhead (Includes $3 per unit for supervisor) - $10 per unit Current Cost to make part - $36 per unit Should the company make or buy the part from an outside supplier? Explain your answer based on cost savings

DL + DM + Variable OH + Fixed OH = Cost to Make $9 + $15 + $2 + $3 = $29 Costs to Make $29 Cost to Buy $32 $3 Per Unit Cheaper to Make the Part Overall, $30,000 cheaper to make = 10,000 parts X $3

The net present value method assumes that the project's cash flows are reinvested at the:

Discount rate used in the net present value calculation.

Which product would be selected in a decision that involves the utilization of a constrained resource? A. The product with the lowest total cost per unit. B. The product with the lowest variable cost per unit. C. The product that uses the least amount of constrained resource per unit. D. The product with the highest contribution margin. E. The product with the highest contribution margin per unit of the constrained resource.

E. The product with the highest contribution margin per unit of the constrained resource.

Identify capital budgeting decisions. - Equipment replacement decisions - Expansion decisions - Employee attainment decisions - Product costing decisions

Equipment replacement decisions Expansion decisions

T or F When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.

F - The project with the shortest payback period will earn its investment back most quickly, but is not necessarily the most desirable project between the alternatives.

The Fun Fox Co. is considering the following three investment projects. Required: Compute the profitability index & net present value. Rank the projects based on the net present value. Project Fox Investment Required $27,000 Present value of cash inflows $27,810 Internal Rate of Return 12% Project Fun Investment Required $44,000 Present value of cash inflows $49,720 Internal Rate of Return 18% Project EE Investment Required $72,000 Present value of cash inflows $72,480 Internal Rate of Return 10%

FOX: 1 FUN: 3 EE: 2

T or F A cost that will be incurred regardless of which course of action a manager takes is always relevant to the manager's decision.

False

T or F A cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision.

False

T or F A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.

False

T or F All future costs are relevant in decision-making.

False

T or F Contribution margin and segment margin mean the same thing.

False

T or F Under absorption costing, fixed manufacturing overhead cost is not included in product cost.

False

T or F Under variable costing, variable production costs are not included in the product costs.

False - Variable production costs ARE included in product costs.

T or F A common fixed cost is a fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.

False - a common fixed cost would not be eliminated if a segment was discontinued.

T or F When common fixed costs are allocated, a segment may look more profitable than they really are.

False - a segment may look less profitable.

T or F Direct materials are considered to be a product cost under variable costing but not under absorption costing.

False - both variable costing and absorption costing include direct materials in computing the product cost.

T or F In screening projects, a net present value of zero should be rejected as it would earn below the minimum requirement (or the cost of capital).

False; A net present value of zero would be acceptable in the screening project as this indicates the investment would earn the minimum requirement.

T or F Avoidable costs, differential costs, incremental costs and sunk costs are considered relevant and therefore should be considered in decision making.

False; A sunk cost is not relevant.

T or F In computing the net present value, an annual cash savings of $10,000 would be considered a cash outflow.

False; Annual cash savings is treated as a cash inflow when computing the net present value.

T or F The lower the net present value, the more desirable the project.

False; The HIGHER the NPV the more desirable the project.

T or F The higher the payback period the more desirable the investment.

False; The lower the payback period the more desirable the investment.

T or F The net present value, the profitability index, the payback method and the internal rate of return all consider the time value of money.

False; The payback method does not consider the time value of money, however, the other methods do.

T or F The payback method of making capital budgeting decisions gives full consideration to the time value of money.

False; The payback method does not consider the time value of money.

T or F The payback method of making capital budgeting decisions gives full consideration to the time value of money.

False; The payback method ignores the time value of money.

T or F $10,000 depreciation expense would be included in the payback period method.

False; The payback method includes only cash revenues and cash expenses. Depreciation is a noncash expenditure.

T or F The internal rate of return, the profitability index, the payback period and the net present value are all ways to screen capital projects and they all consider the time value of money.

False; The payback period does not consider the time value of money.

T or F Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

False; Traceable fixed costs are also relevant.

