# Accounting Test 4 Problems Set 2015

January 31, 2017

Question
1.

Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company \$1,336 in total. If the company were to buy new supplies of this raw material on the open market, it would cost \$7.35 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of \$6.65 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of \$77 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project?

\$1,064

\$987

\$1,162

\$1,176

2.

Part A42 is used by Elgin Corporation to make one of its products. A total of 23,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

Per Unit

Direct materials

\$8.90

Direct labor

\$10.30

\$6.90

Supervisor’s salary

\$7.00

Depreciation of special equipment

\$9.40

\$6.70

An outside supplier has offered to make the part and sell it to the company for \$36.00 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company’s other products, generating an additional segment margin of \$30,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part A42 from the outside supplier?

Net operating income would decrease by \$36,700 per year.

Net operating income would decrease by \$241,400 per year.

Net operating income would increase by \$30,000 per year.

Net operating income would decrease by \$299,000 per year.

3.

Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 14,200 of the components each year. The unit product cost of the component according to the company’s absorption cost accounting system is given as follows:

Direct materials

\$ 10.00

Direct labor

7.00

2.80

4.80

Unit product cost

\$24.60

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier, the remainder is not avoidable. In addition, making the component uses 1 minutes on the machine that is the company’s current constraint. If the component were bought, time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of \$6.40 per unit.

When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?(Round your intermediate calculations and final answer to 2 decimal places.)

\$27.80

\$24.00

\$21.24

\$24.44

4.

Gwinnett Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity to manufacture and sell 17,500 cases of sauce each year but is currently only manufacturing and selling 16,000. The following costs relate to annual operations at 16,000 cases:

Total Cost

Variable manufacturing cost

\$288,000

Fixed manufacturing cost

\$60,000

\$48,000

\$42,000

Gwinnett normally sells its sauce for \$40 per case. A local school district is interested in purchasing Gwinnett’s excess capacity of 1,500 cases of sauce but only if they can get the sauce for \$20 per case. This special order would not affect regular sales or total fixed costs or variable costs per unit. If this special order is accepted, Gwinnett’s profits for the year will:

increase by \$1,200

decrease by \$1,500

decrease by \$16,000

decrease by \$11,500

5.

Farnsworth Television makes and sells portable television sets. Each television regularly sells for \$260. The following cost data per television are based on a full capacity of 15,000 televisions produced each period:

Direct materials

\$95

Direct labor

\$75

Manufacturing overhead (80% variable, 20% unavoidable fixed)

\$45

A special order has been received by Farnsworth for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be \$10 per television for shipping. Farnsworth is now selling 7,500 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order?

\$260

\$206

\$215

\$216

6.

Wiacek Corporation has received a request for a special order of 5,300 units of product F65 for \$28.30 each. Product F65’s unit product cost is \$27.65, determined as follows:

Direct materials

\$3.25

Direct labor

8.55

7.65

8.20

Unit product cost

\$27.65

Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by \$4.60 per unit and that would require an investment of \$17,000 in special molds that would have no salvage value.

This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company’s overall net operating income would increase (decrease) by:

\$(37,935)

\$5,525

\$3,445

\$(94,075)

7.

Two products, IF and RI, emerge from a joint process. Product IF has been allocated \$28,300 of the total joint costs of \$49,000. A total of 2,300 units of product IF are produced from the joint process. Product IF can be sold at the split-off point for \$12 per unit, or it can be processed further for an additional total cost of \$10,300 and then sold for \$14 per unit. If product IF is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

\$35,200 less profit

\$5,700 less profit

\$21,900 more profit

\$22,600 more profit

8.

Tawstir Corporation has 400 obsolete personal computers that are carried in inventory at a total cost of \$576,000. If these computers are upgraded at a total cost of \$110,000, they can be sold for a total of \$170,000. As an alternative, the computers can be sold in their present condition for \$40,000.

Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

\$55

\$308

\$375

\$120

9.

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 58,000 units per month is as follows:

Direct materials

\$51.60

Direct labor

\$9.90

\$2.90

\$20.90

\$5.40

\$26

The normal selling price of the product is \$122.10 per unit.

An order has been received from an overseas customer for 3,800 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be \$3.00 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is \$94.40 per unit. By how much would this special order increase (decrease) the company’s net operating income for the month?

\$(92,000)

\$25,460

\$104,880

\$(84,740)

10.

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 50,000 units per month is as follows:

Direct materials

\$47.60

Direct labor

\$9.10

\$2.10

\$19.30

\$3.80

\$18

The normal selling price of the product is \$106.10 per unit.

An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be \$2.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

\$43.50

\$18.40

\$19.70

\$17.20

11.

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 60,000 units per month is as follows:

Direct materials

\$52.60

Direct labor

\$10.10

\$3.10

\$21.30

\$5.80

\$28

The normal selling price of the product is \$126.10 per unit.

An order has been received from an overseas customer for 4,000 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be \$3.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,700 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

\$126.10

\$102.90

\$69.10

\$91.56

12.

The following are the Jensen Corporation’s unit costs of making and selling an item at a volume of 2,800 units per month (which represents the company’s capacity):

Manufacturing:

Direct materials

\$2.80

Direct labor

\$3.80

\$2.30

\$0.75

Variable

\$3.80

Fixed

\$1.15

Present sales amount to 1,600 units per month. An order has been received from a customer in a foreign market for 280 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 1,600 units and 2,800 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. Direct labor is a variable cost.

