MANAGEMENT ADVISORY SERVICES

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Quality Costs
1. The following activities are typical in production management:
1. Warranty work
2. Labor and overhead incurred for rework of defective products found by an inspector
3. Quality training program
4. The costs of a consumer complaint department
5. In-process inspection costs
6. Reinspection of reworked products
7. Downtime attributed to quality problems
8. Product recalls
9. Lower sales due to poor product performance
10. Quality audits
To what classification of quality costs do the foregoing described costs belong?
Prevention
Appraisal
Internal Failure
External Failure
A.
3,7,10
3,5
2
1,4,8,9
B.
3,10
5
2,6,7
1,4,8,9
C.
10
3
2,5,6
1,4,7,8,9
D.
3,10
5
1,2,10
4,7,8,9
Questions 2 thru 4 are based on the following information.
At the beginning of the year, Joshua Corporation initiated a quality improvement program. The
program was successful in reducing scrap and rework costs. To help assess the impact of the
quality improvement program, the following data was collected for the current and preceding year.
Preceding Year
Current Year
Sales
P1,000,000
P 1,000,000
Recruiting
1,000
1,500
Packaging inspections
2,500
4,000
Downtime
20,000
15,000
Reinspection
40,000
25,000
Product inspection
5,000
10,000
Product liability
35,000
27,500
2. As a result of quality improvements, profits have increased by
A. P32,500
C. P7,500
B. P20,500
D. P5,00

May 9, 2004

Pre-week Quizzer

3. If quality costs had been reduced to 2.5 percent of sales in the current year, profits would have
increased by
A. P177,000
C. P61,000
B. P58,000
D. P25,000
4. For the current year, the respective percentages based on sales of the different quality costs,
respectively, are:
Prevention
Appraisal
Internal Failure
External failure
A.
0.15%
1.40%
2.50%
1.50%
B.
0.15%
1.40%
4.00%
2.75%
C.
0.65%
1.00%
1.50%
4.25%
D.
0.65%
1.00%
2.50%
1.50%
Productivity Measures
Questions 5 & 6 are based on the following information.
Information about Rose Company is as follows:
Output (units)
Selling price per unit
Input quantities:
Materials (pounds)
Labor (hours)
Input prices:
Materials (per pound)
Labor (per hour)

2001
80,000
P25

2002
84,000
P25

4,000
3,200

4,000
3,250

P5.00
P7.00

P5.50
P7.50

5. What are the materials productivity, and labor productivity ratio for 2001?
A.
B.
C.
Materials
20.00
100.00
25.00
Labor
25.00
95.45
24.00

D.
20.00
24.00

6. By how much did profits change as a result of changes in productivity related to materials, and
labor, respectively?
A.
B.
C.
D.
Materials
P(1,100)
P1,100
P(625)
P625
Labor
P (825)
P 825
P 625
P625
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Activity-Based Costing
7. Designing and changing are activities that are classified as:
A. Unit-level
C. Product-level
B. Batch-level
D. Facility-level
8. How are the following activities classified using ABC system?
1. Security
2. Product inspections
3. Insurance on the plant
4. Materials handling
5. Modifications made by engineering to the product design of several products
6. Machine-related overhead
7. Set-ups
8. Providing space and utilities
9. Moving of inventory
Unit Level
Batch Level
Product Level
Facility Level
A.
4,6,8
2,4,7
1,3
10
B.
2,6
4,5
1,7
3,10
C.
6
2,4,7,10
5
1,3,8
D.
2
1,6,7
10
3,4,5,8
9. Protex Company makes two products, X and Z. X is being introduced this period, whereas Z
has been in production for 2 years. For the period about to begin, 1,000 units of each product
are to be manufactured. The only relevant overhead item is the cost of engineering change
orders. X and Z are expected to require eight and two change orders, respectively. X and Z
are expected to require 2 and 3 machine hours, respectively. The cost of a change orderis
P600.
If Protex applies engineering change order cost on the basis of machine hours, the overhead
cost per unit to be assigned to X and Z, respectively, are
A. P2.40 and P3.60, respectively
C. P4.80 and P3.60, respectively
B. P3.60 and P2.40, respectively
D. P3.60 and P4.80, respectively
10. Zeta Co. is preparing its profit plan. As part of its analysis of the profitability of individual
products, the controller estimates the amount of overhead that should be allocated to the
individual product lines from the information given as follows:
Wall mirrors
Special windows
Units produced
25
25
May 9, 2004

