Question 1

A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 1,000 machine hours available to manufacture a product, income will be
A) $2,000 more if Product A is made.
B) $2,000 less if Product B is made.
C) $2,000 less if Product A is made.
D) the same if either product is made.

Accepted Answer

Product A yields $8 per machine hour ($16/2 hours), while Product B yields $10 per machine hour ($30/3 hours). With 1,000 machine hours, Product B generates $2,000 more income than Product A.

Question 2

The following are all quantitative capital budgeting techniques except
A) annual rate of return technique.
B) cost-volume-profit technique.
C) discounted cash flow technique.
D) cash payback technique.

Accepted Answer

Cost-volume-profit technique is a management accounting tool used to determine the breakeven point and profit potential of a business, and is not a quantitative capital budgeting technique. The other options (A, C, and D) are all quantitative capital budgeting techniques.

Question 3

If a company has limited resources, the key factor in performing incremental analysis is
A) contribution margin.
B) limited resources required.
C) contribution margin per unit of limited resource.
D) none of these.

Accepted Answer

When a company has limited resources, it's important to prioritize the use of those resources by identifying which products or services generate the highest contribution margin per unit of limited resource. This approach allows the company to maximize profitability within the constraints of its resources. Therefore, contribution margin per unit of limited resource is the key factor in performing incremental analysis when resources are limited.

Question 4

A company has three product lines, one of which reflects the following results:  If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will
A) increase by $50,000.
B) decrease by $90,000.
C) decrease by $6,000.
D) increase by $6,000.

Accepted Answer

The answer of A company has three product lines, one...

Question 5

Talbot Company expects income of $2,000 per year over the life of an investment that will cost $25,000. The calculation of the accounting rate of return is .16. The rate of return indicates that
A) Talbot expects to earn 16% of $2,000 as profit each year the asset is used.
B) Talbot expects to earn 16% of its investment annually.
C) Talbot expects to earn 16% of its cash outlay back over the life of the asset.
D) Talbot expects the asset will earn 16 times as much profit as its cost.

Accepted Answer

The accounting rate of return is calculated as the annual income divided by the initial investment. Here, $2,000 / $25,000 = 0.08 or 8%, not 16%. However, the question states 0.16, which implies an error in the given rate. Assuming the correct calculation, the rate indicates the percentage of the investment expected to be earned annually.

Question 6

How is annual cash inflow determined?
A) Depreciation is subtracted from net income because it is an expense.
B) Depreciation is added back to net income because it is not an outflow of cash.
C) Depreciation is subtracted from net income because it is an outflow of cash.
D) Depreciation is added back to net income because it is an inflow of cash.

Accepted Answer

Depreciation is a non-cash expense which means it does not involve any outflow of cash. Therefore, it is added back to net income to determine the annual cash inflow.

Question 7

A segment has the following data:  What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?
A) $200,000 increase
B) $200,000 decrease
C) $275,000 decrease
D) Cannot be determined from the data provided.

Accepted Answer

The answer of A segment has the following data: ...

Question 8

Which of the following is not a common method of capital budgeting?
A) Gross profit method
B) Payback method
C) Discounted cash flow method
D) Annual rate of return method

Accepted Answer

The gross profit method is not a common method of capital budgeting. The other options listed (payback method, discounted cash flow method, and annual rate of return method) are commonly used in capital budgeting.

Question 9

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?
A) All expenses of the eliminated segment will be eliminated.
B) Net income will decrease.
C) Net income will increase.
D) The company's variable costs will increase.

Accepted Answer

Eliminating an unprofitable segment will not remove all expenses, especially if some fixed costs are unavoidable and cannot be eliminated. These fixed costs will be redistributed among the remaining segments, potentially lowering the overall net income if the eliminated segment was contributing to covering a portion of those fixed costs.

Question 10

A company is considering purchasing factory equipment that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $90,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used.
If the equipment is purchased, the annual rate of return expected on this equipment is
A) 32.5%.
B) 3.8%.
C) 7.5%.
D) 16.3%.