TRUE OR FALSE ABSORPTION COSTING IS MORE COMPATIBLE WITH COST VOLUME-PROFIT ANALYSIS THAN IS VARIABLECOSTING.

False; Variable costing follows CVP.

T or F When computing the net present value, cash savings are considered cash outflows.

False; cash savings are considered cash inflows not cash outflows.

T or F A payback period of 2.8 years is better than a payback period of 1.8 years.

False; the lower the time to recoup the original investment, the more desirable with the payback method.

The variable costing income statement separates ______.

variable and fixed expenses

T or F Depreciation would be treated as a cash outflow when computing the net present value.

False

T or F Sunk costs are avoidable costs and therefore always relevant in decision making.

False

T or F The unit product cost under variable costing includes variable selling and administrative costs.

False

Moon Co. is considering a capital budgeting project that would require an initial investment of $200,000. The investment would generate annual cash inflows of $64,000 for the life of the project which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $10,000. The company's discount rate is 9%. The net present value of the project is closest to:

$14,376. Calculation of net present value of project NPV = Present value of cash inflows- Present value of cash outflows Present value of cash inflows = Annual cash inflows *PVAF(9%,4years) + Salvage value (9%,4 year) = 64000 * 3.24 + 10,000 * 0.708 = 207,360 + 7,080 i.e 214,440 Present value of cash outflows = 200,000 NPV = 214,440 - 200,000 i.e 14,440 NPV is closest to 14,376

The Vedder Corporation has two divisions: the Black Division and the Alive Division. The corporation's net operating income is $93,200. The Black Division's segment margin is $223,200 and the Alive Division's segment margin is $15,900. What is the amount of the common fixed expense not traceable to the individual divisions?

$145,900 (Black SM $223,200 + Alive SM $15,900) = $239,100 - ($93,200 Net Operating Inc.) = $145,900

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $27/unit Fixed manufacturing overhead: $30,000 total Units: 10,000 produced and 6,000 sold

$155 (50 + 75 + 27 + (30000/10000) = 155/unit)

The Silverfox Co. produces 1,000 parts per year which are used in the assembly of a toy car the company manufactures. The unit product cost of the part is $21 based on: Direct Materials - $5.00 Direct Labor - $2.00 Variable O/H - $5.00 Fixed O/H - $9.00 Cost Per Unit - $21.00 The part can now be purchased from an outside supplier for $20 per part. If the part is purchased from an outside supplier, 2/3 of the fixed manufacturing cost can be eliminated. If the part is purchased from an outside supplier, what will be the annual impact on the company's net operating income?

$2,000 decrease in net operating income. Total Annual Cost (If Buy) = Purchase Price + fixed Manufacturing Overhead = $ 20,000+$ 3,000 = $ 23,000 Fixed Manufacturing Overhead (If Buy) = 1/3 Of $ 9,000 = $ 3,000 Operating Loss if Buy = $ 21,000-$ 23,000 = $ 2,000 Operating Loss if Buy = $ 21,000-$ 23,000 = $ 2,000

The Matisse Co. has two divisions: East Division and West Division. The East Division's segment margin is $34,300 and West Division's segment margin is $86,700. The total amount of common fixed expenses not traceable to the individual divisions is $95,600. What is the company's net operating income?

$25,400 (East SM $34,300 + West SM $86,700) = $124,100 - ($95,600 Common FC) = $25,400

Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is:

$4,350

Which of the following would be considered a cash outflow in computing the net present value of an investment? Annual cash revenues of $10,000. Annual cash savings of $5,000. $5,000 to rebuild the engine in year 3. $3,000 salvage value at the end of the project's useful life.

$5,000 to rebuild the engine in year 3. This is a cash outflow.

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. This month 1,490 bottles were produced and 1,203 bottles were sold. Total cost of goods sold is $______.

$5.38 × 1,203 = $6,472.14

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals ______.

