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Quality Costs 1. The following activities are typical in production management: 1. Warranty work 2. Labor and overhead incurred for rework of defective products found by an inspector 3. Quality training program 4. The costs of a consumer complaint department 5. In-process inspection costs 6. Reinspection of reworked products 7. Downtime attributed to quality problems 8. Product recalls 9. Lower sales due to poor product performance 10.Quality audits To what classification of quality costs do the foregoing described costs belong? Prevention Appraisal Internal Failure External Failure A. 3,7,10 3,5 2 1,4,8,9 B. 3,10 5 2,6,7 1,4,8,9 C. 10 3 2,5,6 1,4,7,8,9 D. 3,10 5 1,2,10 4,7,8,9

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2. As a result of quality improvements, profits have increased by A. P32,500 C. P7,500 B. P20,500 D. P5,00

Questions 2 thru 4 are based on the following information. At the beginning of the year, Joshua Corporation initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data was collected for the current and preceding year. Preceding Year Current Year Sales P1,000,000 P 1,000,000 Recruiting 1,000 1,500 Packaging inspections 2,500 4,000 Downtime 20,000 15,000 Reinspection 40,000 25,000 Product inspection 5,000 10,000 Product liability 35,000 27,500 May 9, 2004

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3. If quality costs had been reduced to 2.5 percent of sales in the current year, profits would have increased by A. P177,000 C. P61,000 B. P58,000 D. P25,000 4. For the current year, the respective percentages based on sales of the different quality costs, respectively, are: Prevention Appraisal Internal External Failure failure A. 0.15% 1.40% 2.50% 1.50% B. 0.15% 1.40% 4.00% 2.75% C. 0.65% 1.00% 1.50% 4.25% D. 0.65% 1.00% 2.50% 1.50% Productivity Measures Questions 5 & 6 are based on the following information. Information about Rose Company is as follows: 2001 Output (units) 80,000 Selling price per unit P25 Input quantities: Materials (pounds) 4,000 Labor (hours) 3,200 Input prices: Materials (per pound) P5.00 Labor (per hour) P7.00

2002 84,000 P25 4,000 3,250 P5.50 P7.50

5. What are the materials productivity, and labor productivity ratio for 2001? A. B. C. D. Materials 20.00 100.00 25.00 20.00 Labor 25.00 95.45 24.00 24.00 6. By how much did profits change as a result of changes in productivity related to materials, and labor, respectively? A. B. C. D. Materials P(1,100) P1,100 P(625) P625 May 9, 2004

Labor

Pre-week Quizzer P (825)

P 825

P 625

P625

Activity-Based Costing 7. Designing and changing are activities that are classified as: A. Unit-level C. Product-level B. Batch-level D. Facility-level 8. How are the following activities classified using ABC system? 1. Security 2. Product inspections 3. Insurance on the plant 4. Materials handling 5. Modifications made by engineering to the product design of several products 6. Machine-related overhead 7. Set-ups 8. Providing space and utilities 9. Moving of inventory Unit Level Batch Level Product Level Facility Level A. 4,6,8 2,4,7 1,3 10 B. 2,6 4,5 1,7 3,10 C. 6 2,4,7,10 5 1,3,8 D. 2 1,6,7 10 3,4,5,8 9. Protex Company makes two products, X and Z. X is being introduced this period, whereas Z has been in production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The only relevant overhead item is the cost of engineering change orders. X and Z are expected to require eight and two change orders, respectively. X and Z are expected to require 2 and 3 machine hours, respectively. The cost of a change orderis P600. If Protex applies engineering change order cost on the basis of machine hours, the overhead cost per unit to be assigned to X and Z, respectively, are A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively Page 2 of 36

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10.Zeta Co. is preparing its profit plan. As part of its profitability of individual products, the controller amount of overhead that should be allocated to product lines from the information given as follows: Wall mirrors

analysis of the estimates the the individual

Special windows Units produced 25 25 Material moves per product line 5 15 Direct labor hours per unit 200 200 Budgeted materials handling costs P50,000 Under each of the systems of costing, how much materials handling costs should be allocated to one unit of wall mirrors? A. B. C. D. Based on direct labor P1,000 P 500 P2,000 P5,000 hours Under activity-based P 500 P1,000 P1,500 P2,500 costing

Life-Cycle Costing 11.Richards, Inc. developed the following budgeted life-cycle income statement for two proposed products. Each product’s life cycle is expected to be two years. Product Product Total X Y Sales P200,000 P200,0 P400,000 00 Cost of goods sold ( 120,00 (130,0 ( 250,000) 0) 00) Gross Profit P 80,000 P P150,000 70,000 Period expenses: Research & development ( 70,000) Marketing ( 50,000) Life-cycle income P 30,000

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A 10% return on sales is required for new products. Because the proposed products did not have a 10% return on sales, the products were going to be dropped. Relative to Product Y, Product X requires more research and development costs but fewer resources to market the product. Sixty percent of the research and development costs are traceable to Product X and 30 percent of the marketing costs are traceable to Product X. If research and development costs and marketing costs are traced to each product, life-cycle income for Product Y would be A. P35,000 C. P12,000 B. P20,000 D. P7,000 Cost Behavior 12.The following cost functions were developed for manufacturing overhead costs: Manufacturing Overhead Costs Cost Function Electricity P100 + P20 per direct labor hour Maintenance P200 + P30 per direct labor hour Supervisors’ salaries P10,000 per month Indirect materials P16 per direct labor hour

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If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated manufacturing overhead costs would be A. P109,300 C. P76,300 B. P99,000 D. P10,366 Cost-Volume-Profit Analysis 13.The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, what must the total fixed costs be? A. P80,000 C. P240,000 B. P90,000 D. P600,000 14.Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. The selling price should be A. P1.60 C. P2.40 B. P2.10 D. P2.50 15.The following relates to Gloria Corporation, which produced and sold 50,000 units during a recent accounting period: Sales P850,000 Fixed manufacturing costs 210,000 Variable manufacturing costs 140,000 Fixed selling and administrative expense 300,000 Variable selling and administrative expense 45,000 Income tax rate 40% For the next accounting period, if production and sales are expected to be 40,000 units, the company should anticipate a contribution margin per unit of A. P1.00 C. P3.10 B. P13.30 D. P7.30 16.Madden, Company has projected its income before taxes for next year as shown below. Madden is subject to a 40% income tax rate. Sales (160,000 P8,000,000 May 9, 2004

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units) Cost of sales Variable costs P 2,000,000 Fixed costs 3,000,000 5,000,000 Income before P 3,000,000 taxes Madden’s net assets are P36,000,000. The peso sales that must be achieved for Madden to earn a 10 percent after tax return on assets would be A. P8,800,000 C. P12,000,000 B. P16,000,000 D. P6,880,000 17.The following data relate to Homer Company which sells a single product: Unit selling price P 20.00 Purchase cost per unit 11.00 Sales commission, 10% of selling price 2.00 Monthly fixed costs P80,000 The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5 percent commission plus P20,000 per month in salary. They now receive only commission. The change in compensation plan should change the monthly breakeven point by A. 1,071 Increase C. 1,538 Increase B. 1,071 Decrease D. 1,538 Decrease 18.Brunei Corp. is developing a new product, surge protectors for highvoltage electrical flows. The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00 per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of additional fixed costs associated with this new product. A corporate fixed charge of P20,000 currently absorbed by other products will be allocated to this new product. How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is 40%) A. 10,700 C. 20,000 Page 4 of 36

