Acct 5200Chapter 22 Handout Questions

1. Assume your goal in life is to retire with $2,800,000. How much would you need to save at the end of

each year if interest rates average 10% and you have a 30-year work life? (Round the final answer to the

nearest whole dollar.)

A) $9333

B) $17,022

C) $186,667

D) $160,464

2. Morrow Cleaners has been considering the purchase of an industrial dry-cleaning machine. The

existing machine is operable for three more years and will have a zero disposal price. If the machine is

disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash

investment in working capital of $170,000 will be required. The new machine will reduce the average

amount of time required to wash clothing and will decrease labor costs. The investment is expected to net

$130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year

of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally

occur throughout the year and are recognized at the end of each year. Income taxes are not considered in

this problem. The working capital investment will not be recovered at the end of the asset’s life.

What is the net present value of the investment, assuming the required rate of return is 6%? Would the

company want to purchase the new machine?

A) $264,290; yes

B) $243,489.592; yes

C) $($243,489.592); no

D) $($264,290); no

3. Clayton Hospital has been considering the purchase of a new x-ray machine. The existing machine is

operable for three more years and will have a zero disposal price. If the machine is disposed now, it may

be sold for $170,000. The new machine will cost $700,000 and an additional cash investment in working

capital of $115,000 will be required. The new machine will reduce the average amount of time required to

take the x-rays and will allow an additional amount of business to be done at the hospital. The

investment is expected to net $150,000 in additional cash inflows during the year of acquisition and

$180,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These

cash flows will generally occur throughout the year and are recognized at the end of each year. Income

taxes are not considered in this problem. The working capital investment will not be recovered at the end

of the asset’s life.

What is the net present value of the investment, assuming the required rate of return is 9%? Would the

hospital want to purchase the new machine? If PV of $1 at 9% is:

Year

PV

1

.917

2

.842

3

.772

4

.708

5

.650

a)

b)

c)

d)

(27,510); no

117,000; no

27,510, yes

117,000’ yes

4. The Comil Corporation recently purchased a new machine for its factory operations at a cost of

$328,325. The investment is expected to generate $115,000 in annual cash flows for a period of four years.

The required rate of return is 13%. The old machine has a remaining life of four years. The new machine

is expected to have zero value at the end of the four-year period. The disposal value of the old machine at

the time of replacement is zero. What is the internal rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

5. Network Service Center is considering purchasing a new computer network for $82,000. It will require

additional working capital of $13,000. Its anticipated eight-year life will generate additional client

revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight

years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not

considered.

Required:

a. If the company has a required rate of return of 14%, what is the net present value of the proposed

investment?

b.

What is the internal rate of return?

6. EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been

gathered, and they are as follows:

Purchase Price, New

Current book value

Overhaul needed now

Annual cash operating costs

Current salvage value

Salvage value in five years

Required:

Current Machine New Machine

$88,000

$110,000

33,000

44,000

77,000

44,000

22,000

5,500

22,000

Which alternative is the most desirable with a current required rate of return of 20%? Show

computations, and assume no taxes.

7. Supply the missing data for each of the following proposals:

Initial investment

Annual net cash inflow

Life, in years

Salvage value

Payback period in years

Internal rate of return

Proposal A

(a)

$60,000

10

$0

(b)

12%

Proposal B

$62,900

(c)

6

$10,000

(d)

24%

Proposal C

$226,000

(e)

10

$0

5.65

(f)

8. Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The

machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and

will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life.

Annual cash savings from the purchase of the machine will be $10,000.

Required:

a. Compute the net present value at a 14% required rate of return.

b. Compute the internal rate of return.

c.

Determine the payback period of the investment.

9. Griffith Vehicle has received three proposals for its new vehicle-painting machine. Information on

each proposal is as follows:

Initial investment in equipment

Working capital needed

Annual cash saved by operations:

Year 1

Year 2

Year 3

Year 4

Salvage value end of year:

Year 1

Year 2

Year 3

Year 4

Working capital returned

Proposal X Proposal Y Proposal Z

$240,000

$150,000

$190,000

0

0

10,000

80,000

80,000

80,000

80,000

50,000

42,000

46,000

24,000

80,000

80,000

80,000

80,000

100,000

80,000

40,000

10,000

0

80,000

60,000

40,000

20,000

0

60,000

50,000

30,000

15,000

10,000

Required:

Determine each proposal’s payback.