$70,000/40% = $175,000

Potential advantages of dropping a product line or other segment include ______. - an overall increase in net operating income - increasing relevant costs that the company incurs - avoiding more fixed costs than the company loses in contribution margin - an overall decrease in other product line sales

- an overall increase in net operating income - avoiding more fixed costs than the company loses in contribution margin

Using absorption costing for segmented income statements can lead to ______. - omission of upstream and downstream costs - under-costing of segments - the need to maintain two costing systems - inconsistencies between internal and external reports

- under-costing of segments - omission of upstream and downstream costs

When calculating the profit impact of discontinuing a segment, consider ____. - common costs allocated to the segment - the segment's traceable fixed costs - the segment's contribution margin

-the segment's traceable fixed costs -the segments contribution margin

Sandy's Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for the next 5 years as follows: $21,500 in year 1 $23,100 in year 2 $19,000 in year 3 $13,900 in year 4 $15,200 in year 5 The payback period for the cooling equipment is ______ years.

3 years After two years $44,600 ($21,500 + $23,100) will have been paid back leaving $11,400 ($56,000 - $44,600). $11,400 ÷ $19,000 = .6, so the total payback period is 2.6 years, which is rounded off to 3 years.

Net Present Value Formula

= (Present Value of initial investment) + Present value of Cash Inflows - Present Value of Cash Outflows

Simple Rate of Return Formula

= Annual incremental net operating income / Initial investment

Payback Method Formula

= Initial Investment / Net Cash Flows

Profitability Index Formula

= Net Present Value of Cash Inflows / Investment Required

Variable costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

Which of the following statements are true? A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. The net present value method does not provide for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds. The net present value method automatically provides for return of the original investment.

A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds. The net present value method automatically provides for return of the original investment.

All other things equal, if a division's traceable fixed expenses decrease: A. The division's segment margin will increase. B. The overall company net operating income will decrease. C. The division's contribution margin will increase. D. The division's sales volume will increase.

A. The division's segment margin will increase.

The Matisse Co. produces a single product and has provided the following data for its most recent month of operations. Required: Compute the unit cost under absorption costing. Direct labor - $47 per unit Direct materials - $50 per unit Variable MO - $2/unit Variable selling & admin expense - $8/Unit Fixed manufacturing overhead (total cost) - $31,000 Fixed selling and administrative expense (total cost) - $69,000

Absorption Costing = $130 DM + DL + Variable OH + Fixed OH* *Fixed overhead $31,000 / 1,000 units = $31 per unit

T or F Common fixed costs should be allocated between product lines and are relevant in decision making as to add or drop a segment.

False

Saluki Company is considering investing in new technology that will decreases annual operating expenses by $100,000. The technology will cost $500,000, with a 10-year useful life. Calculate simple rate of return.

Annual incremental net operating Income Decrease in expense $100,000Increase in depreciation $50,000 = $50,000 Simple Rate of Return $50,000 / $500,000 = 10%

Under absorption costing, fixed manufacturing overhead costs:

Are deferred in inventory when production exceeds sales..

All other things being equal, if a division's traceable fixed expenses increase: A. The division's contribution margin ratio will decrease. B. The division's segment margin ratio will remain the same. C. The division's segment margin will decrease. D. The overall company profit will remain the same

C. The division's segment margin will decrease.

Selling and administrative expenses are considered to be: A. A product cost under variable costing. B. A product cost under absorption costing. C. Part of fixed manufacturing overhead under variable costing. D. A period cost under variable costing.

D. A period cost under variable costing.

Identify capital budgeting decisions.

Expansion decisions Equipment replacement decisions

T or F Absorption costing includes only variable costs when computing the cost per unit.

False - Also includes fixed overhead costs.

T or F All future costs are relevant in decision-making.

False - Rent, Salaries

T or F Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product.

False - Salary of a manager that is over a product line

T or F The lower the net present value, the more desirable the project would be.

False; The higher the NPV the more desirable.

Consider a decision facing a company of either accepting or rejecting a special order/special price for one of its products. A cost that is not relevant in the decision making process is

Fixed Overhead that will be incurred regardless of whether or not the special order is accepted.

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases.

Increase; When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______.