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19.A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to 10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price were reduced to P9 per unit, the profit would be A. P3,000 C. P5,000 B. P4,000 D. P6,000

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20.Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a 10% increase over last year. For the company to increase income by P15,000 in the coming year, the marginal contribution margin rate must be A. 20% C. 40% B. 30% D. 70% 21.Wilson Co. prepared the following preliminary forecast concerning product G for next year assuming no expenditure for advertising: Selling price per unit P 10 Units sales 100,000 Variable costs P600,000 Fixed costs P300,000 Based on a market study in December of this year, Wilson estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent on advertising. Assuming that Wilson incorporates these changes in its forecast, what should be the operating income from product G? A. P175,000 C. P205,000 B. P190,000 D. P365,000 22.Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each pair of shoes sold. Sales personnel also receive a small basic salary. The following cost and revenue data relate to Store 21 and are typical of the company’s many sales outlets: Selling price P 800 Variable expenses: Invoice costs P360 Sales commission 140 500 Fixed expenses per year: Rent P1,600,000

May 9, 2004

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Advertising 3,000,000 Salaries 1,400,000 Total P6,000,000 The company is considering paying the store manager a P60 commission on each pair of shoes sold in excess of break-even point. If this change were made, what will be the store’s before tax profit or loss assuming 23,500 pairs of shoes are sold in a year? A. P(360,000) C. P840,000 B. P2,930,000 D. P1,330,000

Administration Total fixed costs Net income before income taxes Income taxes (40%) Net income after income taxes

Pre-week Quizzer 45,000 247,500 P157,500 (63,000) P 94,500

24.The breakeven volume in tons of product for the year is A. 420 C. 1,100 B. 495 D. 550

23.BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and will continue whether or not production ceases. Depreciation on the equipment is P20,000 a year. If production is stopped, the equipment can be sold for P18,000, if production continues, however, it will be useless at the end of 1 year and will have no salvage value. The selling price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break even on a cash flow basis is A. 4,500 units C. 1,800 units B. 5,000 units D. 36,000 units Questions 24 through 28 are based on the Statement of Income of Davao, Inc. which represents the operating results for the current fiscal year ending December 31. Davao had sales of 1,800 tons of product during the current year. The manufacturing capacity of Davao’s facilities is 3,000 tons of product. Consider each question’s situation separately. Sales P900,000 Variable costs Manufacturing P315,000 Selling costs 180,000 Total variable costs 495,000 Contribution margin P405,000 Fixed costs Manufacturing P 90,000 Selling 112,500 May 9, 2004

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25.If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same levels and amounts next year, the after-tax net income that Davao can expect for the next year is A. P135,000 C. P110,25 B. P283,500 D. P184,500 26.Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all of Davao’s costs would be at the same levels and rates as last year. What net income after taxes would Davao make if it took this order and rejected some business from regular customers so as not to exceed capacity? A. P297,500 C. P252,000 B. P211,500 D. P256,500

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29.Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of finished product contains 2 yards of cloth. However, there is unavoidable waste of 20% calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 per yard. The standard direct material cost for cloth per unit of finished product is: A. P4.80 C. P7.00 B. P6.00 D. P7.50

27.Without prejudice to your answers to previous questions, and assume that Davao plans to market its product in an new territory. Davao estimates that an advertising and promotion program costing P61,500 annually would need to be undertaken for the next two or three years. In addition , a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Davao’s current after-tax income of P94,500? A. 307.5 C. 1,095 B. 273.33 D. 1,545 28.Without prejudice to preceding questions, assume that Davao estimates that the per ton selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs will not change. What sales volume in pesos will be required to earn an after-tax net income of P94,500 next year? A. P1,140,000 C. P825,000 B. P1,500,000 D. P1,350,000 Standard Costing & Variance Analysis May 9, 2004

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30.The following information relates to Ore Company’s 2003 manufacturing activities: Standard direct labor hours per unit 2 Number of units produced 5,000 Standard variable overhead per standard direct labor hoursP3 Actual variable overhead P28,000 Unfavorable overhead efficiency variance P 1,500 The number of actual direct labor hours are A. 10,500 C. 10,000 B. 11,000 D. 12,400 Questions 31 & 32 are based on the following information. Rainbow Company uses a standard cost system. Information about its direct labor costs for Product Lux for the month of January follows: Standard hours allowed for actual production 1,500 Actual hourly rate paid P61.00 Standard hourly rate P60.00 Labor efficiency variance, Favorable P6,000 31.How many direct labor hours were actually worked during the month of January? A. 1,400 C. 1,402 B. 1,498 D. 1,600 32.How much was the direct labor rate variance? A. P1,400 F C. P1,400 U B. P1,600 F D. P1,600 U 33.STA Company uses a standard cost system. The following information pertains to direct labor costs for the month of June: Standard direct labor rate per hour P10.00 Actual direct labor rate per hour P 9.00 Labor rate variance P12,000 favorable Actual output 2,000 units Standard hours allowed for actual production 10,000 hours How many actual labor hours were worked during March for STA Company? May 9, 2004

A. 10,000 B. 12,000

Pre-week Quizzer C. 8,000 D. 10,500

34.If annual overhead costs are expected to be P1,000,000 and 200,000 total labor hours are anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is A. P6.25 C. P25.00 B. P5.00 D. P4.00 35.ABC had a P28,000 favorable volume variance, a P25,000 unfavorable variable overhead spending variance, and P12,000 total overapplied overhead. The fixed overhead budget variance was A. P9,000 favorable C. P9,000 unfavorable B. P26,000 favorable D. P26,000 unfavorable 36.Given for the variable factory overhead of X Products Inc.: P39,500 actual input at budgeted rate, P41,500 flexible budget based on standard input allowed for actual output, P2,500 favorable flexible budget variance. Compute the spending variance: A. P500 U C. P500 F B. P2,000 F D. P2,000 U 37.Bacon had a P28,000 unfavorable volume variance, a P5,000 unfavorable fixed overhead budget variance, and P22,000 total underapplied overhead. The variable overhead spending variance was A. P11,000 favorable C. P11,000 unfavorable B. P1,000 favorable D. P23,000 unfavorable 38.Acme had a P22,000 favorable fixed overhead budget variance, a P15,000 unfavorable variable overhead spending variance, and P2,000 total overapplied overhead. The volume variance was A. P13,000 overapplied C. P5,000 overapplied B. P13,000 underapplied D. P5,000 underapplied

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39.Aldorp had a P10,000 unfavorable fixed overhead budget variance, a P6,000 unfavorable variable overhead spending variance, and a P2,000 favorable volume variance. The total overhead was A. P14,000 overapplied C. P18,000 overapplied B. P14,000 underapplied D. P18,000 underapplied

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40.Fidelity Company uses a flexible budget system and prepared the following information for the year: Fidelity operated at 80 percent of capacity during the year, but applied factory overhead based on the 90 percent capacity level. Assuming that actual factory overhead was equal to the budgeted amount of overhead, how much was the overhead volume variance for the year? Percent of Capacity 80 90 Percent Percent Direct labor hours 24,000 27,000 Variable factory overhead P54,000 P60,750 Fixed factory overhead P81,000 P81,000 Total factory overhead rate pre DLH P5.625 P5.25 A. P9,000 U C. P9,000 F B. P15,750 U D. P15,750 F 41.Using the information presented below, calculate the total overhead spending variance. Budgeted fixed overhead P10,000 Standard variable overhead (2 DLH at P2 per DLH) P4 per unit Actual fixed overhead P10,300 Actual variable overhead P19,500 Budgeted volume (5,000 units x 2 DLH) 10,000 DLH Actual direct labor hours (DLH) 9,500 Units produced 4,500 A. P500 U C. P1,000 U B. P800 U D. P1,300 U