Pre-week Quizzer

Material moves per product line

5
15
Direct labor hours per unit
200
200
Budgeted materials handling costs
P50,000
Under each of the systems of costing, how much materials handling costs should be allocated
to one unit of wall mirrors?
A.
B.
C.
D.
Based on direct labor hours
P1,000
P 500
P2,000
P5,000
Under activity-based costing
P 500
P1,000
P1,500
P2,500
Life-Cycle Costing
11. Richards, Inc. developed the following budgeted life-cycle income statement for two proposed
products. Each products life cycle is expected to be two years.
Product X Product Y
Total
Sales
P200,000 P200,000
P400,000
Cost of goods sold
( 120,000) (130,000)
( 250,000)
Gross Profit
P 80,000 P 70,000
P150,000
Period expenses:
Research & development
( 70,000)
Marketing
( 50,000)
Life-cycle income
P 30,000
A 10% return on sales is required for new products. Because the proposed products did not
have a 10% return on sales, the products were going to be dropped.
Relative to Product Y, Product X requires more research and development costs but fewer
resources to market the product. Sixty percent of the research and development costs are
traceable to Product X and 30 percent of the marketing costs are traceable to Product X.
If research and development costs and marketing costs are traced to each product, life-cycle
income for Product Y would be
A. P35,000
C. P12,000
B. P20,000
D. P7,000
Cost Behavior
12. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Costs
Cost Function
Electricity
P100 + P20 per direct labor hour
Maintenance
P200 + P30 per direct labor hour
Supervisors salaries
P10,000 per month
Indirect materials
P16 per direct labor hour
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Pre-week Quizzer

If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated
manufacturing overhead costs would be
A. P109,300
C. P76,300
B. P99,000
D. P10,366

Maddens net assets are P36,000,000. The peso sales that must be achieved for Madden to
earn a 10 percent after tax return on assets would be
A. P8,800,000
C. P12,000,000
B. P16,000,000
D. P6,880,000

Cost-Volume-Profit Analysis
13. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell
100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are
70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000,
what must the total fixed costs be?
A. P80,000
C. P240,000
B. P90,000
D. P600,000

17. The following data relate to Homer Company which sells a single product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firms salespersons would like to change their compensation from a 10 percent
commission to a 5 percent commission plus P20,000 per month in salary. They now receive
only commission.
The change in compensation plan should change the monthly breakeven point by
A. 1,071 Increase
C. 1,538 Increase
B. 1,071 Decrease
D. 1,538 Decrease

14. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00.
The selling price should be
A. P1.60
C. P2.40
B. P2.10
D. P2.50
15. The following relates to Gloria Corporation, which produced and sold 50,000 units during a
recent accounting period:
Sales
P850,000
Fixed manufacturing costs
210,000
Variable manufacturing costs
140,000
Fixed selling and administrative expense
300,000
Variable selling and administrative expense
45,000
Income tax rate
40%
For the next accounting period, if production and sales are expected to be 40,000 units, the
company should anticipate a contribution margin per unit of
A. P1.00
C. P3.10
B. P13.30
D. P7.30
16. Madden, Company has projected its income before taxes for next year as shown below.
Madden is subject to a 40% income tax rate.
Sales (160,000 units)
P8,000,000
Cost of sales
Variable costs
P 2,000,000
Fixed costs
3,000,000
5,000,000
Income before taxes
P 3,000,000
May 9, 2004

18. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows.
The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00
per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of
additional fixed costs associated with this new product. A corporate fixed charge of P20,000
currently absorbed by other products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling
price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is
40%)
A. 10,700
C. 20,000
B. 12,100
D. 28,300
19. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6
and total fixed costs are P12,000. At this selling price, the company earns a profit equal to
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
costs and variable costs per unit remain unchanged. If the selling price were reduced to P9
per unit, the profit would be
A. P3,000
C. P5,000
B. P4,000
D. P6,000

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20. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs
are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a
10% increase over last year. For the company to increase income by P15,000 in the coming
year, the marginal contribution margin rate must be
A. 20%
C. 40%
B. 30%
D. 70%
21. Wilson Co. prepared the following preliminary forecast concerning product G for next year
assuming no expenditure for advertising:
Selling price per unit
P
10
Units sales
100,000
Variable costs
P600,000
Fixed costs
P300,000
Based on a market study in December of this year, Wilson estimated that it could increase the
unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent
on advertising. Assuming that Wilson incorporates these changes in its forecast, what should
be the operating income from product G?
A. P175,000
C. P205,000
B. P190,000
D. P365,000
22. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many
styles of shoes that are all sold at the same price. To encourage sales personnel to be
aggressive in their sales efforts, the company pays a substantial sales commission on each
pair of shoes sold. Sales personnel also receive a small basic salary.
The following cost and revenue data relate to Store 21 and are typical of the companys many
sales outlets:
Selling price
P 800
Variable expenses:
Invoice costs
P360
Sales commission
140
500
Fixed expenses per year:
Rent
P1,600,000
Advertising
3,000,000
Salaries
1,400,000
Total
P6,000,000

May 9, 2004

Pre-week Quizzer

The company is considering paying the store manager a P60 commission on each pair of
shoes sold in excess of break-even point. If this change were made, what will be the stores
before tax profit or loss assuming 23,500 pairs of shoes are sold in a year?
A. P(360,000)
C. P840,000
B. P2,930,000
D. P1,330,000
23. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed
overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and
will continue whether or not production ceases. Depreciation on the equipment is P20,000 a
year. If production is stopped, the equipment can be sold for P18,000, if production continues,
however, it will be useless at the end of 1 year and will have no salvage value. The selling
price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break
even on a cash flow basis is
A. 4,500 units
C. 1,800 units
B. 5,000 units
D. 36,000 units
Questions 24 through 28 are based on the Statement of Income of Davao, Inc. which represents
the operating results for the current fiscal year ending December 31. Davao had sales of 1,800
tons of product during the current year. The manufacturing capacity of Davaos facilities is 3,000
tons of product. Consider each questions situation separately.
Sales
P900,000
Variable costs
Manufacturing
P315,000
Selling costs
180,000
Total variable costs
495,000
Contribution margin
P405,000
Fixed costs
Manufacturing
P 90,000
Selling
112,500
Administration
45,000
Total fixed costs
247,500
Net income before income taxes
P157,500
Income taxes (40%)
(63,000)
Net income after income taxes
P 94,500
24. The breakeven volume in tons of product for the year is
A. 420
C. 1,100
B. 495
D. 550
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25. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax net income that Davao can expect
for the next year is
A. P135,000
C. P110,25
B. P283,500
D. P184,500
26. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Davaos costs would be at the same levels and rates as last year. What net
income after taxes would Davao make if it took this order and rejected some business from
regular customers so as not to exceed capacity?
A. P297,500
C. P252,000
B. P211,500
D. P256,500
27. Without prejudice to your answers to previous questions, and assume that Davao plans to
market its product in an new territory. Davao estimates that an advertising and promotion
program costing P61,500 annually would need to be undertaken for the next two or three
years. In addition , a P25 per ton sales commission over and above the current commission to
the sales force in the new territory would be required. How many tons would have to be sold
in the new territory to maintain Davaos current after-tax income of P94,500?
A. 307.5
C. 1,095
B. 273.33
D. 1,545
28. Without prejudice to preceding questions, assume that Davao estimates that the per ton selling
price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs
will not change. What sales volume in pesos will be required to earn an after-tax net income of
P94,500 next year?
A. P1,140,000
C. P825,000
B. P1,500,000
D. P1,350,000
Standard Costing & Variance Analysis
29. Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of finished
product contains 2 yards of cloth. However, there is unavoidable waste of 20% calculated on
input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 per yard. The
standard direct material cost for cloth per unit of finished product is:
A. P4.80
C. P7.00
B. P6.00
D. P7.50

