ACCT 331 Final Exam

Which of the following statements is true of the break-even point?

a. When calculating the break-even point, income taxes play no role.

b. When calculating the break-even point, fixed costs play no role.

c. When calculating the break-even point, contribution margin plays no role.

d. When calculating the break-even point, variable costs play no role.

a

Which of the following is the formula to calculate net income?

a. Net income = Operating income – Tax rate

b. Net income = Operating income × (1 + Tax rate)

c. Net income = Operating income + Tax rate

d. Net income = Operating income × (1 – Tax rate)

d

Which of the following is an underlying assumption of cost-volume-profit analysis?

a. It assumes that what is produced is not sold entirely.

b. It assumes a linear revenue function and a linear cost function.

c. It assumes a change in inventory over a period.

d. It assumes that the sale mix is unknown for multiple-product analysis.

b

Jessie's Jewelry plans to sell 5,000 silver necklaces and 2,500 gold necklaces. What is the sales mix (reduced to the lowest whole number for each product)?

a. 1:2

b. 2:1

c. 3:5

d. 5:3

b

Which of the following is an example of direct fixed expenses?

a. Costs of factory landscaping

b. Corporate headquarter costs

c. Salaries of factory managers

d. Salaries of an individual segment's supervisors

d

Which equation represents how operating income is calculated?

a. Operating income = [(Price × Units) + (Unit variable cost × Units)] ÷ Fixed costs

b. Operating income = (Price × Units) ÷ [(Unit variable cost × Units) – Fixed costs]

c. Operating income = (Price × Units) – (Unit variable cost × Units) – Fixed costs

d. Operating income = (Price × Units) + (Unit variable cost × Units) + Fixed costs

c

_____ is a what-if technique that scrutinizes the effect of changes in fundamental assumptions on an answer.

a. The degree of operating leverage

b. The sales-revenue approach

c. Sensitivity analysis

d. The contribution margin ratio

c

The _____ is the total variable costs subtracted from the sales revenue.

a. break-even point

b. contribution margin

c. variable cost ratio

d. net income

b

Consider the following information available for Barium Company:

Total fixed costs	$1,440,000
Contribution margin ratio	0.30

Based on the given information, calculate the sales revenue needed to achieve a target profit of $360,000.

a. $5,750,000

b. $6,250,000

c. $5,000,000

d. $6,000,000

d

Which of the following statements about total fixed costs and total contribution margin is true?

a. If total fixed costs equal the contribution margin, profit is zero.

b. If total fixed costs are less than the contribution margin, the company is facing an operating loss.

c. If total fixed costs diminish over a period when compared to total contribution margin, profit is zero.

d. If total fixed costs are greater than the contribution margin, the company is earning a profit equal to the excess of contribution margin over fixed costs.

a

The _____ are the fixed costs that are not connected to the segments and that would still occur even if one of the segments was removed.

a. variable cost ratios

b. contribution margin ratios

c. common fixed expenses

d. direct fixed expenses

c

Decorating Designs had a unit contribution margin of $4.25 and fixed costs of $35,530. Income was $3,519. What was the margin of safety, in units?

a. 828

b. 15,892

c. 8,360

d. 7,532

a

Consider the following information for Burgundy Company:

Operating income	$50,000
Tax rate	30%

Based on the given information, Burgundy's net income will be

a. $45,000.

b. $40,000.

c. $30,000.

d. $35,000.

d

How is the degree of operating leverage calculated?

a. Degree of operating leverage = Profit ÷ Total contribution margin

b. Degree of operating leverage = Total contribution margin ÷ Profit

c. Degree of operating leverage = (Total contribution margin + Profit) ÷ Total contribution margin

d. Degree of operating leverage = (Total contribution margin + Profit) ÷ Profit

b

The proportion of each sales dollar available to cover fixed costs and provide for profit is the

a. variable cost ratio.

b. contribution margin ratio.

c. sales mix.

d. net income.

b

Net income is income taxes subtracted from

a. gross income.

b. contribution margin.

c. investment income.

d. operating income.

d

When the income target is expressed as net income, what must be added back to determine operating income?

a. Income taxes

b. Variable costs

c. Direct fixed expenses

d. Sales revenue

a

On a cost-volume-profit (CVP) graph, a loss region is defined when the

a. total revenue line lies above the total cost line.

b. total revenue line lies below the total cost line.