Increased online sales contribution margin [$100,000 × 10% × ($60,000 ÷ $100,000)] is $6,000 + $5,000 saved from stopping catalog sales = $11,000.

An increase in cost between two alternatives is a(n) _______ cost.

Incremental, differential, or relevant

As it applies to sell or process further decisions, which term refers to a product that is in the process of being made?

Intermediate product

The Fun Fox Co. is considering the following three investment projects. Required: Compute the profitability index & net present value. Rank the projects based on the Internal rate of return Project Fox Investment Required $27,000 Present value of cash inflows $27,810 Internal Rate of Return 12% Project Fun Investment Required $44,000 Present value of cash inflows $49,720 Internal Rate of Return 18% Project EE Investment Required $72,000 Present value of cash inflows $72,480 Internal Rate of Return 10%

Net Present Value - PV Inflows - PV Outflows FOX: $27,810 - ($27,000) = $810 Ranking by NPV: 3 FUN: $49,720 - (44,000) = $5,720 Ranking by NPV: 2 EE: $78,480 - ($72,000) = $6,480 Ranking by NPV: 1

Which of the following should not be included in the analysis when making a decision? Non-differential future costs Sunk costs. Opportunity costs Avoidable costs

Non-differential future costs Sunk costs

Which of the following statements are correct regarding income statements prepared under variable and absorption costing? Absorption costing categorizes costs based on cost behavior. The difference between the statements is how total manufacturing overhead is accounted for. Reported net income on the statements often differ. Both income statements include product and period costs.

Reported net income on the statements often differ. Both income statements include product and period costs.

One of the dangers in allocating common fixed costs to a product line is that such allocations can make the product line appear less profitable than it really is.

True

T or F 2.In preference decision situations, a project with a negative net present value should be rejected.

True

T or F A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

T or F Avoidable costs, differential costs, incremental costs are considered relevant and therefore should be considered in making a decision as to discontinue a segment or product line.

True

T or F Cash savings would be treated as a cash inflow when computing the net present value.

True

The two general costing approaches used by manufacturing companies to prepare income statements are _______ costing and ________ costing.

Variable; Absorption

Which of the following statements are true? When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. The cost of capital may be used to screen out undesirable projects.

When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. The cost of capital may be used to screen out undesirable projects.

The principal difference between variable costing and absorption costing centers on:

Whether fixed manufacturing costs should be included in product costs.

Capri Industries is considering an investment that has an initial cost of $26,500 and the following expected cash inflows: Year 1 - $6,000 Year 2 - $8,000 Year 3 - $10,000 Year 4 - $5,000 Year 5 - $3,000 The expected payback period is ______ years.

Year 4 After three years $24,000 ($6,000 + $8,000 + $10,000) will have been paid back, leaving $2,500 ($26,500 - $24,000). $2,500 ÷ $5,000 = 0.5, so the total payback period is 3.5 years, which is rounded off to 4 years.

The Fox Company is trying to decide whether to invest in automated production equipment as they are currently operating via manual labor. The following relates to the proposed investment to automate: $500,000 initial cost of the equipment life of the project 5 years estimated salvage value at the end of 5 years is $60,000 annual cash revenues $170,000 (received each year) annual cash expenses $40,000 (paid each year) At the end of year three, the company will have to; pay $50,000 for an engine replacement Depreciation expense will be $100,000 each year (not included in the cash expenses of $40,000 each year) The discount rate is 10%. 42. What is the present value of the $50,000 payment in year 3 to replace the engine?

a cash outflow of $37,550

Which of the following costs are always irrelevant in decision-making? a. Avoidable costs. b. Fixed costs. c. Sunk costs.

c. Sunk costs.

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) ______ fixed cost.

common

An otherwise profitable segment may appear to be unprofitable if _______ fixed costs are allocated to it.

common

If a segment is eliminated, ______ fixed costs that are not traced to the segment will not change.

common

When preparing a segment margin income statement: fixed manufacturing costs are included in cost of goods sold. cost of goods sold consists of only variable manufacturing costs. common fixed expenses are excluded from the statement. traceable fixed expenses are deducted from contribution margin.

cost of goods sold consists of only variable manufacturing costs. traceable fixed expenses are deducted from contribution margin.