42. STA Company’s standard fixed overhead cost is P3 per direct labor hour based on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours per unit. During 2001, STA produced 55,000 units of product, incurred P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct labor. What are the fixed overhead variances? Fixed OH spending (budget) variance Fixed OH Volume variance May 9, 2004

A. P15,00 0U P30,00 0F

B. P33,00 0U P30,00 0F

C. D. P15,00 P33,000 0U U P18,00 P18,000 0F F Page 9 of 36

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Questions 43 and 44 are based on the following information. Raff Co.’s monthly normal volume is 50,000 units (100,000 direct labor hours.) Raff Co.’s standard cost system contains the following overhead costs: Variable P6 per unit Fixed 8 per unit

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The following information pertains to the month of March Units actually produced 38,000 Actual direct labor hours worked 80,000 Actual overhead incurred: Variable P250,000 Fixed 384,000 43.For March, the unfavorable variable overhead spending variance was A. P6,000 C. P12,000 B. P10,000 D. P22,000 44.For March, the fixed overhead volume variance was A. P96,000 U C. P80,000 U B. P96,000 F D. P80,000 F 45.Smile Corporation uses a standard cost system. Information for the month of April is as follows: Actual manufacturing overhead costs (P13,000 is fixed)P40,000 Direct labor: Actual hours worked 12,000 hours Standard hours allowed 10,000 hours Average actual labor cost per hour P9 The factory overhead rate is based on a normal volume of 12,000 direct labor hours Standard cost data at 12,000 direct labor hours was: Variable factory overhead P24,000 Fixed factory overhead 12,000 Total factory overhead P36,000 What are the following overhead variances? A. B. C. D. Variable OH P3,000 U P3,000 U P7,000 U P7,000 U Spending Variable OH P2,000 U P4,000 U P2,000 U P4,000 U Efficiency Fixed OH P4,000 U P1,000 U P1,000 U P4,000 U Spending

May 9, 2004

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Questions 46 thru 48 are based on the following information. Edney Company employs standard absorption system for product costing. The standard cost of its product is as follows: Raw materials P14.50 Direct labor (2 DLH x P8) 16.00 Manufacturing overhead (2 DLH x P11) 22.00 The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours. Edney planned to produce 25,000 units each month during the year. The budgeted annual manufacturing overhead is Variable P3,600,000 Fixed 3,000,000 During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000 fixed and 315,000 variable. The total manufacturing overhead applied during November was P572,000.

Actual variable overhead Actual fixed overhead Actual machine time

Pre-week Quizzer P405,000 P122,000 40,500 machine hours

Standard cost and budget information for Roadtrek Company follows: Standard variable overhead rate P9.00 per MH Standard quantity of machine hours 4 hours per case Budgeted fixed overhead P1,440,000 per year Budgeted output 10,000 cases per month

46.The variable manufacturing overhead variances for November are A. B. C. D. Spending P9,000 U P6,000 F P4,000 U P 9,000 F Efficiency P3,000 U P9,000 U P1,000 F P12,000 U 47.The fixed manufacturing overhead variances for November are A. B. C. D. Spending P10,000 F P10,000 U P6,000 F P 4,000 U Volume P10,000 f P10,000 F P3,000 U P22,000 F 48.The total variance related to efficiency of the manufacturing operation for November is: A. P9,000 U C. P21,000 U B. P12,000 U D. P12,000 U Questions 49 thru 53 are based on the following information. The following data are actual results for Roadtrek company for October: Actual output 9,000 cases May 9, 2004

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49.The variable overhead spending variance for the month of October is A. P40,500 U C. P45,000 U B. P81,000 U D. P81,000 F 50.The overhead efficiency variance is A. P4,500 U C. P4,500 F B. P40,500 U D. P40,500 F 51.The amount of fixed overhead controllable variance is A. P2,000 U C. P42,500 U B. P2,000 F D. P42,500 F 52.The amount of fixed overhead volume variance is A. P12,000 F C. P21,000 F B. P12,000 U D. P21,000 U 53.The amount variable overhead volume variance is A. Zero C. P12,000 F B. P9,000 U D. P2,250 U Absorption Costing & Variable Costing 54.Which of the following statements is true for a firm that uses variable (direct) costing? A. The cost of a unit of product changes because of changes in the number of units manufactured. B. Profits fluctuate with sales C. An idle facility variation is calculated D. Product costs include “direct” (variable) administrative costs. 55.At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change by A. P0.25 C. P0.75 B. P0.12 D. P0.10 May 9, 2004

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Relevant Costing 56.An important concept in decision making is described as the contribution to income that is forgone by not using a limited resources in its best alternative use. This concept is called A. Marginal cost C. Potential cost B. Opportunity costs D. Relevant cost 57.If revenues are P210,000 under alternative A and P216,000 under alternative B, and costs are P190,000 for A and P204,000 for B, then using the basic approach in incremental analysis, incremental revenues, costs, and net income, in comparing B to A are respectively A. P6,000, P(14,000), P(8,000) C. P6,000, P14,000, P8,00 B. P(6,000), P14,000, P8,000 D. P(6,000), P(14,000), P(8,000) 58.For the year ended April 30, 2003, Leba Company incurred direct costs of P800,000 based on a particular course of action. Had a different course of action been taken, direct costs would have been P650,000. In addition, Leba’s fixed costs during the fiscal year were P110,000. The incremental (decremental) costs was: A. P40,000 C. P(40,000) B. P150,000 D. P(150,000)

59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of Product B each week by incurring a common variable costs of P400,000. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint product. Data gathering there two products are as follows: Product Product A B Selling price per pound without further P P 9.00 Processing 12.00 Selling price per pound with further P P 11.00 Processing 15.00 Total separate weekly variable costs of P50,00 P45,000 Further processing 0 Page 12 of 36

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To maximize Wallace Company’s manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week are A. P45,000 C. P95,000 B. P50,000 D. P0 60.Blue & Company sells a product for P20 with variable cost of P8 per unit. Blue could accept a special order for 1,000 units at P14. If Blue accepted the order, how many units could it lose at the regular price before the decision become unwise? A. 1,000 units C. P500 units B. P200 units D. 0 units 61.Geary Manufacturing has assembled the following data pertaining to two popular products. Blender Electric mixer Direct materials P 6 P 11 Direct labor 4 9 Factory overhead @ P16 per 16 32 hour Cost if purchased from an 20 38 outside supplier Annual demand (units) 20,000 28,000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal strategy, it should A. produce 25,000 electric mixers, and purchase all other units as needed B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed C. produce 20,000 blenders and purchase all other units as needed D. purchase all units as needed May 9, 2004

