1.To make a decision whether to accept or reject a special sales order, managers need critical information about all the following except: (Points : 2)
.gif”> Relevant costs.
.gif”> Prior period operating costs.
.gif”> Any opportunity costs.
.gif”> The strategic, competitive environment of the firm.
2.Which of the following statements regarding “opportunity costs” is TRUE? (Points : 2)
.gif”> These costs are recorded routinely by cost accounting systems.
.gif”> These costs relate to the benefit lost or foregone when a chosen option (course of action) precludes the benefits from an alternative option.
.gif”> These costs are generally deductible for federal income tax purposes.
.gif”> In terms of most short-run decisions, they are irrelevant.
3.In deciding between alternative choices for a given situation, managers usually employ a five-step process. Which of the following is not a step in the decision-making process? (Points : 2)
.gif”> Evaluate performance.
.gif”> Specify the criteria and identify the alternative actions.
.gif”> Select and implement the best course of action.
.gif”> Perform relevant and strategic cost analysis.
.gif”> Review the audit report.
4.A useful device for solving production problems involving multiple products and limited resources is: (Points : 2)
.gif”> Gross profit per unit of product.
.gif”> Contribution per unit of scarce resource.
.gif”> Value-stream costing.
.gif”> Relevant cost pricing.
.gif”> The contribution income statement.
5.In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to this short-run decision is: (Points : 2)
.gif”> Direct labor.
.gif”> Variable overhead.
.gif”> Fixed overhead that will be avoided if the part is bought from an outside vendor.
.gif”> Fixed overhead that will continue even if the part is bought from an outside vendor.
6.A company’s approach to a make-or-buy decision: (Points : 2)
.gif”> Depends on whether the company is operating at or below the breakeven point.
.gif”> Depends on whether the company is operating at or below normal volume.
.gif”> Involves an analysis of avoidable costs.
.gif”> Should utilize absorption (i.e., full) costing.
.gif”> Should consider an allocation of corporate headquarter expenses to the unit in question.
7.Which one of the following is true for the internal rate of return (IRR) method? (Points : 2)
.gif”> It assumes cash proceeds during the life of a project can be reinvested to earn the same rate of return as the weighted-average cost of capital.
.gif”> Unlike the NPV method, it assumes only a single discount rate.
.gif”> IRRs of multiple projects are additive (that is, can be added together).
.gif”> It can be used to make optimal decisions regarding mutually exclusive investment projects.
.gif”> It makes it easy to incorporate multiple costs of capital.
8.Which one of the following statements concerning capital budgeting is not true? (Points : 2)
.gif”> A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return.
.gif”> Capital budgeting is the process of identifying, evaluating, selecting, and controlling long-term investment projects.
.gif”> Capital budgeting is based on precise estimates of future events.
.gif”> Capital budgeting involves estimating the revenues and costs of each proposed project, evaluating their merits, and choosing those worthy of investment.
9.The tax impact of a capital investment project (such as the replacement of a major piece of machinery) is present during: (Points : 2)
.gif”> The project initiation stage and final disposal stage only.
.gif”> All stages: initiation, operation, and final disposal of the project.
.gif”> Only the project initiation stage and the operation stage.
.gif”> The project operation stage only.
.gif”> The project disposal stage only.
10.If an existing asset is sold at a gain, and the gain is taxable, then the after-tax proceeds from this transaction would be equal to: (Points : 2)
.gif”> Net proceeds from the sale plus the after-tax gain on the sale.
.gif”> Net proceeds from the sale less the after-tax gain on the sale.
.gif”> Net proceeds from the sale plus the taxes paid on the gain.
.gif”> Net proceeds from the sale less the taxes paid on the gain.
11.Which of the following is not a characteristic of capital budgeting post-audits? (Points : 2)
.gif”> They provide feedback to managers regarding the soundness of their decision-making.
.gif”> They encourage managers to build slack into capital investment proposals.
.gif”> They are sometimes difficult to implement in practice.
.gif”> They may be cost-prohibitive to accomplish.
.gif”> They help keep actual projects on target (e.g., by limiting project managers from diverting project funds, without authorization, to other uses).
12.Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals? (Points : 2)
.gif”> NPV facilitates comparisons of mutually exclusive projects requiring different amounts of initial investments.
.gif”> NPV facilitates comparisons among mutually exclusive projects that have the same useful life but different initial outlays.
.gif”> NPV can be used to determine an optimum capital budget under conditions of capital rationing, while IRR cannot.
.gif”> NPV is relatively intuitive.
.gif”> IRR relies on discounted cash-flow analysis, while NPV does not.
13.Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.
What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year). (Points : 2)
.gif”> 2.5 years.
.gif”> 2.7 years.
.gif”> 3.1 years.
.gif”> 3.6 years.
14.Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.
What is the net present value (NPV) of the investment? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end. (Points : 2)
15.A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $5,000 cash and be replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The net relevant cost of the replacing option is: (Points : 2)
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