10. Cedile Trailer Supply has received three proposals for its new trailer assembly line. Information on

each proposal is as follows:

Initial investment in equipment

Working capital needed

Annual cash saved by operations:

Year 1

Year 2

Year 3

Proposal X Proposal Y Proposal Z

$180,000

$140,000

$145,000

0

0

15,000

60,000

60,000

60,000

60,000

50,000

35,000

60,000

60,000

60,000

Year 4

Salvage value end of year:

Year 1

Year 2

Year 3

Year 4

Working capital returned:

Required:

Determine each proposal’s payback.

60,000

10,000

60,000

30,000

25,000

20,000

15,000

0

25,000

20,000

15,000

10,000

0

45,000

40,000

35,000

25,000

15,000

Acct 5200

Chapter 23 Handout Questions

1.

Axelia Corporation has two divisions, Refining and Extraction. The company’s primary product

is Luboil Oil. Each division’s costs are provided below:

Extraction:

Refining:

Variable costs per barrel of oil

Fixed costs per barrel of oil

Variable costs per barrel of oil

Fixed costs per barrel of oil

$14

$5

$27

$31

The Refining Division has been operating at a capacity of 40,200 barrels a day and usually purchases

25,100 barrels of oil from the Extraction Division and 15,600 barrels from other suppliers at $58 per barrel.

What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the

method used to place a value on each barrel of oil is 180% of variable costs?

A) $25.20

B) $34.20

C) $77.00

D) $138.60

2.

Axelia Corporation has two divisions, Refining and Extraction. The company’s primary product

is Luboil Oil. Each division’s costs are provided below:

Extraction:

Refining:

Variable costs per barrel of oil

Fixed costs per barrel of oil

Variable costs per barrel of oil

Fixed costs per barrel of oil

$10

$8

$26

$38

The Refining Division has been operating at a capacity of 40,300 barrels a day and usually purchases

25,400 barrels of oil from the Extraction Division and 15,100 barrels from other suppliers at $64 per barrel.

What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the

method used to place a value on each barrel of oil is 120% of full costs?

A) $18.00

B) $21.60

C) $56.00

D) $100.80

3.

Axelia Corporation has two divisions, Refining and Extraction. The company’s primary product

is Luboil Oil. Each division’s costs are provided below:

Extraction:

Refining:

Variable costs per barrel of oil

Fixed costs per barrel of oil

Variable costs per barrel of oil

Fixed costs per barrel of oil

$16

$9

$26

$38

The Refining Division has been operating at a capacity of 40,900 barrels a day and usually purchases

25,600 barrels of oil from the Extraction Division and 15,400 barrels from other suppliers at $64 per barrel.

Assume 260 barrels are transferred from the Extraction Division to the Refining Division for a transfer

price of $26 per barrel. The Refining Division sells the 260 barrels at a price of $220 each to customers.

What is the operating income of both divisions together?

A) $13,520

B) $34,060

C) $16,380

D) $50,440

4.

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching

Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing

Division, which completes the shoes and sells them to retailers. The Stitching Division “sells”

shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of

shoes is $48. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed

to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division

are assumed to be $17 per pair at 101,000 units.

Stitching’s costs per pair of shoes are:

Direct materials

$11

Direct labor

$9

Variable overhead

$7

Division fixed costs

$5

Polishing’s costs per completed pair of shoes are:

Direct materials

$20

Direct labor

$9

Variable overhead

$8

Division fixed costs

$18

What is the market-based transfer price per pair of shoes from the Stitching Division to the Polishing

Division?

A) $23

B) $36

C) $48

D) $59

5.

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching

Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing

Division, which completes the shoes and sells them to retailers. The Stitching Division “sells”

shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of

shoes is $52. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed

to be the same over the range of 40,000-103,000 units. The fixed costs for the Polishing Division

are assumed to be $24 per pair at 103,000 units.

Stitching’s costs per pair of shoes are:

Direct materials

$20

Direct labor

$18

Variable overhead

$16

Division fixed costs

$14

Polishing’s costs per completed pair of shoes are:

Direct materials

$20

Direct labor

$10

Variable overhead

$5

Division fixed costs

$18

What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the

method used to place a value on each pair of shoes is 175% of variable costs?

A) $36.75

B) $66.50

C) $94.50

D) $7.00

6.

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching

Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing

Division, which completes the shoes and sells them to retailers. The Stitching Division “sells”

shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of

shoes is $46. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed

to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division

are assumed to be $14 per pair at 101,000 units.

Stitching’s costs per pair of shoes are:

Direct materials

$12

Direct labor

$10

Variable overhead

$8

Division fixed costs

$6

Polishing’s costs per completed pair of shoes are:

Direct materials

$15

Direct labor

$6

Variable overhead

$6

Division fixed costs

$18

What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the

transfer price per pair of shoes is 125% of full costs?