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62.The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is determined as follows: Product X Product Y Revenue P 130 P80 Variable costs 70 38 Contribution P 60 P42 margin Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce resource. 42,000 machine hours are available during the year. Product X requires 6 machine hours per unit while product Y requires 3 machine hours per unit. How many units of X and Y should Hingis Corporation produce? A. B. C. D. Product X 16,000 8,000 7,000 3,000 Product Y -04,000 -08,000 63.Wagner sells product A at a price of P21 per unit. Wagner’s cost per unit based on the full capacity of 200,000 units is as follows: Direct materials P 4 Direct labor 5 Overhead (2/3 of which is fixed) 6 P15 A special order offering to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner has sufficient existing capacity to manufacture the additional units To achieve an increase in operating income of P40,000. Wagner should charge a selling price of A. P14 C. P16 B. P15 D. P18 64.Yardley Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs: Variable costs P56,250 Fixed costs 45,000 Page 13 of 36

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The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-house design will be done. Instead, the special job will require the use of external designers costing P13,750. What is the minimum acceptable price of the job? A. P63,050 C. P101,250 B. P70,000 D. P108,200 65.MC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units: Direct materials P 4 Direct labor 12 Variable manufacturing overhead 6 Fixed manufacturing overhead 8 The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be A. a P20,000 increase C. a P4,000 increase B. a P16,000 decrease D. P0 66.Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata’s pretax profit? A. increase of P48,000 C. increase of P6,000 B. decrease of P48,000 D. increase of P6,000 67.Pili Company plans to discontinue a segment with a P32,000 segment margin. Common expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment were closed. The effect of closing down the segment on Pili Company’s before tax profit would be A. P12,000 decrease C. P12,000 increase B. P 7,000 decrease D. P 7,000 increase

May 9, 2004

Pre-week Quizzer

68.Division B earns a contribution margin of P200,000 and has a divisional margin of P70,000. If Division B is closed, all of the direct divisional expenses and P110,000 of common expenses can be eliminated. These facts indicate that closing the division will cause the firm’s operating income to A. increase by P90,000 C. increase by P40,000 B. decrease by P90,000 D. decrease by P40,000 69.Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed expenses of Division X include P30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses: Net sales P100,000 Variable manufacturing costs 60,000 Gross profit P 40,000 Fixed expenses (direct and allocated) 50,000 Loss from operations P (10,000) What would be the effect on the firm’s operating income if Division X were discontinued? A. increase of P10,000 C. decrease of P100,000 B. decrease of P40,000 D. decrease of P10,000 70.Condensed monthly operating income data for Cosmo Inc. for November 2000 is presented below. Additional information regarding Cosmo’s operation follows the statement. Total Hall Town Store Store Sales P200,000 P80,000 P120,000 Less Variable costs 116,00 32,000 84,00 0 0 Contribution margin P 84,000 P48,000 P 36,000 Less direct fixed expense 60,00 20,000 40,00 0 0 Store segment margin P 24,000 P28,000 P ( 4,000) Page 14 of 36

MANAGEMENT ADVISORY SERVICES Less common expenses Operating income

fixed

10,00 0 P 14,000

CPA Review School of the Philippines 4,000

6,00 0 P24,000 P (10,000) One-fourth of each store’s direct fixed expenses would continue through December 31, 2001, if either store were closed. Management estimates that closing the Town Store would result in a ten percent decrease in Hall Store. Hall Store would not affect Town Store sales. The operating results for November 2000 are representative of all months. A decision of Cosmo, Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo’s operating income during 2001 of A. P4,000 C. (P800) B. (P10,800) D. (P6,000)

Pre-week Quizzer

Manufacturing overhead (150% of direct labor) 12,000 Material handling represents the direct variable costs of the Receiving department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, has offered to supply Part No. KJ137 at a unit price of P15,000. 72.If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of KJ37 would A. increase by P4,800 C. decrease by P3,200 B. decrease by P6,200 D. increase by P1,800

71.Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity. Peluso’s plant manager is considering making the headlights now being purchased for P1,100 each, a price that is not expected to change in the near future. The Peluso plant has the equipment and labor force required to manufacture the headlights. The design engineer estimates that each headlight requires P400 of direct materials and P300 of direct labor. Peluso’s plant overhead rate is 200 percent of direct labor costs, and 40 percent of the overhead is fixed cost. A decision by Peluso Company to manufacture the headlights will result in a gain (loss) for each headlight of A. P(200) C. P40 B. P160 D. P280 Questions 72 thru 74 are based on the following information: Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture one unit of KJ37 is presented below. Direct materials P1,000 Materials handling (20% of direct material cost) 200 Direct labor 8,000 May 9, 2004

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73.Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If Leland decided to purchase the 10 units from Scott Supply, Leland’s monthly cost for KJ37 would A. increase P48,000 C. decrease P7,000 B. increase P23,000 D. decrease P57,000 74.Assume that Leland does not wish to commit to a rental agreement but could use idle capacity to manufacture another product that would contribute P52,000 per month. If Leland elects to manufacture KJ37 in order to maintain quality control, Leland’s opportunity cost is A. P18,000 C. P4,000 B. (P20,000) D. (P48,000) Responsibility Accounting & Transfer Pricing 75.A management decision may be beneficial for a given profit center, but not for the entire company. From the overall company viewpoint, this decision would lead to A. goal congruence C. suboptimization B. centralization D. maximization 76.Company L had its operating asset turnover increased by 50% and the operating income margin increased by 50%. Company U had its operating asset turnover increased by 30% and the operating income margin decreased by 30%. What changes are expected for ROI of Company L and Company U, respectively? A. B. C. D. Company L 50% 125% 225% 125% increase increase increase increase Company U 9% 9% no change no change decrease decrease 77.The manager of the Queen Division of Pusoy Company expects the following results in 2004 (pesos in millions): Sales P49.60 Variable costs (60%) 29.76 Contribution margin P19.84 May 9, 2004

Fixed costs Profit Investment: Plant equipment Working capital

Pre-week Quizzer 12.00 P 7.84

P19.51 14.88 P34.39 ROI P7.84/P34.39 22.80% The division has a target ROI of 30 percent, and the manager has asked you to determine how much sales volume the division would need to reach that. He states that the sales mix is relatively constant so variable costs should be close to 60 percent of sales, fixed cost and plant and equipment should remain constant, and working capital (cash, receivables, and inventories) should vary closely with sales in the percentage reflected above. The peso sales that the division needs in order to reach the 30 percent ROI target is A. P19,829,032 C. P57,590,322 B. P44,373,871 D. P59,510,000 78.Ace Division of Card, Inc. expects the following result for 2004: Unit sales 70,000 Unit selling price P 10 Unit variable cost P 4 Total fixed costs P 300,000 Total investment P 500,000 The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Houston’s manager with an offer to buy 10,000 units at P7 each. Houston Division has capacity of 75,000 units and the foreign customer will not accept fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and investment by P40,000. At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that Houston could sacrifice and still maintain its expected residual income? A. 2,333 C. 2,667 B. 3,333 D. 3,667 Page 16 of 36

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79. Family Company has two division, Ma and Pa. Information for each division is as follows: Ma P20,000 P50,000 15% 10% 12%

Pa P65,000 P300,000 18% 20% 12%

Net earnings for division Asset base for division Target rate of return Operating income margin Weighted average cost of capital What is the Economic Value Added for Ma and Pa, respectively? A. P20,000, P36,000 C. P12,500, P11,000 B. P14,000, P29,000 D. P20,000, P29,000

