Accounting and Finance

ACCY 122 – Spring 2010 Practice Exam 2

ACCY122_Sp10_Practic_Exam_02 of 6

NAME ________________________________________________ We will go over this practice exam on Tuesday – keep it to study for the exam on Thursday and turn it in then. For numerical questions you have the check figures. Be able to calculate that amount. This will be treated as a problem set for points. On the exam you will need to show work and then select the correct answer. The question number jump around a bit – do not concern yourself with that. Differential Costs 64. Which of the following costs always differ among future alternatives? a. fixed costs b. historical costs c. relevant costs d. variable costs

65. Which of the following costs are never relevant in the decision-making process? a. fixed costs b. historical or sunk costs c. relevant costs d. variable costs

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 AND 67: Jim’s 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:

Geo Prizm Honda Civic Acquisition cost $15,000 $3,000 Repairs $ 3,000 — Annual operating costs (Gas, maintenance, insurance) $ 2,280 $2,100

66. The cost NOT relevant for this decision is the: a. acquisition cost of the Geo Prizm b. acquisition cost of the Honda Civic c. repairs to the Geo Prizm d. annual operating costs of the Honda Civic

67. What should Jim do? What are his savings in the first year? a. Buy the Honda Civic; $9,780 b. Fix the Geo Prizm; $5,518 c. Buy the Honda Civic; $180 d. Fix the Geo Prizm; $5,280

c is correct



75. One-time-only special orders should only be accepted if: a. incremental revenues exceed incremental costs b. differential revenues exceed variable costs c. incremental revenues exceed fixed costs d. total revenues exceed total costs 82. Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level

are: Direct materials $0.25 Direct labor 0.40 Variable overhead 0.15 Fixed overhead 0.20 Marketing - fixed 0.20 Marketing/distribution - variable 0.40 Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about

purchasing 1,500 units at $2.00 each. Current sales would not be affected by the one-time-only special order, and variable marketing/distribution costs would not be incurred on the special order. What is Ratzlaff Company’s change in operating profits if the special order is accepted?

a. $400 increase in operating profits b. $400 decrease in operating profits c. $1,800 increase in operating profits d. $1,800 decrease in operating profits c is correct THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 84 THROUGH 86: Grant’s Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials $455 Direct labor 300 Variable manufacturing support 45 Fixed manufacturing support 100 Total manufacturing costs 900 Markup (60%) 540 Targeted selling price $1440

Grant’s Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.

84. For Grant’s Kitchens, what is the minimum acceptable price of this one-time-only special order? a. $830 b. $930 c. $785 d. $1,440

a is correct



85. Other than price, what other items should Grant’s Kitchens consider before accepting this one-time-only special order?

a. reaction of shareholders b. reaction of existing customers to the lower price offered to Ms. Wang c. demand for cherry cabinets d. price is the only consideration.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 89 AND 90: Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods’ policy to add a 50% markup to full costs. 89. Northwoods is invited to bid on a one-time-only special order to supply 100 rustic tables. What is

the lowest price Northwoods should bid on this special order? a. $6,300 b. $7,200 c. $9,000 d. $13,500

b is correct 91. Cochran Corporation has a plant capacity of 100,000 units per month. Unit costs at capacity are: Direct materials $4.00 Direct labor 6.00 Variable overhead 3.00 Fixed overhead 1.00 Marketing — fixed 7.00 Marketing/distribution — variable 3.60 Current monthly sales are 95,000 units at $30.00 each. Suzie, Inc., has contacted Cochran

Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Cochran’s change in operating profits if the one-time-only special order is accepted?

a. $14,800 increase b. $17,200 increase c. $22,000 increase d. $33,200 increase a is correct Cost Allocation 52. The support department allocation method that is the most widely used because of its simplicity is

the: a. step-down method b. reciprocal allocation method c. direct allocation method d. sequential allocation method



56. The step-down allocation method: a. typically begins with the support department that provides the highest percentage of its total

services to other support departments b. recognizes the total amount of services that support departments provide to each other c. allocates complete reciprocated costs d. offers key input for outsourcing decisions THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 59 THROUGH 61: Jake’s Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Support Departments Production Departments

Maintenance Department

Personnel Department

A B

Budgeted costs $160,000 $40,000 $80,000 $120,000 Budgeted maintenance-hours

NA 400 480 320

Number of employees 20 NA 80 240 61. Using the step-down method, what amount of Maintenance Department cost will be allocated to

Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up)

a. $32,000 b. $42,667 c. $57,334 d. $64,000 b is correct For the following problems set them up in a grid like you would in Excel like you see in Chapter 21 of the text. You do not need to solve them, just set them up with all the amounts that you can. For example see page 737 Exhibit 21-6. THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 47 AND 48: 47. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The

existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working capital of $60,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.



55. Upper Darby Park Department is considering a new capital investment. The following information

is available on the investment. The cost of the machine will be $150,000. The annual cost savings if the new machine is acquired will be $40,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be $20,000. Upper Darby Park Department is assuming no tax consequences. If Upper Darby Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project?

56. Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is

expected to generate annual cash inflows of $300,000. The required rate of return is 12% and the current machine is expected to last for four years. What is the maximum dollar amount Shirt Company would be willing to spend for the machine, assuming its life is also four years? Income taxes are not considered.

Target Costing THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 96 THROUGH 98: Sheltar’s TV currently sells small televisions for $180. It has costs of $140. A competitor is bringing a new small television to market that will sell for $150. Management believes it must lower the price to $150 to compete in the market for small televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Sheltar’s sales are currently 100,000 televisions per year. 96. What is the target cost if target operating income is 25% of sales? a. $37.50 b. $45.00 c. $112.50 d. $135.00 c is the correct answer 97. What is the change in operating income if marketing is correct and only the sales price is changed? a. $1,100,000 b. $300,000 c. $(1,100,000) d. $(2,900,000) d is the correct answer 98. What is the target cost if the company wants to maintain its same income level, and marketing is

correct (rounded to the nearest cent)? a. $112.50 b. $113.64 c. $123.34 d. $140.00 b is the correct answer



167. Steven Corporation manufactures fishing poles that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing pole that will sell for $18.00. Management believes it must lower the price to $18.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Steven Corporation’s sales are currently 200,000 poles per year.

Required: a. What is the target cost for the new price if target operating income is 20% of sales?

b. What is the change in operating income for the year if $18.00 is the new price and costs remain the same?

c. What is the target cost per unit if the selling price is reduced to $18.00 and the company wants to maintain its same income level?

Answer: a. $14.40 b. = $600,000 reduction in income c. Current income = $936,000 Target cost per unit:= $13.32

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