A) $15.00

B) $27.50

C) $37.50

D) $45.00

Acct 5200

Chapter 20 Balanced Scorecard: Quality and Time

Chapter 20 Handout Questions

1) Conformance quality ________.

A) is the first step of a quality management system such as ISO

9000

B) is the performance of a product or service according to design

and product specifications

C) is making the product according to design, engineering, and

manufacturing specifications

D) focuses on how a product meets customer needs and wants

2) The costs of quality ________.

A) are the costs incurred to enhance large scale production

B) are the costs incurred to prevent the production of a low

quality product

C) are costs incurred to company due to defective and low quality

product

D) include warranty costs, costs of normal spoilage, costs of

abnormal spoilage, and scrap costs

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3) Costs incurred in precluding the production of products that

do not conform to specifications are ________.

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

4) Appraisal costs ________.

A) are costs incurred to prevent the production of products that

do not conform to specifications

B) are costs incurred to detect which of the individual units of

products do not conform to specifications

C) are costs incurred on defective products before they are

shipped to customers

D) are costs incurred on defective products after they have been

shipped to customers

5) Costs incurred on defective products before being shipped to

customers are ________.

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

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6) Design engineering is an example of ________.

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

7) Spoilage is an example of ________.

A) prevention costs

B) appraisal costs

C) internal failure costs

D) external failure costs

Answer the following questions using the information below:

Morrow Corp manufactures expensive tables. Its varnishing

department is fully automated and requires substantial inspection

to keep the machines operating properly. An improperly

varnished table is very expensive to correct. Inspection hours for

the 5,000 tables varnished in September totaled 1,500 hours by 8

employees. Eight quarts of varnish were used, on average, for

each table. The standard amount of varnish per table is nine

quarts. The cost of inspection for September was equal to the

budgeted amount of $40,000.

3

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8) The $40,000 represents a(n) ________.

A) activity cost pool

B) possible cost allocation base

C) internal failure cost

D) work-in-process control

9) What is the inspection cost per unit?

A) $30.40

B) $8.00

C) $9.00

D) $4,750

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Answer the following questions using the information below:

Atlanta Products has a budget of $900,000 in 2021 for prevention

costs. If it decides to automate a portion of its prevention

activities, it will save $80,000 in variable costs. The new method

will require $40,000 in training costs and $100,000 in annual

equipment costs. Management is willing to adjust the budget for

an amount up to the cost of the new equipment. The budgeted

production level is 150,000 units.

Appraisal costs for the year are budgeted at $600,000. The new

prevention procedures will save appraisal costs of $50,000.

Internal failure costs average $15 per failed unit of finished goods.

The internal failure rate is expected to be 3% of all completed

items. The proposed changes will cut the internal failure rate by

one-third. Internal failure units are destroyed. External failure

costs average $54 per failed unit. The company’s average external

failures average 3% of units sold. The new proposal will reduce

this rate by 50%. Assume all units produced are sold and there

are no ending inventories.

10) What is the net change in the budget for prevention costs if

the procedures are automated in 2021? Will management agree

with the changes?

A) $60,000 decrease, yes

B) $60,000 increase, yes

C) $140,000 increase, no

D) $80,000 decrease, yes

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11) How much will appraisal costs change assuming the new

prevention methods reduce material failures by 40% in the

appraisal phase?

A) $140,000 decrease

B) $60,000 increase

C) $50,000 decrease

D) $22,500 decrease

12) How much will internal failure costs change if the internal

product failures are reduced by 1/3 with the new procedures?

A) $22,500 decrease

B) $67,500 decrease

C) $500,000 decrease

D) $750,000 decrease

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13) How much do external failure costs change if all changes are

as anticipated with the new prevention procedures? Assume all

units produced are sold and there are no ending inventories.

A) $121,500 decrease

B) $121,500 increase

C) $243,000 decrease

D) None of these answers is correct.

14) Ventaz Corp manufactures glasses. The manufacturing cycle

efficiency is 70%. What is its waiting time if the manufacturing

lead time is 120 minutes per keyboard?

A) 38.00 minutes

B) 42.00 minutes

C) 48.00 minutes

D) 36.00 minutes.

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15) Alex is injured and rushed to Care Hospitals for treatment. He

spent 45 minutes at the hospital out of which he filled a form for

15 minutes, stood in the queue for 10 minutes, doctor treated him

for 15 minutes, and payment time was 5 minutes. What is the

service cycle efficiency for his visit?

A) 18.50%

B) 11.11%

C) 66.67%

D) 33.33%

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