Pre-week Quizzer

80.An appropriate transfer price between two divisions of the Star Corporation can be determined from the following data: Fabrication Division Market price of subassembly P50 Variable cost of subassembly P20 Excess capacity (in units) 1,000 Assembling Division Number of units needed 900 What is the natural bargaining range for the two divisions? A. Between P20 and P50 C. Any amount less than P50 B. Between P50 and P70 D. P50 is the only acceptable price 81.Pacific Company has three plants: one located in Malaysia, one in India and another plant located in the Philippines. Both plants manufactures a component used in a finished product manufactured in the Philippine plant. Currently, both plants are operating at 70 percent capacity. In Malaysia the income tax rate is 42% while in India the tax rate 35%; in the Philippines, the corporate income tax rate is 40%. The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs to manufacture the component are as follows: Direct materials P10 Direct labor 20 Variable overhead 5 Fixed overhead 25 Which transfer price would be in the best interest of the overall corporation? A. B. C. D. Malaysia P35 P 35 P100 P100 India P35 P100 P100 P 35 82.The Engine Division provides motors for the Auto Division of a company. The standard unit costs for Engine Division are as follows:

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Direct materials 10,000 Direct labor 20,000 Variable Overhead 5,000 Fixed Overhead 2,500 Market price P45,500 What is the best transfer price to avoid transfer price problems? A. P45,500 C. P35,000 B. P30,000 D. P37,500

Pre-week Quizzer

83.To avoid waste and maximize efficiency when transferring products among divisions in a competitive economy, a large diversified corporation should base transfer prices on: A. Full cost C. variable costs B. replacement cost D. market price Product Pricing Decision 84.Garden Corp. had the following information: Revenues Cost of goods sold: Direct materials P100,000 Direct labor 75,000 Overhead 125,000 Gross profit Selling and admin expenses Operating income What are the mark up based on: A. B. C. Cost of goods 66.7% 166.7% 66.7% sold Prime costs 185.7% 42.9% 42.9% Direct 400.0% 500.0% 400.0% materials

P500,000

300,000 P200,000 75,000 P125,000 D. 166.7% 185.7% 500.0%

Master Budget 85.The method of budgeting which adds one month’s budget to the end of the plan when the current month’s budget is dropped from the plan refers to A. Long-term budget C. Incremental budget B. Operations budget D. Continuous budget 86.Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a growth in sales of 5 percent per month. The target ending inventory in units of the product is 80% of the next month’s estimated sales. There are 150,000 units in inventory as of the end of September. The production requirement in units of Batik for the quarter ending December 31 would be May 9, 2004

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MANAGEMENT ADVISORY SERVICES A. 670,560 B. 691,525

CPA Review School of the Philippines C. 665,720 D. 675,925

Pre-week Quizzer

Questions 87 & 88 concern Paradise Company, which budgets on annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 2000 through June 30, 2001. July 1, 2000 June 30, 2001 Raw material* 40,000 50,000 Work-in-process 10,000 10,000 Finished goods 80,000 50,000 *Two (2) units of raw material are needed to produce each unit of finished product. 87.If Paradise Company plans to sell 480,000 units during the 2002001 fiscal year, the number of units it would have to manufacture during the year would be A. 440,000 C. 510,000 B. 480,000 D. 450,000 88.If 500,000 finished units were to be manufactured during the 20002001 fiscal year by Paradise Company, the units of raw material needed to be purchased would be A. 1,000,000 units C. 1,020,000 units B. 1,010,000 units D. 990,000 units 89.The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000 in July, and P6,100,000 in August. On average, 30% of its sales are cash, 50% of credit sales are collected in one month, and 45% are collected in the second month. The remainder are written off to bad debt in the third month after sale. What are the expected cash inflow for August and expected receivable balance on August 31? A. B. C. D. Cash Inflow P5,050,00 P4,084,00 P1,830,00 P5,071,00 0 0 0 0 Aug 31 AR P7,140,00 P6,093,50 P7,232,00 P6,279,00 Balance 0 0 0 0 90.Dolyar, Inc. prepared the following sales budget: Month Cash Sales

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Credit Sales Page 19 of 36

MANAGEMENT ADVISORY SERVICES February March April May June

P 80,000 100,000 90,000 120,000 110,000

CPA Review School of the Philippines P340,000 400,000 370,000 460,000 380,000

Pre-week Quizzer

Collection pattern is: 40% percent in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. The company’s total budgeted collection from April to June amounts to A. P1,090,000 C. P1,468,500 B. P1,325,500 D. P1,397,500 91.Beta Co. has the following sales forecasts for the selected threemonth period in 2004 April P120,000 May 70,000 June 80,000 Seventy percent of sales are collected in the month of the sale, and the remainder are collected in the following month. Accounts receivable balance (April 1, 2004) P100,000 Cash balance (April 1, 2004) 50,000 Minimum cash balance is P50,000. Cash can be borrowed in P10,000 increments from the local bank (assume no interest charges). What is the cash balance at the end of April, assuming that cash is received only from customers and that P200,000 out during April? A. P34,000 C. P54,000 B. P50,000 D. P55,000 Capital Budgeting 92.Which of the following would decrease the net present value of a project? A. A decrease in the income tax rate B. A decrease in the initial investment C. An increase in the useful life of the project D. An increase in the discount rate 93.A weakness of the internal rate of return method for screening investment projects is that it: A. does not consider the time value of money B. implicitly assumes that the company is able to reinvest cash flows from the project at the company’s discount rate

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C. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return D. fails to consider the timing of cash flows

Pre-week Quizzer

94.Sensitivity analysis, if used with capital projects, A. Is used extensively when cash flows are known with certainty B. Measures the change in the discounted cash flows when using the discounted payback method rather than the net present value method. C. Is a “what-if” technique that asks how a given outcome will change if the original estimates of the capital budgeting model are changed. D. Is a technique used to rank capital expenditure requests. 95.If Sol Company expects to get a one-year loan to help cover the initial financing of capital project, the analysis of the project should A. offset the loan against any investment in inventory or receivable required by the project B. show the loan as an increase in the investment C. show the loan as a cash outflow in the second year of the project’s life D. ignore the loan 96.Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Royal’s net cash investment at the time of purchase is the old grinder is sold and the new one purchased is A. P19,000 C. P17,400 B. P15,000 D. P25,000 97.Flow Industries is analyzing a capital investment proposal for new machinery to produce a new product over the next 10 years. At the end of the 10 years, the machinery must be disposed of with a net zero book value but with a scrap salvage value of P20,000. It will require some P30,0000 to remove the machinery. The applicable tax rate is 35%. The appropriate “end of life” cash flow based on the foregoing information is

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MANAGEMENT ADVISORY SERVICES A. inflow of P30,000 B. outflow of P6,500

CPA Review School of the Philippines C. outflow of P10,000 D. outflow of P17,000

98.Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax purposes will be P100,000 annually for six years. The new machine is expected to produce cash flow from operations, net of income taxes, of P150,000 a year in each of the next six years. The accounting (book value) rate of return on the initial investment is expected to be A. 8.3% C. 16.7% B. 12.0% D. 25.0%

Pre-week Quizzer

99.Barf is considering a 10-year capital investment project with forecasted revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the equipment of the project is P23,000 and Barfield expects to sell the equipment for P9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of P7,000 at its inception and another P5,000 at the end of year 5. Using a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is A. P32,000 C. P20,000 B. P24,000 D. P11,000 100. Brand is considering, an investment in a new cheese-cutting machine to replace its existing cheese cutter. Information on the existing machine and the replacement machine follow: Cost of the new machine P40,000 Net annual savings in operating costs 9,000 Salvage value now of the old machine 6,000 Salvage value of the old machine in 8 years 0 Salvage value of the new machine in 8 years 5,000 Estimated life of the new machine 8 years What is the expected payback period for the new machine? A. 4.44 years C. 8.50 years B. 2.67 years D. 3.78 years 101. Cause Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations, net of income taxes, of P20,000 in each of the five years. Cause’s expected rate of return is 10%. Information on present value and future amount factors is as follows: 1 2 3 4 5 Present value of P1 .909 .826 .751 .683 .621 at 10% Present value of an annuity of P1 at .909 1.736 2.487 3.170 3.791 10%

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MANAGEMENT ADVISORY SERVICES Future amount of P1 1.100 at 10% Future amount of an annuity of P1 at 1.000 10% How much will the machine cost? A. P32,220 C. B. P62,100 D.

