2013 AICPA Newly Released Questions Business

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29. CPA-08308
In an e-commerce environment that requires that the information technology (IT) system be available on a
continuous basis, more emphasis will be placed on which of the following aspects of the planning than in
a traditional organization?
a. Maintain appropriate written source documents so the data can be re-entered if it is lost or
compromised.
b. Maintain redundant systems for instant availability to assure the flow of transactions.
c. Review additional expenses to obtain the required amount of business interruption insurance
coverage for the organization.
d. Assure that appropriate data backups are stored in an off-site location.
Solution:
Choice "b" is correct. E-commerce environments are more highly dependent upon robust
communications systems than traditional organizations to ensure continuous service. Maintenance of
redundant systems for instant availability to assure the flow of transactions would require more emphasis
in an e-commerce environment than a traditional organization.
Choice "a" is incorrect. Traditional systems will place more emphasis on written source documents to
provide data redundancy than e-commerce environments.
Choice "c" is incorrect. Both traditional and e-commerce organizations will invest in business interruption
insurance to ensure business survival.
Choice "d" is incorrect. Both traditional and e-commerce organizations will make appropriate
arrangements for system backup and safeguarding of data.
2013 AICPA Newly Released Questions Business
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30. CPA-08309
As part of a benchmarking process, a company's costs of quality for the current month have been
identified as follows:
Employee training $20,000
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive maintenance 19,500
Supplier education expense 17,500
Materials inspection expense 60,000
Processing product returns 2,500
What amount is the company's prevention cost for the current month?
a. $39,500
b. $57,000
c. $165,000
d. $175,500
Solution:
Choices "b" is correct. The company's prevention costs total $57,000, as computed below:
Cost
Conforming costs Nonconforming costs
Prevention Appraisal Internal External
Employee training $20,000
Product recalls $8,000
Scrap $4,500
Quality inspectors $48,000
Preventive
maintenance
$19,500
Supplier education
expense
$17,500
Materials
inspection exp.
$60,000
Processing
product returns
$2,500
Total $57,000 $108,000 $4,500 $10,500
Choices "a", "c", and "d" are incorrect based on the above analysis.
2013 AICPA Newly Released Questions Business
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31. CPA-08310
A company is considering outsourcing one of the component parts for its product. The company currently
makes 10,000 parts per month. Current costs are as follows:
Per unit Total
Direct materials $4 $40,000
Direct labor 3 30,000
Fixed plant facility cost 2 20,000
The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity
for $5,000/month. How will the company's monthly costs change?
a. Decrease $15,000.
b. Decrease $10,000.
c. Increase $5,000.
d. Increase $10,000.
Solution:
Choice "c" is correct. Monthly costs of the company would increase by $5,000 if the company elects to
buy rather than make its component part. Change in cost is computed as follows:
Cost of purchased component (10,000 parts x $8 per part) $80,000
Rental of idle capacity (5,000)
Net cost $75,000
Avoidable costsdirect materials ($40,000)
Avoidable costsdirect labor ( 30,000)
Total costs avoided $(70,000)
Cost increase $ 5,000
Choice "a" is incorrect. A decrease of $15,000 appears to include fixed plant facility costs as part of the
incremental reduction in expenses.
Choice "b" is incorrect. A decrease of $10,000 appears to include fixed plant facility costs as part of the
incremental reduction in expenses while ignoring the benefit of the rental of idle space.
Choice "d" is incorrect. An increase of $10,000 appears to ignore the benefit of the rental of idle space.
2013 AICPA Newly Released Questions Business
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32. CPA-08311
Which of the following methods should be used if capital rationing needs to be considered when
comparing capital projects?
a. Net present value.
b. Internal rate of return.
c. Return on investment.
d. Profitability index.
Solution:
Choice "d" is correct. The profitability index is used for capital rationing. The profitability index is the ratio
of the present value of net future cash inflows to the present value of the net initial investment. Ranking
and selection of investments is made by listing projects in descending order. Limited capital resources
are applied in the order of the index until resources are either exhausted or the investment required by
the next project exceeds remaining resources.
Choice "a" is incorrect. The net present value method is a technique to screen investments for
compliance with capital investment policy or criteria, not a capital rationing method.
Choice "b" is incorrect. The internal rate of return method is a technique to screen investments for
compliance with capital investment policy or criteria, not a capital rationing method.
Choice "c" is incorrect. The return on investment method is a technique to screen investments for
compliance with capital investment policy or criteria, not a capital rationing method.
2013 AICPA Newly Released Questions Business
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33. CPA-08312
The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2
trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in
government expenditures is necessary to produce full employment?
a. $100 billion
b. $80 billion
c. $20 billion
d. $10 billion
Solution:
Choice "c" is correct. Government expenditures must increase by $20 billion in order to increase the
GDP by $100 billion (from $1.2 trillion to $1.3 trillion). Government expenditures will benefit from the
multiplier effect, i.e., the multiplied increase in the level of economic activity that results from increased
spending in the economy. The multiplier effect results from the marginal propensity to consume. The
level of spending required to achieve a $100 billion increase in the economy, assuming a 0.8 marginal
propensity to consume, is as follows:
Spending = Change in GDP
(1 - MPC)
Spending = $100,000,000,000
(1 - 0.8)
Spending = $100,000,000,000 x (1 - 0.8)
Spending = $20,000,000,000
Choices "a", "b", and "d" are incorrect based on the above calculation.
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