MIS EXAM3

Question 1 (12 points)

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1. Company X has gathered the following data for its three product lines, X, Y, and Z.

Product X

Product Y

Product Z

Contribution margin

$10,000

$12,000

$22,500

Units produced

1,000

2,400

1,800

Labor hours required per unit

4

4

5

Machine hours required per unit

4

4

5

If Company X has a limited supply of labor hours, which product(s) should it prefer most?

Question 1 options:

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Product X

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Product Y

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Products X and Y

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Products X and Z

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Question 2 (12 points)

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The Cowboys Company needs 20,000 units of a certain part to use in its production cycle. Cowboys is considering the possibility of buying the part from Dolphins Company instead of making it. Sixty percent of the fixed overhead will remain regardless of the decision made. Accounting records indicate the following data:

Cost to Cowboys to make the part:

Direct materials, $4

Direct labor, $16

Variable factory overheead, $18

Fixed factory overhead, $10

Cost to buy the part for Dolphins Company, $36

Which decision should Cowboys make & what is the total cost savings that would result?

Question 2 options:

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Make, $120,000

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Make, $80,000

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Buy, $120,000

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Buy, $80,000

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Question 3 (12 points)

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Zell Company derives two products, Great and Grand, from a single process. Great and Grand can be sold either as is or after further processing. Costs and selling prices are as follows:

Product

Gallons

Selling Price (as is)

Additional Processing Costs

Selling price (after processing)

Great

30,000

$8/gallon

$50,000

$10/gallon

Grand

20,000

$6/gallon

$80,000

$9.50/gallon

Which of the following products should Zell Company process further?

Question 3 options:

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Great only

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Grand only

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Both Great and Grand

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Neither Great nor Grand

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Question 4 (8 points)

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A company uses the net present value method to evaluate planned capital expenditures. Everything else being equal, the lower the required rate of return they use, the ____ will be the net present value.

(Fill in the blank above with correct choice from the ones provided below)

Question 4 options:

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higher

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lower

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identical

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can’t be determined

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Question 5 (12 points)

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Equipment is purchased at a cost of $39,000. As a result, annual cash revenues will increase by $20,000; annual cash operating expenses will increase by $7,000; straight-line depreciation is used; the asset has a ten-year life; the salvage value is $3,000. Assuming a tax bracket of 34%, determine the accounting rate of return? (round to the nearest %)

Question 5 options:

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13%

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16%

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27%

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33%

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Question 6 (8 points)

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A company uses the net present value methodology in making capital expenditure decisions. In making a decision where they have to choose among two pieces of equipment, which of the following pieces of information will be considered irrelevant

Question 6 options:

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Initial cost of each machine

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Estimated life of each machine

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MACRS Depreciation

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Cash flow generated by each machine during the estimated life of the machine

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Question 7 (16 points)

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Darlington Company is considering investing in an equipment, which will increase yearly cash revenues by $65000, and yearly cash expenses to operate the equipment by $30,000. The asset will cost $200,000, and will last 8 years, with a salvage value of $40,000. Assuming a tax rate of 39%, determine the net present value of this asset, if the company requires a 10% return on investments.

Question 7 options:

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($5,405)

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($25,804.75)

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$25,804.75

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$5,405

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Question 8 (12 points)

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Shirt Co. wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual net cash inflows of $30,000, have a useful life of 8 years, and an estimated salvage value of $10,000. If Shirt Co. has a required rate of return of 12%, the maximum amount they will be willing to spend for this machine is:

Question 8 options:

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$149,040

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$153,080

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$198,720

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$300,000

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Question 9 (8 points)

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Which of the following statements is true–

Question 9 options:

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The accounting rate of return method ignores the time value of money concept

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The payback period ignores the time value of money concept and ignores cash flows received after the payback period

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The net present value method considers the time value of concept and also considers cash flows during the entire life of the investment project

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When the above methods yield conflicting results, the decision indicated by the net present value method should be considered

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All of the above are true.