CPA Review School of the Philippines 1.210

1.33

1.464

1.611

2.100

3.310

4.641

6.105

P75,820 P122,100

102. Janet Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs P450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage value is anticipated. Janet is subject to a 40% income tax rate. To meet the company’s payback goal, the sorter must generate reductions in annual cash operating costs of A. P60,000 C. P150,000 B. P100,000 D. P190,000

Pre-week Quizzer

discount rate, the net present value of the cash flows associated with just the tangible costs and benefits is a negative P184,350. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? A. P18,435 C. P35,000 B. P30,000 D. P37,236 Questions 105 thru 107 are based on the following information. A firm must choose between leasing a new asset of purchasing it with funds from a term loan. Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6% interest on the unpaid balance. Principal and interest are due at the end of each year for five years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400 with payments due at the beginning of each year. The corporate tax rate is 35% and the appropriate after tax cost of capital is 12%.

103. Moorman Products Company is considering a new product that will sell for P100 and have a variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and having a fiveyear useful life and no salvage value is needed, and will be depreciated using the straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478. How many units per year the firm must sell for the investment to earn 12 percent internal rate of return? A. 12,838 C. 8,225 B. 10,403 D. 7,625 104. Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company’s 10% May 9, 2004

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105. Which of the following is closest to the PV of the after-tax interest payment? A. P360 C. P640 B. P453 D. P726

B. 3.0 years

Pre-week Quizzer D. 5.0 years

110.Logo’s expected IRR on its investment in this machine is A. 3.3% C. 12.0% B. 10.0% D. 15.3%

106. Which of the following is closes to the present value of cost if leasing the asset? A. P3,694 C. P3,849 B. P3,779 D. P3,992 107. Which of the following is closest to the PV of cost of purchasing the new asset with a term loan? A. P3,777 C. P4,058 B. P3,952 D. P4,153 Questions 108 through 110 are based on the following information: Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes, this machine will be depreciated P8,000 each year for five years. Logo estimates that this machine will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. Logo’s desired rate of return on its investments is 12%. At the following discount rates, the NPVs of the investment in this machine are: Discount rate NPV 12% +P3,258 14% + 1,197 16% 708 18% - 2,474 108. Logo’s accounting rate of return on its initial investment in this machine is expected to be A. 30% C. 12% B. 15% D. 10% 109.Logo’s expected payback period for its investment in this machine is A. 2.0 years C. 3.3 years May 9, 2004

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111.Lawton Co. is expanding its manufacturing plant, which requires an investment of P4,000,000 in new equipment and plant modifications. Lawton’s sales are expected to increase by P3,000,000 per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% sales. What is the estimated total investment for this expansion? A. P3,400,000 C. P4,600,000 B. P4,300,000 D. P4,000,000 112.Par Co. is reviewing the following data relating to an energy saving investment proposal: Investment P50,000 Residual value at the end of 5 years 10,000 Present value of an annuity of 1 at 12% for 5 years 3.60 Present value of 1 due in 5 years at 12% 0.57 What would be the annual savings needed to make the investment realize a 12% yield? A. P8,189 C. P12,306 B. P11,111 D. P13,889

98) Profitability index 98% 101% Internal rate of 11% 13% return Which project(s) should Investors, Inc. select year under each budgeted amount of funds? No Budget P600,000 Available Restriction Funds A. Projects 2, 3 & 4 Projects 3 & 4 B. Projects 1, 2 & 3 Projects 2, 3 & 4 C. Projects 1, 3 & 4 Projects 2 & 3 D. Projects 3 & 4 Projects 2 & 4

Pre-week Quizzer 106% 14%

105% 15%

during the upcoming P300,000Available Funds Project 3 Projects 3 & 4 Project 2 Projects 2 & 4

113.Investor’s Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year. Project Project 2 Project 3 Project 1 4 Initial cash outlay P200,0 P298,00 P248,000 P272,0 00 0 00 Annual net cash inflows Year 1 P P100,00 P 80,000 P 65,000 0 95,000 Year 2 70,000 135,000 95,000 125,00 0 Year 3 80,000 90,000 90,000 90,000 Year 4 40,000 65,000 80,000 60,000 Net present value ( 3,7 4,276 14,064 14,662 May 9, 2004

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Questions 114 thru 117 are based on the following information. In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 2002. The following information is being considered by Gunning Industries:  The new machine would be purchased for P160,000 in cash. Shipping installation, and testing would cost an additional P30,000.  The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year.  The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end or year 5.  Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.  The new machine has an estimated useful life of 5 years and zero salvage value  Gunning is subject to a 40% corporate income tax rate. Gunning uses the net present value method to analyze investments and will employ the following factors and rates: Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10% 1 .909 .909 2 .826 1.736 3 .751 2.487 4 .683 3.170 5 .621 3.791

B. P16,762

Pre-week Quizzer D. P22,800

116.The acquisition of the new production machine by Gunning will contribute a discounted net-of-tax contribution margin of A. P242,624 C. P363,936 B. P303,280 D. P454,920

114.Gunning Industries’ net cash outflow in a capital budgeting decision is A. P190,000 C. P204,525 B. P195,000 D. P225,000 115.Gunning Industries’ discounted annual depreciation tax shield for the year 2002 is A. P13,817 C. P20,725 May 9, 2004

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117.The overall discounted cash flow impact of Gunning’s working capital investment for the new production machine would be A. P(7,959) C. P(13,265) B. P(10,080) D. P(35,000)

Inventory turnover (based on Gross profit margin Sheridan’s net sales for the year A. P800,000 B. P480,000

Pre-week Quizzer cost of sales)

8 times 40%

were C. P1,200,000 D. P672,000

Financial Statement Analysis 118. Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0. Using Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectively A. 115% and 125% C. 115% and 130% B. 115% and 109% D. 87% and 80% 119. A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the beginning of the period was P50,000 and at the end of the period was P70,000. Net income is P40,000. Inventory turnover is A. 5 times C. 1.75 times B. 3.25 times D. 0.67 times 120. The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for the year was P20,000 and the company’s tax rate is 40%. The company’s net income is: A. P22,000 C. P42,000 B. P54,000 D. P66,000 121. If the North Division of Alliance Products Company had an operating asset turnover of 4.2 and an operating income margin of 0.10, the return on investment would be A. 23.8% C. 42.0% B. 420.0% D. 4.2% 122. Selected data from Sheridan Corporation’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities P120,000 May 9, 2004

