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