The first step in decision making is to _____.

define the alternatives

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.

income statements

When a product is past the split-off point, but is not yet a finished product, it is called a(n) ______ product.

intermediate

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the ______.

internal rate of return

The split-off point is the point in the manufacturing process at which the _______ products can be recognized as separate products.

joint

Two or more products that are produced from a common input are known as ______ products.

joint

Two or more products produced from a common input are called ______.

joint products

Working capital ________.

often increases when a company takes on a new project

Segment break-even calculations include ______ fixed expenses.

only traceable

If a company has a resource that could be used for something else, the ________ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

Space being used that would otherwise be idle has a(n) ________ cost of zero.

opportunity

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity

If the original investment in a capital project has been recovered, the net present value will be ______.

positive or zero

The purpose of a(n) ________ is to see if capital budgeting expectations were actually realized.

postaudit

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ____.

should be rejected In order for a project to be acceptable, the internal rate of return must equal or exceed the required rate of return.

Costs that can be traced directly to a segment ______.

should not be allocated to other segments

Only costs that would disappear over time if a segment disappeared should be treated as ______ fixed costs.

traceable

Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax of a store is the _______ fixed cost of the store and the _______ fixed cost of each product line sold in the store.

traceable; common

Working capital is ______. not discounted when computing the net present value of an investment not treated as a cash flow in an investment project. treated as a cash inflow when released at the end of a project. treated as a cash outflow when required at the beginning of a project.

treated as a cash inflow when released at the end of a project. treated as a cash outflow when required at the beginning of a project.

T or F Depreciation expense is considered when computing the simple rate of return.

true

T or F If a company operates at the break-even point for each of its segments, it will lose money overall if common fixed expenses exist

true

T or F In the context of decision making, every decision involves choosing from among at least two alternatives.

true

T or F Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

true

The Fox Company is considering investing in production equipment to replace the existing, outdated equipment. The initial cost will be $120,000 The estimated useful life is 10 years The net present value is $4,300 based on a 12% discount rate. What is the annual cost savings of the investment?

$22,000

Quinn Co. has two divisions: Export Division and Business Division. The Export Division's segment margin is $34,300 and Business Division's segment margin is $86,700. The total amount of common fixed expenses not traceable to the individual divisions is $95,600. What is the company's net operating income?

$25,400 The Export Products Division's Margin = $34,300 Business Products Division's Margin = $86,700 Total Margin = $ 121,000 Less Fixed Expenses= ($95,600)

The Matisse Co. is contemplating investing in equipment that will automate their manufacturing facilty. The following information relates to purchasing the equipment: Initial cost of the equipment - $18,955 Life of the investment - 5 years Annual cost savings - $5,000 Estimated salvage value received at the end of 5 years - $1,000 Discount Rate - 10% Factor - Present value of a $1 at the end of 5 years using 10% - .621 Factor - Present value of an annuity for 5 years using 10% - 3.791 Required: Compute the net present value of the investment.

$621 Initial investment ($18,955) x 1.0 = ($18,955) Annual cost savings $5,000 X 3.791 = $18,955 Salvage Value $1,000 X .621 = $621 Net Present Value = $621

The Fox Company received an offer from an outside supplier of $76 per unit to purchase a part they currently manufacture for $80 per unit (per part). Currently the $80 cost per unit is based on: $40 direct materials $20 direct labor $8 variable overhead $12 fixed overhead The fixed overhead includes $4 for the supervisor salary that is the only fixed cost traceable to manufacturing the part. Currently, the Fox Company produces 30,000 parts each year and there is adequate factory space to do so. What are the relevant costs, per unit, the Fox Company should consider in making the decision to make or buy the part from an outside supplier?

$72 per unit

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced. The unit product cost of each frame using variable costing is $

(Direct Materials + Direct Labor + Manufacturing overhead cost) ($19 + $40 + $9) = $68

Isolating relevant costs is desirable because ______.