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123. Jade Corporation has a practical production capacity of a million units. The current year’s master budget was based on the production and sales of 700,000 units during the current year. Actual production for the current year was 720,000 units, while actual sales amounted to only 600,000 units. The units are sold for P20 each and the contribution margin ratio is 30%. The peso amount that best qualifies the Marketing Department’s failure to achieve budgeted performance for the current year is: A. P720,000 unfavorable C. P2,400,000 unfavorable B. P600,000 unfavorable D. P2,000,000 unfavorable 124. The gross profit of Rea Company for each of the years ended as indicated follow: 2001 2000 Sales P792,000 P800,000 Cost of goods sold 463,000 480,000 Gross profit P328,000 P320,000 Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit due to change in the selling price? A. P8,000 C. P79,200 B. P72,000 D. P88,000 125. Garfield Company, which sells a single product, provided the following data from its income statements for the years 2001 and 2000: 2001 2000 Sales (150,000 units in 2001; 180,000 P750,000 P720,0 units in 2000) 00 Cost of goods sold 525,00 575,0 0 00 Gross profit P225,000 P145,0 00 In an analysis of variation in gross profit between the two years, what would be the effects of changes in sales price and sales volume, respectively? A. P150,000 F; P120,000 U C. P180,000 F; P150,000 U B. P150,000 U; P120,000 F D. P180,000 U; P150,000 F May 9, 2004

Pre-week Quizzer

Working Capital Management 126.Gear Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Gear has the opportunity to invest the money of 24% per annum. The company spends, on the average, P40 for every cash conversion to marketable securities. What is the optimal cash conversion size? A. P60,000 C. P55,000 B. P45,000 D. P72,500 127. Lyman Company has the opportunity to increase annual sales P100,000 by selling to a new riskier group of customers. The uncollectible expense is expected to be 15% and collection costs will be 5%. The company’s manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lyman should accept this opportunity, the company’s after tax profits would increase by A. P6,000 C. P10,200 B. P10,000 D. P14,400 128.The following information regarding a change in credit policy was assembled by the Willis Company. The company has a required rate of return of 10% and a variable cost ratio of 60%. Old Credit Policy New Credit Policy Sales P3,600,000 P3,960,000 Average Collection 30 days 36 days period The pretax cost of carrying the additional investment in receivable, using 360-day year would be A. P5,760 C. P8,160 B. P9,600 D. P960 129. The sales director of Lloyd Company suggested that certain credit terms be modified. He estimates the following effects:  Sales will increase by at least 20%  Accounts receivable turnover will be reduced to 8 times from the present turnover of 10 times Page 28 of 36

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 Bad debts, now at 1% of sales will increase to 1.5% Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the desired rate of return is 20%. Fixed expenses amount to P150,000. Should the company allow revision of its credit terms? A. Yes, because income will increase by P64,800 B. Yes, because losses will be reduced by P73,800 C. No, because income will be reduced by P13,000 D. No, because losses will be increased by P28,000 130.A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker P50.00 to locate a supplier and handle the ordering and delivery arrangements. Storage and handling costs are P0.02 per case per month. If each case costs P0.78 the most economical order quantity (rounded to the next whole number) is A. 884 cases C. 1,133 cases B. 625 cases D. 1,000 cases

Pre-week Quizzer

131.Expected annual usage of a particular raw material is 2,000,000 units and the standard order size is 10,000 units. The invoice cost of each unit is P500, and the cost to place one purchase order is P80. The estimated annual order costs is A. P16,000 C. P32,000 B. P100,000 D. P50,000 132.The Handy Company has the following information available concerning one of its inventory items: Cost of placing an order P 32.00 Unit of carrying cost per year P 4.00 Annual unit demand 5,625 Safety stock 100 Average daily demand 25 Normal lead time in days 10 The reorder point for the inventory item is A. 250 C. 350 B. 600 D. 300 133.The G Corporation purchases 60,000 headbands per year. The average purchase lead time is 20 working days. Maximum lead time is 27 working days. The corporation works 240 days per year. The appropriate safety stock level and the reorder point for the company are: A. B. C. D. Safety 1,750 1,750 1,167 1,167 Stock Reorder 6,750 5,250 6,750 5,250 Point 134.Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent per annum. The bank requires 10 percent of loan as compensating balance in its new checking account. The loan is payable at the end of 6 months. The effective interest rate of this loan is A. 28.21 percent C. 27.27 percent B. 14.29 percent D. 15.38 percent

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135.The Manunuba Company was recently quoted terms on a commercial bank loan of 7% interest with 20% compensating balance. The term of the loan is one year. The effective cost of borrowing (rounded to the nearest hundredth) for each interest arrangements are: A. B. C. D. Discounted 9.59% 8.75% 7.53% 7.53% interest Payable upon 8.75% 9.59% 8.75% 9.59% maturity Cost of Capital & Risk 136. For 2003, Bee Company increased earnings before interest and taxes by 17%. During the same period, net income after tax increased by 42%. The degree of financial leverage that existed during 2003 is A. 1.70 C. 2.47 B. 4.20 D. 5.90 137.Mars Company plans to issue some P100 preferred stock with an 11 percent dividend. The stock is selling on the market for P97, and Mars must pay flotation costs of 5 percent of the market price. The company is under the 40 percent corporate tax rate. The cost of preferred stock for Mars Company is A. 7.16 percent C. 11.34 percent B. 6.80 percent D. 11.94 percent 138.ABC Corp. stock’s beta is .50. If the market return is 16%, and the risk-free rate is 6%, what is the required rate of return on ABC stock? A. 11% C. 13% B. 12% D. 14% 139.The following data are related to WXY stock: Required return on WXY common Beta coefficient May 9, 2004

15 percent 1.5

Risk-free rate The required market return is A. 13.0 percent B. 25.0 percent

Pre-week Quizzer 9.0 percent C. 18.0 percent D. 16.0 percent

140. The Taurus Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now sells for P36. New stock can be sold to net the firm P32.40 per share. What is the Taurus Company’s cost of retained earnings? A. 14.83 percent C. 15.81 percent B. 15.26 percent D. 9.69 percent 141. The Leonard Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now sells for P36. New stock can be sold to net the firm P32.40 per share. A. 14.83 percent C. 15.81 percent B. 15.26 percent D. 9.69 percent 142.Williams Co. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.  Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of P30 per bond would be received, and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is estimated to be 4.8%.  Williams can sell 8% preferred stock at P105 per share. The cost of issuing and selling the preferred stock is expected to be P5 per share.  Williams’ common stock is currently selling for P100 per share. The firm expects to pay cash dividends of P7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by P3 per share, and flotation costs are expected to amount to P5 per share.  Williams expects to have available P100,000 of retained earnings in the coming year; once these retained earnings are Page 30 of 36

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exhausted, the firm will use new common stock as the form of common stock equity financing.  Williams’ preferred capital structure is Long-term debt 30% Preferred stock 20% Common stock 50% What are the corresponding weighted-average cost of capital under each financing needs? A. B. C. D. P200,000 6.5% 6.8% 4.5% 7.3% P1,000,000 6.8% 4.8% 6.5% 9.1%

144.Using the dividend growth model, retained earnings for Larry Technics, A. 10.44 percent C. B. 9.30 percent D.