Assume the company has 90 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company’s other sales. Which of the following costs is relevant in this decision?

rev: 11_29_2014_QC_60187

\$8.90 variable manufacturing cost

\$9.65 unit product cost

\$3.80 variable selling and administrative cost

\$14.60 full cost

13.

Brown Corporation makes four products in a single facility. These products have the following unit product costs:

Products

A

B

C

D

Direct materials

\$16.60

\$20.50

\$13.50

\$16.20

Direct labor

18.60

22.00

16.40

10.40

5.40

6.60

9.10

6.10

28.50

15.40

15.50

17.50

Unit product cost

\$69.10

\$64.50

\$54.50

\$50.20

Additional data concerning these products are listed below.

Products

A

B

C

D

Grinding minutes per unit

2.50

1.60

1.20

0.80

Selling price per unit

\$83.70

\$76.10

\$72.90

\$67.60

Variable selling cost per unit

\$3.60

\$4.10

\$3.80

\$4.50

Monthly demand in units

4,000

3,000

3,000

5,000.00

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labor is a variable cost in this company.

Which product makes the MOST profitable use of the grinding machines?

Product B

Product A

Product C

Product D

14.

(Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for \$28,000 and will have a 6-year useful life and a \$4,700 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least \$32,700 per year. The cost of these prescriptions to the pharmacy will be about \$26,400 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:

4.4 years

3.7 years

5.2 years

4.2 years

15.

(Ignore income taxes in this problem.) The Zinger Corporation is considering an investment that has the following data:

Year 1

Year 2

Year 3

Year 4

Year 5

Investment

\$16,000

\$4,600

Cash inflow

\$3,600

\$3,600

\$8,200

\$5,600

\$5,600

Cash inflows occur evenly throughout the year. The payback period for this investment is:(Round your answer to 1 decimal place)

3 years

3.9 years

4 years

4.9 years

16.

Ignore income taxes in this problem.) The management of Helberg Corporation is considering a project that would require an investment of \$228,000 and would last for 6 years. The annual net operating income from the project would be \$108,000, which includes depreciation of \$29,000. The scrap value of the project’s assets at the end of the project would be \$15,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

1.7 years

2.1 years

1.5 years

1.9 years

17.

The Jackson Company has invested in a machine that cost \$76,000, that has a useful life of eight years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of five years. Given these data, the simple rate of return on the machine is closest to: (Ignore income taxes in this problem.)(Round your answer to 1 decimal place.)

3.9%

5.0%

7.5%

32.5%

18.

Fimbrez Corporation has provided the following data concerning an investment project that it is considering:

Initial investment

\$230,000

Annual cash flow

\$132,000

per year

Expected life of the project

4

years

Discount rate

12%

Click here to view.mhhe.com/connect/007802563x/exhibit_13b_1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/007802563x/exhibit_13b_2.jpg”>Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

The net present value of the project is closest to:(Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

\$171,016

\$230,000

\$(98,000)

\$(171,016)

19.

(Ignore income taxes in this problem.) The following data pertain to an investment proposal:

Cost of the investment

\$46,000

Annual cost savings

\$14,000

Estimated salvage value

\$5,000

Life of the project

5 years

Discount rate

12%

Click here to view.mhhe.com/connect/007802563x/exhibit_13b_1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/007802563x/exhibit_13b_2.jpg”>Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

The net present value of the proposed investment is closest to:(Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

\$7,305

\$4,470

\$2,835

\$27,000

20.

The management of Urbine Corporation is considering the purchase of a machine that would cost \$380,000 would last for 5 years, and would have no salvage value. The machine would reduce labor and other costs by \$85,000 per year. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes in this problem.)

Click here to view.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg”>Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

?\$81,055

?\$6,055

?\$121,780

?\$40,330

21.

The management of Londo Corporation is investigating buying a small used aircraft to use in making airborne inspections of its above-ground pipelines. The aircraft would have a useful life of 5 years. The company uses a discount rate of 14% in its capital budgeting. The net present value of the investment, excluding the intangible benefits, is ?\$395,850. (Ignore income taxes in this problem)

Click here to view.jpg” href=”http://lectures.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg”>Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

How large would the annual intangible benefit have to be to make the investment in the aircraft financially attractive?(Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

\$395,850

\$115,307

\$79,170

\$55,419

22.

(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of \$30,000, would be replaced by a new machine. The new machine would be purchased for \$396,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save \$137,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

19.4%

17.9%

34.6%

16.7%

23.

Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost \$200,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost \$30,000 per year to operate and maintain, but would save \$62,000 per year in labor and other costs. The old machine can be sold now for scrap for \$20,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)

9.75%

31.00%

21.67%

10.83%

24.

(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs \$461,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are:

Incremental Net
Operating Income

Incremental Net Cash Flows

Year 1

\$69,000

\$149,000

Year 2

\$75,000

\$150,000

Year 3

\$86,000

\$181,000

Year 4

\$49,000

\$151,000

Year 5

\$91,000

\$153,000

Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period of this investment is closest to:

2.0 years

5.0 years

4.1 years

2.9 years

25.

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.)

Investment required in equipment

\$610,000

Annual cash inflows

\$88,000

Salvage value

\$0

Life of the investment

16 years

Required rate of return

10%

The company uses straight-line depreciation. Assume cash flows occur uniformly throughout a year except for the initial investment.

The payback period for the investment is closest to:

0.1 years

1.0 years

4.9 years

6.9 years

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