c. variable cost line lies above the fixed cost line.

d. variable cost line lies below the fixed cost line.

b

_____ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

a. Contribution margin

b. Margin of safety

c. Financial leverage

d. Operating leverage

d

Compute the degree of operating leverage (rounded to one decimal place) for Magenta Company from the following information:

Sales	$500,000
Variable Expenses	$200,000
Fixed expenses	$100,000

a. 1.3

b. 1.6

c. 1.2

d. 1.5

d

The analysis that includes predicting costs, identifying relevant costs, and comparing relevant costs is referred to as

a. tactical cost analysis.

b. job-order analysis.

c. variance analysis.

d. life-cycle cost analysis.

a

A _____ is a set of procedures that, if followed, will lead to a decision.

a. decision model

b. make-or-buy decision

c. keep-or-drop decision

d. tactical cost analysis

a

When a business function moves to another company, it is referred to as

a. sinking costs.

b. reshoring.

c. outsourcing.

d. cannibalization.

c

Depreciation on machinery is a(n) _____ because no future decision can alter the original cost of the machinery.

a. opportunity cost

b. outsourcing cost

c. activity resource cost

d. sunk cost

d

Which of the following steps in a tactical decision-making model follows the step that involves the comparison of the relevant costs and benefits of each alternative?

a. Assess qualitative factors.

b. Select the alternative with the greatest overall benefit.

c. Identify alternatives as possible solutions to the problem, and eliminate any unfeasible alternatives.

d. Recognize and define the problem.

a

Which of the following statements is true about relevant costs?

a. Depreciation represents an allocation of a cost already incurred and is an example of a relevant cost.

b. Relevant costs should be eliminated before determining benefits of various alternatives in a decision-making process.

c. Relevant costs are costs that have already been incurred and remain the same across alternatives.

d. Relevant costs are future costs that differ across alternatives.

d

About 10 years ago, Strange Corporation, a U.S. company, decided to move the production of all the parts for its Model S to Mexico in an effort to reduce costs. Now, it is moving the production of all these parts back to the United States. What is this process called?

a. Cannibalization

b. Reshoring

c. Offshoring

d. Outsourcing

b

If a future cost is the same for more than one alternative, it has no effect on the decision, and such a cost is referred to as a(n)

a. direct cost.

b. indirect cost.

c. irrelevant cost.

d. relevant cost.

c

The first step in a general tactical decision-making model is

a. identify the costs and benefits associated with each feasible alternative.

b. assess qualitative factors.

c. identify feasible alternatives.

d. recognize and define the problem.

d

Which of the following statements is true about tactical decision making?

a. Tactical decision making involves the commitment of a large amount of resources.

b. The immediate objective of tactical decision making is to increase long-run profits.

c. Tactical decision making involves identifying and eliminating relevant costs.

d. Tactical decision making consists of choosing among alternatives with an immediate or limited end in view.

d

To handle the qualitative factors in a decision-making process, the decision maker should

a. identify the committed resources relating to qualitative factors.

b. increase the sunk costs relating to qualitative factors.

c. quantify qualitative factors.

d. eliminate the relevant benefits of qualitative factors.

c

Which of the following statements is true about sunk costs?

a. Sunk costs are past costs and are always irrelevant.

b. The cost of providing plant utilities is a sunk cost.

c. Sunk costs are future costs and are always irrelevant.

d. A sunk cost is the net benefit sacrificed or forgone when one alternative is chosen over another.

a

_____ transpires when a special-order sale takes away from the sale of a regular product or service.

a. Offshoring

b. Cannibalization

c. Reshoring

d. Outsourcing

b

Which of the following statements is true about the accounting rate of return method of capital investment decisions?

a. It considers the profitability of an investment.

b. It measures the return on a project in terms of cash flows.

c. It determines the time required to recover a project's initial investment.

d. It explicitly considers the time value of money concept.

a

Poseidon, Inc., is planning to make an investment of $250,000 in a machine that has an expected useful life of three years and has no expected salvage value. The investment is expected to produce the following income over its life: $100,000, $80,000, and $90,000. The accounting rate of return for the investment is

a. 8%.

b. 108%.

c. 28%.

d. 36%.

d

Collins Corporation has used several methods of ranking mutually exclusive projects and obtained different results. It needs to use the method that consistently reveals the wealth-maximizing project. Which method should it choose?

