ACTG213 Final Exam

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to ___.

$0

Company A has a contribution ratio of 35%. For each dollar in sales, contribution margin will increase by ___.

$0.35

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales rounded to the nearest dollar must be ___.

$1,520,000 Sales = ($240,400 + 930,000) / 0.77

Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by the end of the year, net operating income for the year will increase by ___.

$137,500 Net operating income change = $250,000 x 55%

The present value of a 5-year, 8% loan with annual payments of $4,000 made at the end of each year is ___.

$15,972 $4,000 x 3.993

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is ___.

$168,000 = (9,000 x $32) - $120,000

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals ___.

$244,068 (Sales = $144,000 / 0.59)

Building Blocks Co. is considering the purchase of anew specialty saw. The saw has a useful life of 10 years, but the salvage value is unknown. The net present value excluding the salvage value of the saw is negative $13,950. If the present value factor is 0.588, then the salvage value must be ___ in order to make this investment acceptable.

$25,000 $13,950 / 0.558

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is ___ per minute.

$3 CM of $15 / 5 minutes of labor time

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is ___.

$380,000 Net operating income = 30,000 x ($40 - 19) - $250,000

A company needs to sell 90,000 units to reach a target profit of $180,000. If each unit sells for $7.50, the total sales dollar needed to reach the target profit is ___.

$675,000 90,000 x $7.50

Vivian's Violins has sales of $326,000, a contribution margin of $184,000, and fixed costs total $85,000. Vivian's Violins net operating income is ___.

$99,000 Net operating income = $184,000 - 85,000

What is the profit function?

(P x Q) - (V x Q) - fixed expenses

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is ___.

19% $559,740 / 2,946,000

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?

2,800 = ($98,000 / ($50 - 15))

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is ___.

21,645 Sales volume = ($470,000 + 222,640) / $32

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is ___.

40,000 Sales volume = ($520,000 + $320,000) / $21

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is ___.

780 $27,300 / 35

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ___.

8,400 Sales volume = ($320,000 + 200,800) / ($90 - 28)

When making a capital budgeting decision, it is most useful to calculate the payback period:

As part of the screening process and if a company is "cash poor"

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Buy - $20,000 advantage The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or $380,000. Thus, there is a $20,000 advantage to buying the part.

What is true regarding the time value of money?

By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more. Projects that provide earlier returns are preferable to those that promise later returns.

When making a decision using incremental analysis consider the ___.

Change in sales dollars specifically resulting from the decision and change in cost resulting specifically from the decision.

To effectively deal with a contraint:

Efforts should be focused on the weakest link and improvements should focus on the constraint.

True of False: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

True or False: Preference decisions relate to whether a proposed project is acceptable based on present criteria.

False, Preference decisions relate to selecting the best project(s) among several acceptable alternatives.

What are the assumptions of cost-volume-profit analysis?

In multi product companies, the sales mix is constant. Costs are linear and can be accurately divided into variable and fixed elements.

Stephens, Inc. is considering dropping a product line. during the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $$110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will ___.

Increase by $11,00 The company will lose $84,000 in contribution margin ($170,000 - 86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.

Which capital budgeting approach uses discounted cash flows?

Internal rate of return and net present value methods

What are ways to increase the capacity of a bottleneck?

Investing in additional machines at the bottleneck and shifting workers from processes that are not bottlenecks to the process that is the bottleneck.

Isolating relevant costs is desirable beacuse:

Irrelevant costs may be used incorrectly in the analysis, all information needed for the total cost approach is rarely available and critical information may be overlooked with the total cost approach.

The payback method:

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

One dollar earned today is worth:

More than one dollar earned at a future point in time

Company A has ales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ___.

Reached the break-even point, a contribution margin equal to fixed costs.

A company is considering buying a component part that they currently make. What, related to the equipment currently being used to make the component, are relevant to the decision?

Salvage value, alternative uses for the equipment.

Typical capital budgeting cash inflows include:

Salvage value, cost reductions and working capital released

What ways can one calculate the benefit of selecting one alternative over another?

The difference between the net operating income for the two alternatives, an analysis that just looks at the relevant costs and benefits, and an analysis that looks at all costs and benefits and identifies those that are differential.

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ___.

The sale of 12,000 putters results in net operating income of $380,000 (12,000 units x $65 contribution margin = $780,000 - 400,000), the contribution margin per putter is $65.

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ___.

Total contribution margin will increase by $0.70, net operating income will increase by $0.70.

True of False: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

What is cash inflow?

Working capital is released for use elsewhere within the company.

What is cash outflow?

Working capital is tied up for project needs

The simple rate of return is also referred to as the ___ or ___ rate of return.

accounting, unadjusted

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

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

Average costs:

are often misleading and contain sunk costs

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

be reduced by

When a manager increases the capacity of constraint or ___, it is called relaxing the constraint.

bottleneck

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called ___ ___.

capital budgeting

When discussing capital investments, the term out-of-pocket costs refers to:

cash outlays for salaries, advertising and other operating expenses.

An investor deposits $100.00 and earns $6.00 of interest in the first year and $6.36 of interest in the second year. This means the investment is earning 6% ___ interest.

compound

After reaching the break-even point, a company's net operating income will increase by the ___ ___ per unit for each additional unit sold.

contribution margin

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

Calculating the present vale of money is referred to as ___ cash flows.

discounting

A company has reached its break-even point when the contribution margin __ fixed expenses.

equals

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

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

incremental

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

irrelevant

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a ___ cost.

irrelevant

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

When considering accepting a special order:

normal sales must not be affected, there must be idle capacity

Allocated common costs are:

only relevant to decisions if they are avoidable

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

Net present value of the project / investment required is the formula for the:

project profitability index

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a ___ cost.

relevant

When selecting one alternative over another, opportunity costs:

represent forgone economic benefits and are sometimes zero.

It is profitable to continue processing a joint product after the split-off point, so long as the incremental ___ from such processing exceeds the incremental processing cost incurred after the split-off point.

revenue

The relative proportions in which a company's products are sold is referred to as ___ ___.

sales mix

High-low or least square regression analysis should be only done if a ___ plot depicts linear cost behavior.

scatter

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

screening, preference

The contribution margin income statement allows users to easily judge the impact of a change in ____ on profit.

selling price, cost, volume

When making a decision, qualitative differences between alternatives ___ ___ be ignored.

should not

The capital budgeting method that focus on incremental operating income is:

simple rate return

In the equation, Y = a + bX, b represents the ___.

slope of the line, variable cost per unit of activity

The net present value of a project is:

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

An investment requires committing funds today with:

the expectation of earning a return on those funds in the future.

In the equation, Y = a + bX, a represents the ___.

total fixed cost, vertical intercept of the line.

In the equation, Y = a + bX, Y represents the:

total mixed cost

Activities ranging from development to production to after-sales service are called a ___ ___.

value chain

When using the high-low method, the slope of the line equals the ___ cost per unit of activity.

variable

Variable expenses / sales is the calculation for the ___ ___ ratio.

variable expense

When a company is involved in more than one activity in the entire value chain, it is ___ ___.

vertically integrated

The total cost approach and the differential approach methods of decision analysis ___ ___ provide the same correct answer.

will always

Current assets minus current liabilities is called ___ ___.

working capital