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Question 10 (8 points)

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Co. X has gathered the following estimates:

Machine A

Machine B

Cost

$600,000

$600,000

Life

5 yrs

5 yrs

Net Cash Inflow:

Yr 1

i$100,000

$500,000

Yr 2

$200,000

$400,000

Yr 3

$300,000

$300,000

Yr 4

$400,000

$200,000

Yr 5

$500,000

$100,000

Co. X uses the net present value method to evaluate capital expenditures. Which of the following two machines has the higher net present value?

Question 10 options:

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Machine A

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Machine B

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They are the same

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Cannot be determined from the information provided

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Question 11 (16 points)

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Use the following information to answer questions 11 & 12

The Sip & Dip Donut company is considering the acquisition of a new automatic donut dropper for $600,000. The machine will have a six-year life and will produce before tax cash savings of $200,000 each year. The asset is to be depreciated using the straight-line method with no salvage value. The company’s tax rate is 40 percent.

The after-tax net cash inflow on the investment is:

Question 11 options:

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$ 80,000

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$120,000

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$160,000

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$200,000

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Question 12 (16 points)

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Use the following information to answer questions 11 & 12

The Sip & Dip Donut company is considering the acquisition of a new automatic donut dropper for $600,000. The machine will have a six-year life and will produce before tax cash savings of $200,000 each year. The asset is to be depreciated using the straight-line method with no salvage value. The company’s tax rate is 40 percent.

The payback period is:

Question 12 options:

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3 years

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3.75 years

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5 years

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7.5 years

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Question 13 (12 points)

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Use the following information to answer questions 13 – 16

Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November 1999, they incurred joint processing costs of $420,000. Production and sales value information for November 1999 are as follows:

Product

Cases

Selling Price/Case

Additional Costs/Case

Catsup

100,000

$10

$2

Tomato Juice

150,000

$8

$1

Canned Tomatoes

250,000

$12

$3

The unit cost per case of Canned Tomatoes using the physical volume method is (rounded to 2 decimal places):

Question 13 options:

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$0.84

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$1.84

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$2.84

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$3.84

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Question 14 (16 points)

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Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November 1999, they incurred joint processing costs of $420,000. Production and sales value information for November 1999 are as follows:

Product

Cases

Selling Price/Case

Additional Costs/Case

Catsup

100,000

$10

$2

Tomato Juice

150,000

$8

$1

Canned Tomatoes

250,000

$12

$3

The joint cost allocated to Canned Tomatoes using the net realizable value method is (rounded to the closest $):

Question 14 options:

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$81,942

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$107,562

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$230,496

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$210,000

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Question 15 (12 points)

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Use the following information to answer questions 13 – 16

Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November 1999, they incurred joint processing costs of $420,000. Production and sales value information for November 1999 are as follows:

Product

Cases

Selling Price/Case

Additional Costs/Case

Catsup

100,000

$10

$2

Tomato Juice

150,000

$8

$1

Canned Tomatoes

250,000

$12

$3

If the company has a philosophy of marking up their products 20% over cost, the selling price per case of Tomato Juice should be using the net realizable value method (rounded to 2 decimal places):

Question 15 options:

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$0.86

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$1.00

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$2.06

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$7.00

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Question 16 (12 points)

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Use the following information to answer questions 13 – 16

Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November 1999, they incurred joint processing costs of $420,000. Production and sales value information for November 1999 are as follows:

Product

Cases

Selling Price/Case

Additional Costs/Case

Catsup

100,000

$10

$2

Tomato Juice

150,000

$8

$1

Canned Tomatoes

250,000

$12

$3

Red Sauce Canning Company is considering an option to further refine Catsup. By incurring an additional cost of $60,000, they will be able to increase their selling price of Catsup to $11.20 per case. Determine the incremental advantage (disadvantage) of this option? (round to the closest $)

Question 16 options:

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$60,000

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($60,000)

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$260,000

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($260,000)

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Question 17 (8 points)

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Lenda Corporation manufactures three different products. All three of these products must pass through a stamping machine in its fabrication department. This machine is Lenda’s constrained resource. Lenda would make the most profit if it produces the product that:

Question 17 options:

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uses the lowest number of stamping machine hours.

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generates the highest contribution margin per unit.

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uses the highest number of stamping machine hours.

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generates the highest contribution margin per stamping machine hour.

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