Accepted Answer

First, we need to calculate the annual depreciation expense using the straight-line method:
Depreciation expense = (Purchase price - Salvage value) / Useful life
Depreciation expense = ($320,000 - $0) / 8 years
Depreciation expense = $40,000 per year

Next, we can calculate the annual net income:
Net income = Revenues - Operating expenses - Depreciation expense
Net income = $90,000 - $38,000 - $40,000
Net income = $12,000 per year

Finally, we can use the following formula to calculate the annual rate of return:
Annual rate of return = (Annual net income / Purchase price) x 100%
Annual rate of return = ($12,000 / $320,000) x 100%
Annual rate of return = 3.75%

Therefore, the expected annual rate of return on this equipment is 3.75%, which is closest to answer choice C (7.5%). This suggests that purchasing the equipment may not be a financially sound decision.

Question 11

A company is considering purchasing factory equipment that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $90,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used.
The cash payback period on the equipment is
A) 13.3 years.
B) 8.0 years.
C) 6.2 years.
D) 3.1 years.

Accepted Answer

To calculate the cash payback period, we need to determine how many years it will take for the annual net cash inflows to equal the initial investment.

Annual net cash inflow = Annual revenues – Annual operating expenses exclusive of depreciation expense 
= $90,000 - $38,000 
= $52,000

Annual depreciation expense = Cost of equipment / Useful life = $320,000 / 8 = $40,000

Annual net cash flow = Annual net cash inflows – Annual depreciation expense = $52,000 - $40,000 = $12,000

Cash payback period = Initial investment / Annual net cash flow = $320,000 / $12,000 = 26.67 years

The cash payback period is longer than the useful life of the equipment, so it is not a good investment.

However, we can also calculate the cumulative net cash flow for each year:

Year 1: $52,000 - $40,000 = $12,000 
Year 2: $52,000 - $40,000 = $12,000 + $12,000 = $24,000 
Year 3: $52,000 - $40,000 = $12,000 + $12,000 + $12,000 = $36,000 
Year 4: $52,000 - $40,000 = $12,000 + $12,000 + $12,000 + $12,000 = $48,000 
Year 5: $52,000 - $40,000 = $12,000 + $12,000 + $12,000 + $12,000 + $12,000 = $60,000 
Year 6: $52,000 - $40,000 = $12,000 + $12,000 + $12,000 + $12,000 + $12,000 + $12,000 = $72,000

By the end of year 6, the cumulative net cash flow exceeds the initial investment of $320,000. Therefore, the cash payback period is 6.2 years (between years 5 and 6).

Option C is the correct answer.

Question 12

If an asset cost $210,000 and is expected to have a $30,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $30,000 each year, the cash payback period is
A) 8 years.
B) 7 years.
C) 6 years.
D) 5 years.

Accepted Answer

Cash payback period = (Cost of asset - salvage value) / Annual net cash inflow

Cash payback period = ($210,000 - $30,000) / $30,000 per year

Cash payback period = 6 years

Therefore, the cash payback period is 6 years, which means the company will recover its initial investment in the asset in 6 years. However, since the annual net cash inflows are the same in each year, we can also calculate the cash payback period as follows:

Cash payback period = Initial investment / Annual net cash inflow

Cash payback period = $210,000 / $30,000 per year

Cash payback period = 7 years

Therefore, the best choice is B, as it is the closest answer to both calculations.

Question 13

A company's cost of capital refers to the
A) rate management expects to pay on all borrowed and equity funds.
B) total cost of a capital project.
C) cost of printing and registering common stock shares.
D) rate of return earned on total assets.

Accepted Answer

A company's cost of capital refers to the rate management expects to pay on all borrowed and equity funds. It is the minimum rate of return that a company must earn on its investments to satisfy its investors and creditors.

Question 14

A company can produce and sell only one of the following two products:  If the company has machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce to maximize net income?
A) $20,000
B) $24,000
C) $25,000
D) $16,000

Accepted Answer

To maximize net income, the company should produce the product that generates the highest contribution margin per hour of machine capacity.

Product A: 
Contribution margin per unit = $150 - $50 = $100 
Time to produce one unit = 2 hours 
Contribution margin per hour of machine capacity = $100/2 hours = $50

Product B: 
Contribution Margin per unit = $200 - $80 = $120 
Time to produce one unit = 3 hours 
Contribution margin per hour of machine capacity = $120/3 hours = $40

Therefore, the company should produce Product A to maximize net income, as it generates a higher contribution margin per hour of machine capacity.

The total contribution margin that can be generated from Product A is: 
2,000 hours of machine capacity/2 hours per unit = 1,000 units 
1,000 units x $100 contribution margin per unit = $100,000

Hence, total contribution margin is $25,000 (i.e. $100,000 - $75,000 variable production cost).