- all information needed for the total cost approach is rarely available - critical information may be overlooked with the total cost approach - irrelevant costs may be used incorrectly in the analysis

Potential advantages of dropping a product line or other segment include ______.

- avoiding more fixed costs than the company loses in contribution margin - an overall increase in net operating income

Capital budgeting decisions include ______. - choosing to lease or buy new equipment - hiring new factory workers - increasing the salary of the current company president - deciding to replace old equipment - acquiring a new facility to increase capacity - purchasing new equipment to reduce cost

- choosing to lease or buy new equipment - deciding to replace old equipment - acquiring a new facility to increase capacity - purchasing new equipment to reduce cost

Using variable costing and the contribution approach for internal decision making______. - supports decision making - is required as part of GAAP financial statements - enables CVP analysis - facilitates explaining changes in net income

- supports decision making - facilitates explaining changes in net income - enables CVP analysis

Present Value of an Annuity Example: Factor 4 years - 6% is:

3.465 Factor PV $1 Table Factor: year 1 .943 year 2 .890 year 3 .840 year 4 .792 = 3.465 Factor

Management of Cantell Co. is considering a project that would require an initial investment of $47,000. No other cash outflows would be required. The present value of the cash inflows would be $55,930. The profitability index is closest to: a. 1.19. b. 0.81. c. 0.19. d. None of the above.

55930 / 47000 = 1.19

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: A. the variable manufacturing cost of the component. B. The total manufacturing cost of the component. C. The fixed manufacturing cost of the component. D. Zero.

D. Zero

The Matisse Company plans to invest in a new production machine which will cost $375,000. The company expects the machine to have a useful life of 6 years, annual net cash flows of $150,000 (this excludes depreciation of $20,000 per year); company's payback period is 3 years. Compute the Payback Period.

Payback Period = $375,000 / $150,000 = 2.5 years The project is acceptable as the payback period is 2.5 years. The company requires 3 years or less.

Which of the following are considered to be product costs under variable costing? a. Variable manufacturing overhead. b. Fixed manufacturing overhead. c. Selling and administrative. d. All of the above. e. None of the above.

a. Variable manufacturing overhead.

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

alternative uses for the equipment salvage value

One mistake companies make when preparing segmented income statements is arbitrarily assigning _____ fixed costs to segments.

common

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Variable manufacturing cost Per Unit - $12 Total - $240,000 Supervisor salary Per Unit - $3 Total - $60,000 Depreciation Per Unit - $1 Total - $20,000 Allocated fixed overhead Per Unit - $7 Total - $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______.

continue to make the part — $60,000 advantage The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make × 20,000 units).

GAAP and IFRS rules for publicly traded companies ______. - create incentives for companies to use the contribution margin format in segment reporting - create problems in reconciling internal and external reports - require segmented financial data be included in annual reports - require that the same method be used for both internal and external segment reporting

create problems in reconciling internal and external reports require that the same method be used for both internal and external segment reporting require segmented financial data be included in annual reports

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is ______.

deducted from the cost of the new equipment

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

A decision to carry out one of the activities in the value chain internally, rather than to purchase externally from a supplier, is called a(n) ____________ or _______ decision.

make or buy

When using the internal rate of return method to rank competing investment projects ______.

the higher the internal rate of return, the more desirable the project

Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a ______ for the individual product lines made in the plant.

traceable fixed cost to the plant and a common fixed cost

The simple rate of return equals the ______.

annual incremental net operating income ÷ initial investment

When a project with a negative NPV has significant intangible benefits, the _____.

annual intangible benefit necessary to make the investment worthwhile should be calculated.

The net present value of a project is the _______.

difference between the present value of cash inflows and the present value of cash outflows

A future cost that is not the same between any two alternatives is known as a(n) _________ , incremental, or avoidable cost.

differential

A future cost that is not the same between any two alternatives is known as a(n), ___________ incremental, or avoidable cost.

differential

Sorto Corporation has two divisions: the East Division and the West Division. The corporation's net operating income is $93,200. The East Division's divisional segment margin is $223,200 and the West Division's divisional segment margin is $15,900. What is the amount of the common fixed expense not traceable to the individual divisions?