a. Accounting rate of return (ARR)

b. Net present value (NPV)

c. Modified accelerated cost recovery system (MACRS)

d. Internal rate of return (IRR)

b

NPV is measured in absolute terms. Because of this, NPV

a. is affected by the size of the investment.

b. measures profitability in relative terms.

c. is size independent.

d. assumes that each cash inflow is reinvested.

a

Future cash flows, conveyed in terms of their present value, are known as

a. annuities.

b. discounted cash flows.

c. rates of return.

d. future values.

b

The required rate of return is the

a. initial investment minus the cost of capital.

b. maximum rate of return.

c. weighted average of the costs from various sources.

d. minimum rate of return.

d

The decisions that are concerned with the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets are known as

a. actuarial decisions.

b. capital investment decisions.

c. divergence decisions.

d. arbitrage decisions.

b

Independent projects are projects that, if accepted,

a. lead to the acceptance of subsidiary projects.

b. result in the raising of capital by issuing secured bonds.

c. preclude the acceptance of all other competing projects.

d. do not affect the cash flows of other projects.

d

The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the

a. internal rate of return.

b. minimum rate of return.

c. annual rate of return.

d. accounting rate of return.

a

Emerald, Inc., whose cost of capital is 10%, is considering investing in a project that requires an initial investment of $150,000. The estimated life of the project is five years. The internal rate of return of the project is 12%. Based on the information, Emerald, Inc., should

a. reject the project because the internal rate of return of the project is higher than the firm's cost of capital.

b. accept the project because the internal rate of return of the project is higher than the firm's cost of capital.

c. accept the project because it earns a return of $18,000 every year, which is higher than the ideal return of $15,000.

d. reject the project because the project earns only $90,000 in the five years, which is less than the initial investment of $150,000.

b

Which of the following statements is true about capital investment decisions?

a. Capital investment decisions mainly focus on decreasing the flexibility and increasing the lead times of a firm.

b. Capital investment decisions place large amounts of resources at risk for long periods of time and affect the future development of a firm.

c. Capital investment decisions do not consider the quantity and timing of cash flows of a project, but consider its impact on profit.

d. Capital investment decisions typically are concerned with investments in short-term capital assets.

b

The process of deciding on capital investment choices is frequently called

a. divergence budgeting.

b. an actuarial decision.

c. capital budgeting.

d. an arbitrage decision.

c

Which of the following is an example of a capital investment decision?

a. Paying a supervisor's salary

b. Opening a bank account

c. Increasing credit sales

d. Purchasing new equipment

d

The nondiscounting model of capital investment decisions that provides managers with information that can be used to help control the risk of obsolescence is the

a. equivalent annuity method.

b. real options valuation method.

c. payback period method.

d. modified internal rate of return method.

c

The _____ is the time necessary to recuperate a project's original investment.

a. postaudit period

b. sensitivity analysis

c. payback period

d. cost of capital

c

Which of the following statements is true about a discount rate?

a. It should correspond to the accounting rate of return of a project.

b. It is the rate of return at which the net present value is less than zero.

c. It is the rate of return at which the net present value is equal to zero.

d. It is the minimum acceptable rate of return on a project.

d

n order for an investment to be considered acceptable, it should

a. have a single discount factor.

b. have an internal rate of return less than the cost of capital.

c. have an internal rate of return greater than the cost of capital.

d. be set up as an independent project.

c

When annual cash flows are uniform or even, the discount factor can be used to calculate internal rate of return and is calculated by dividing

a. annual cash flows by investment.

b. investment by annual cash flows.

c. annual income by investment.

d. investment by annual income.

b

Which of the following statements is true about the decisions produced by the net present value (NPV) and the internal rate of return (IRR) methods of capital investment decisions?

a. For independent projects, if the NPV is greater than zero, then the IRR will be less than the required rate of return.

b. NPV and IRR can produce different results for mutually exclusive projects.

c. NPV and IRR both yield the same decision for mutually exclusive projects.

d. For independent projects, if the NPV is negative, then the IRR will be higher than the required rate of return.

b

Collins Corporation has used several methods of ranking mutually exclusive projects and obtained different results. It needs to use the method that consistently reveals the wealth-maximizing project. Which method should it choose?

a. Internal rate of return (IRR)

b. Net present value (NPV)

c. Accounting rate of return (ARR)

d. Modified accelerated cost recovery system (MACRS)

b