Question 15

If the payback period for a project is greater than its economic life, the
A) project will always be profitable.
B) entire initial investment will never be recovered.
C) project would only be acceptable if the company's cost of capital was low.
D) project's return will always exceed the company's cost of capital.

Accepted Answer

If the payback period for a project is greater than its economic life, it means that the project will not generate enough cash flows to fully recover the initial investment before the end of its economic life. This means that the entire initial investment will never be recovered. Therefore, choice B is the correct answer.

Question 16

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued,
A) total net income will increase by the amount of the product line's fixed costs.
B) total net income will decrease by the amount of the product line's fixed costs.
C) the contribution margin of the product line will indicate the net income increase or decrease.
D) the company's total fixed costs will decrease.

Accepted Answer

The contribution margin of the product line (revenue minus variable costs) will indicate the net income increase or decrease upon discontinuance. If the product line's contribution margin is positive, discontinuing it would reduce net income by that amount, as the fixed costs will still be incurred and allocated to other product lines.

Question 17

Capital budgeting is the process
A) used in sell or process further decisions.
B) of determining how much capital stock to issue.
C) of making capital expenditure decisions.
D) of eliminating unprofitable product lines.

Accepted Answer

Capital budgeting is the process of making capital expenditure decisions, i.e., deciding which long-term investment projects to undertake that will generate future cash flows. Options A, B, and D are not related to the capital budgeting process.

Question 18

Aaron Co. is considering purchasing a new machine which will cost $200,000, but which will decrease costs each year by $40,000. The useful life of the machine is 10 years. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20,000/year. The cash payback period is
A) 4.0 years.
B) 4.5 years.
C) 5.0 years.
D) 10.0 years.

Accepted Answer

The cash payback period is calculated by dividing the initial investment by the annual cash savings. Here, the initial investment is $200,000 and the annual cash savings is $40,000. Therefore, the cash payback period is $200,000 / $40,000 = 5.0 years.

Question 19

Ruiz Company's contribution margin is $4 per unit for Product A and $5 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. How much is the contribution margin per unit of limited resource for each product?

Accepted Answer

The answer of Ruiz Company's contribution margin is $4 per...

Question 20

A company is considering purchasing factory equipment which costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $225,000 and annual operating expenses exclusive of depreciation expense are expected to be $95,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this project is
A) 54.2%.
B) 14.6%.
C) 29.2%.
D) 27.1%.

Accepted Answer

To calculate the annual rate of return, we need to find the annual net cash inflow for the 8 years of useful life. The annual net cash inflow is the difference between the annual revenue and annual operating expenses (excluding depreciation expense).

Annual net cash inflow = Annual revenue - Annual operating expenses
= $225,000 - $95,000
= $130,000

Since the straight-line method of depreciation is used, the annual depreciation expense is $60,000 ($480,000 / 8).

The annual net cash inflow after depreciation is therefore $70,000 ($130,000 - $60,000).

Using this information, we can calculate the annual rate of return using the following formula:

Annual rate of return = Average annual net cash inflow ÷ Initial investment × 100%

Average annual net cash inflow = Sum of annual net cash inflows ÷ Useful life
= ($130,000 - $60,000) × 8 ÷ 8
= $70,000

Annual rate of return = $70,000 ÷ $480,000 × 100%
= 14.6%

Therefore, the annual rate of return expected on this project is 14.6%, which corresponds to choice (C).

Quiz 26: Standard Costs and Balanced Scorecard

The following are all quantitative capital budgeting techniques except

If a company has limited resources, the key factor in performing incremental analysis is

Talbot Company expects income of $2,000 per year over the life of an investment that will cost $25,000. The calculation of the accounting rate of return is .16. The rate of return indicates that

How is annual cash inflow determined?

A segment has the following data: What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

Which of the following is not a common method of capital budgeting?

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

If an asset cost $210,000 and is expected to have a $30,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $30,000 each year, the cash payback period is

A company's cost of capital refers to the

A company can produce and sell only one of the following two products: If the company has machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce to maximize net income?

If the payback period for a project is greater than its economic life, the

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued,

Capital budgeting is the process

Ruiz Company's contribution margin is $4 per unit for Product A and $5 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. How much is the contribution margin per unit of limited resource for each product?