1 of 41 A company is considering the following alternatives Alternative 1 120 000 120 000 Revenues Variable costs60 000 70 000 35 000 Fixed costs 35 000 Alternative 2 Which of the following are relevant in choosing between the alternatives o Variable costs o Variable costs and fixed costs o Revenues o Fixed costs 2 of 41 Unit variable cost Unit fixed cost Total cost per unit 50 24 74 Adler Company manufactures a product with the following costs The company normally sells 10 000 units at a price of 88 each Adler has a one time opportunity to sell an additional 3 000 units at 70 each in a foreign market which would not affect its present sales If the company has sufficient capacity to produce the additional units acceptance of the special order would affect net income as follows o Net income would increase by 60 000 o Net income would increase by 210 000 o Net income would decrease by 60 000 o Net income would decrease by 12 000 o Net income would increase by 12 000 3 of 41 4 of 41 If a company must expand capacity to accept a special order it is likely that there will be o An increase in fixed costs o An increase in variable and fixed costs per unit o No increase in fixed costs o An increase in unit variable costs May Company produces 1 000 units of a necessary component with the following costs 48 000 Direct Materials Direct Labor 32 000 Variable Overhead 8 000 14 000 Fixed Overhead May Company could avoid 6 000 in fixed overhead costs if it acquires the components externally If cost minimization is the major consideration and the company would prefer to buy the components what is the maximum external purchase price that May Company would accept to acquire the 1 000 units externally o 94 000 o 108 000 o 88 000 o 96 000 o 102 000 5 of 41 6 of 41 7 of 41 8 of 41 A company has a process that results in 500 drums of Chemical L that can be sold for 300 per drum An alternative would be to process Chemical L further at a cost of 25 000 and then sell it for 380 per drum Should management sell Chemical L now or should Chemical L be processed further and then sold What is the effect of the action o Process further the company will be better off by 25 000 o Sell now the company will be better off by 15 000 o Process further the company will be better off by 15 000 o Process further the company will be better off by 40 000 o Sell now the company will be better off by 25 000 The focus of a sell or process further decision o Incremental cost o Incremental revenue o Both incremental revenue and incremental cost o Neither incremental revenue nor incremental cost A company is considering replacing old equipment with new equipment Which of the following is a relevant cost for incremental analysis o Book value of the old equipment o Estimated annual depreciation of the new equipment o Cost of the new equipment o Annual depreciation charge on the old equipment A company has several product lines one of which reflect the following results Sales Variable expenses Contribution margin Fixed expenses Net loss 400 000 275 000 125 000 200 000 75 000 If this product line is eliminated 80 of the fixed expenses can be eliminated and the other 20 will be allocated to other product lines If management decides to eliminate this product line the company s net income will o Increase by 35 000 o Decrease by 35 000 o Decrease by 85 000 o Increase by 85 000 o Increase by 75 000 Using compound interest if you deposit 1 000 each year in an account paying 7 interest approximately how much will have in that account in five years A company is considering an investment which will return lump saving of 150 000 four years from now If they require a 10 return what is the most they should pay for the investment The internal rate of return is the interest rate that causes o a positive NPV o a negative NPV o the project that should be rejected o a zero NPV A company is considering investing in a project which will cost 175 000 and last for 5 years Annual net income will be 45 000 and annual cash flow will be 50 000 What is the payback period from 9 of 41 o 7 013 o 1 403 o 5 751 10 of 41 o 136 364 o 102 450 o 32 321 o 47 320 o 219 615 11 of 41 12 of 41 o 3 89 years o 0 29 years o 0 26 years o 5 years o 3 5 years 13 of 41 If a project has equal annual cash flows its cash payback period is computed by dividing the cost of the capital investment by the o annual net income o present value of the net income o net annual cash inflow o present value of the cash inflow Pascual Company is considering the acquisition of new equipment at a cost of 1 700 000 The company s accountants have provided the following additional information about the project for your analysis If the company has established a required return of 12 what is the approximate net present value of the equipment acquisition Your analysis of a project under consideration by Davenport Company reveals the following expected performance over its expected three year useful life Cash Flow Net Income 40 000 35 000 50 000 45 000 60 000 55 000 Year 1 Year 2 Year 3 This project has a cost of 110 000 and Davenport has established a discount hurdle rate of 9 What is the approximate net present value of the project 14 of 41 Annual net income 360 000 Net annual cash flow 390 000 7 years Estimated useful life o 3 608 o 1 030 000 o 1 837 758 o 137 758 o 79 866 15 of 41 o 2 457 o 40 000 o 125 113 o 5 830 o 15 113 16 of 41 Complete the statement Intangible benefits in capital budgeting o include increased quality or employee loyalty o are not considered because they are usually not relevant to the decision You are evaluating the mutually exclusive projects which have the following financial characteristics o should be ignored because they are difficult to determine o none of these 17 of 41 Project A Net present value 50 000 Initial investment 200 000 4 years Project life Project B 75 000 400 000 4 years Which project should be accepted o Either A or B we are indifferent o Neither A nor B should be accepted o Project A o There is not sufficient information to answer o Project B Hingis Hardware is evaluating a new retail location and its accountants have prepared some information for your review Their analysis has established …