$145,900 Total margin segment = $223200 + $15900 = $239100 Net operating income = Total margin segment - Common Fixed expenses $93200 = $239100 - Common Fixed expenses Common Fixed expenses = $239100 - $93200 = $145900

The net present value method assumes that the project's cash flows are reinvested at the: Internal Rate of Return. Simple Rate of Return. Payback Rate of Return. None of the above.

None cash flows are reinvested at the discount rate used in the net present value calculation.

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;

Payback Period = Initial Investment / Annual Cash Inflows = $ 72,000/ $ 18,000 = 4 Years

The Picasso Co. is evaluating a project estimated to cost $190,200 and provide annual cash flows of $60,000 for 4 years. Determine the internal rate of return of the project; the company's cost of capital is 9%.

Step 1 - Amount Invested / Equal Annual Cash Flows= Factor $190,200 / $60,000 = 3.17 factor Step 2 - Locate the factor on the P.V. Annuity Table 3.17 factor at 4 years = 10% Internal Rate of Return is 10% The company's cost of capital is 9%. Project is accepted as 10% meets the minimum 9% requirement

T or F Common fixed costs should not be allocated between divisions when deciding whether or not a division should be discontinued.

True

T or F Depreciation on production equipment would be an example of a sunk cost and therefore not relevant when deciding between two alternatives.

True

T or F Depreciation would be an example of a sunk cost.

True

T or F In a capital budgeting decision, a $20,000 annual cash savings would be treated as a $20,000 annual cash inflow.

True

T or F In a decision to drop a segment, the opportunity cost of the space occupied by the segment would be the profit that could be derived from the best alternative use of the space.

True

T or F In a make or buy decision, the supervisors salary that would be avoided if the part was purchased from an outside supplier would be a relevant cost.

True

T or F One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

True

T or F The salary of the treasurer of a corporation is an example of a common cost which normally cannot be traced to product segments.

True

T or F Under variable costing, product cost does not contain any fixed manufacturing overhead cost.

True

T or F Under variable costing, product costs consist of direct materials, direct labor, and variable manufacturing overhead.

True

T or F Variable costing and absorption costing both include direct labor, direct materials, and variable overhead when computing the product unit cost.

True

T or F Variable costs are always relevant costs.

True

T or F Sales commissions would not be relevant in a special price/special order decision.

True; Since it is a specific order offer then there would not be any sales commissions incurred.

T or F In a net present value calculation you would use the present value of an annuity table to compute the present value of annual cash revenues of $100,000.

True; The present value of an annuity table can be used for annual inflows or outflows

The Sparkle Company manufactures affordable costume jewelry. At the beginning of the year, the Sparkle Company received a request from an oversees customer who would like to purchase 10,000 necklaces for a Breast Cancer Fund Raising event; due to the large order the customer has offered to purchase each necklace for $80 (current selling price is $150 per unit). If the Sparkle Company accepts the special order, then an additional $10,000 in shipping costs and $20,000 in custom packaging/wrapping will be incurred. In addition, the order will require each necklace have special engraving that will cost $3 per necklace. If the special order is accepted, only the $2 of fixed overhead will be relevant as this will cover the supervisor salary. The remaining fixed costs will be incurred with or without the special order. The company currently has the capacity to produce the 10,000 necklaces without incurring any additional fixed costs for factory space. Current Price Structure for each necklace (excludes special order) Direct Labor - $10 Direct Materials - $60 Fixed Cost per unit (includes $2 per unit for the supervisor) - 10 Sales Commission - $3 Total cost per Unit - $83 Which of the following is true if the Sparkle Company accepts the special order?

the company would report a $20,000 profit if they accept the special order

T or F The book value of old equipment is not a relevant cost in a decision.

true

Being less dependent on suppliers and realizing profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations, are advantages of ________ _______.

vertical; Integration