Pre-week Quizzer what is the expected cost of Inc.? 16.30 percent 17.44 percent

Quantitative Methods 145.Reina, Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first batch take? A. 360 hours C. 140.63 hours B. 57.6 hours D. 230.4 hours

Questions 143 & 144 are based on the following information. The earnings, dividends, and stock price of Larry Technics, Inc. are expected to grow at 7 percent per year after this year. Larry’s common stock sells for P23 per share, its last dividend was P2.00 and the company pay P2.14 at the end of the current year. Larry should pay P2.50 flotation cost.

146. A company is designing a new regional distribution warehouse. To minimize delays in loading and unloading trucks, an adequate number of loading docks must be built. The most relevant technique to assist in determining the proper number docks is A. Cost-volume-profit analysis C. PERT/CPM analysis B. Linear programming D. Queuing theory

143. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the average return on the market is 12 percent, what will be the firm’s cost of equity using the CAPM approach? A. 16.05 percent C. 15.00 percent B. 14.27 percent D. 14.00 percent

147.

Following is a table for two separate product lines, X and Y: Probabilit X Profit Y Profit y 20% P5,000 P 500 70% 3,000 4,000 10% 6,000 8,000 The product line to obtain maximum utility for a risk-averse decision maker is A. X because it has the highest expected profit. B. Y because it has the highest dispersion C. Y because it has the highest expected profit D. X because it has the lowest dispersion

148.Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for P1. Dough assigns the following probabilities to selling additional boxes: May 9, 2004

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Pre-week Quizzer

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins? A. P28 C. P52 B. P40 D. P68 149.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The probability of cold weather on a given day at this time is 60%. The expected payoff for either selling coffee or soft drinks and the expected payoff if the vendor has perfect information are A. B. C. D. Coffee P1,360 P1,960 P2,200 P3,900 Soft drinks P1,600 P1,600 P1,900 P1,900 Perfect P3,000 P2,200 P1,360 P1,960 Information. 150.A construction contractor has been invited to submit a bid on a large and complicated construction project. The preparation of the bid proposal will cost about P20,000. Management feels that if the company bids low enough to result in a net profit of P50,000, there would be a 60% chance of getting the job. If the company bids high enough to result in a P100,000 net profit, the chance of getting the contract would be only 20%. What should the company do? A. Bid only high enough to allow for P50,000 profit because the expected value of the payoff is P22,000. B. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is P4,000 C. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is P20,000. D. Make no bid. 151.Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large, complex projects by determining the critical

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path from a single time estimate for each event in a project. The critical path: A. Is the shortest path from the first event to the last event for a project. B. Is an activity within the path that requires the most number of time. C. Is the earliest time to complete the project. D. Is the maximum amount of time an activity may be delayed without delaying the total project beyond its target time.

Pre-week Quizzer

152.Clara Building Corporation uses the critical path method to monitor construction jobs. The company is currently 2 weeks behind schedule on Job 181, which is subject to a P10,500-per-week completion penalty. Path A-B-C-F-G-H-I has normal completion time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be crashed: Activities Cost to Crash 1 Week Cost to Crash 2 Weeks BC P 8,000 P15,000 DE 10,000 19,600 EF 8,800 19,500 Clara desires to reduce the normal completion time of Job 181 and, at the same time, report the highest possible income for the year. Clara should crash A. BC 1 week and EF 1 week C. EF 2 weeks B. BC 2 weeks D. DE 1 week and EF 1week Information Systems 153. A major advantage of obtaining a package of applications programs from a software vendor is A. the likelihood of reducing the time span from planning to implementation B. the ability to more easily satisfy the unique needs of users C. greater operating efficiency from the computer D. the assurance the programs will be written in a high-level language

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Answer Key 1. B 11. D 2. B 12. A 3. B 13. A 4. B 14. D 5. A 15. B 6. B 16. C 7. C 17. A 8. C 18. D 9. A 19. A 10. A 20. B

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

C B A B A C A D D A

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

A B B A A C A D B A

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

C A B C C B C A B A

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

B A D A D C D B D C

91. C 92. D 93. C 94. C 95. D 96. C 97. B 98. A 99. B 100. D

101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

A B A B A B A B A C C D A B B A C D C D

151. C May 9, 2004

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

A A C B B C B C D B C C A D A D C A B C

152. D

121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

C A B D A C A A A D

153. A

131. 132. 133. 134. 135. 136. 137. 138. 139. 140.

A C A D A C D A A A

141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

B A B A B B B C A B

C A C D C D D C B C

Pre-week Quizzer

COMPREHENSIVE: 1. Gasco Co. is a very large company with common stock listed on the Philippine Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: P150 million of 10 percent series 2013 P50 million of 7 percent series 2007 P75 million of 5 percent series 2004 The vice president of finance is planning to sell P75 million of bonds next year to replace the debt due to expire in 2004. Present market yields on similar Baa-rated bonds are 12.1 percent. Gasco also has P90 million of 7.5 percent noncallable preferred stock outstanding, and it has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced at P80 per share, and its dividend per share is P7.80. The company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8 percent and this will continue. The expected dividend is P1.90 per share, and the common stock is selling for P40 per share. The company’s investment banker has quoted the following flotation costs to Gasco: P2.50 per share for preferred stock and P2.20 per share for common stock. On the advice of its investment banker, Gasco has kept its debt at 50 percent of assets and its equity at 50 percent. Gasco sees no need to sell either common or preferred stock in the foreseeable future as it generated enough internal funds for its investment needs when these funds are combined with debt financing. Gasco’s corporate tax rate is 40 percent. Compute the cost of capital for the following: 1. Bond (debt) 2. Preferred stock 3. Common equity in the form of retained earnings 4. New common stock 5. Weighted average cost of capital 2. Andres Company has a single product called Kad. The company normally produces and sells 60,000 Kads each year at a selling Page 34 of 36

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price of P32 per unit. The company’s unit costs at this level of activity are given below: Direct materials P10.00 Direct Labor 4.50 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 5.00 (P300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 (P210,000 total)

Pre-week Quizzer

A number of questions relating to the production and sales of Kads follow. Each question is independent. 1. Assume that Andres Company has sufficient capacity to produce 90,000 Kads each year without any increase in fixed manufacturing overhead costs. The company could increasein sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by P80,000. What would be the effect of the increase in both sales and fixed expenses on the company profit? 2. Assume again that Andres Company has sufficient capacity to produce 90,000 Kads each year. A customer in a foreign market wants to purchase 20,000 Kads. Import duties on the Kads would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling costs that would be associated with the order would be P3.20 per unit shipping costs. What is the breakeven price on this order? 3. The company has 1,000 Kads on hand that have some irregularities and are therefore considered to be “seconds”. Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit costs figure is relevant for setting a minimum selling price? 4. Due to a strike in its supplier’s plant, Andres Company is unable to purchase more material for the production of Kads. The strike is expected to last for two months. Andres Company has enough material on hand to continue to operate at 30% of normal levels for the two-month period. As an alternative, Andres could close its plant down entirely for the two months. If the plant were closed, fixed overhead costs would continue at 60% of their normal level during the two-month period; the fixed selling costs would be reduced by 20% while the plant was closed. What would be the peso advantage or disadvantage of closing the plant for the two-month period?

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Pre-week Quizzer

5. An outside manufacturer has offered to produce Kads for Andres Company and to ship them directly to Andres’ customers. If Andres accepts this offer, the facilities that it uses to produce Kads would be idle; however, fixed overhead costs would be reduced by 75% to their present value. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. What the unit cost figure that is relevant for comparison to whatever quoted price is received from the outside manufacturer?

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