May 9, 2004

Pre-week Quizzer

30. The following information relates to Ore Companys 2003 manufacturing activities:
Standard direct labor hours per unit
2
Number of units produced
5,000
Standard variable overhead per standard direct labor hours
P3
Actual variable overhead
P28,000
Unfavorable overhead efficiency variance
P 1,500
The number of actual direct labor hours are
A. 10,500
C. 10,000
B. 11,000
D. 12,400
Questions 31 & 32 are based on the following information.
Rainbow Company uses a standard cost system. Information about its direct labor costs for
Product Lux for the month of January follows:
Standard hours allowed for actual production
1,500
Actual hourly rate paid
P61.00
Standard hourly rate
P60.00
Labor efficiency variance, Favorable
P6,000
31. How many direct labor hours were actually worked during the month of January?
A. 1,400
C. 1,402
B. 1,498
D. 1,600
32. How much was the direct labor rate variance?
A. P1,400 F
C. P1,400 U
B. P1,600 F
D. P1,600 U
33. STA Company uses a standard cost system. The following information pertains to direct labor
costs for the month of June:
Standard direct labor rate per hour
P10.00
Actual direct labor rate per hour
P 9.00
Labor rate variance
P12,000 favorable
Actual output
2,000 units
Standard hours allowed for actual production
10,000 hours
How many actual labor hours were worked during March for STA Company?
A. 10,000
C. 8,000
B. 12,000
D. 10,500

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34. If annual overhead costs are expected to be P1,000,000 and 200,000 total labor hours are
anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is
A. P6.25
C. P25.00
B. P5.00
D. P4.00
35. ABC had a P28,000 favorable volume variance, a P25,000 unfavorable variable overhead
spending variance, and P12,000 total overapplied overhead. The fixed overhead budget
variance was
A. P9,000 favorable
C. P9,000 unfavorable
B. P26,000 favorable
D. P26,000 unfavorable
36. Given for the variable factory overhead of X Products Inc.: P39,500 actual input at budgeted
rate, P41,500 flexible budget based on standard input allowed for actual output, P2,500
favorable flexible budget variance. Compute the spending variance:
A. P500 U
C. P500 F
B. P2,000 F
D. P2,000 U
37. Bacon had a P28,000 unfavorable volume variance, a P5,000 unfavorable fixed overhead
budget variance, and P22,000 total underapplied overhead. The variable overhead spending
variance was
A. P11,000 favorable
C. P11,000 unfavorable
B. P1,000 favorable
D. P23,000 unfavorable
38. Acme had a P22,000 favorable fixed overhead budget variance, a P15,000 unfavorable
variable overhead spending variance, and P2,000 total overapplied overhead. The volume
variance was
A. P13,000 overapplied
C. P5,000 overapplied
B. P13,000 underapplied
D. P5,000 underapplied
39. Aldorp had a P10,000 unfavorable fixed overhead budget variance, a P6,000 unfavorable
variable overhead spending variance, and a P2,000 favorable volume variance. The total
overhead was
A. P14,000 overapplied
C. P18,000 overapplied
B. P14,000 underapplied
D. P18,000 underapplied

May 9, 2004

Pre-week Quizzer

40. Fidelity Company uses a flexible budget system and prepared the following information for the
year: Fidelity operated at 80 percent of capacity during the year, but applied factory overhead
based on the 90 percent capacity level. Assuming that actual factory overhead was equal to
the budgeted amount of overhead, how much was the overhead volume variance for the year?
Percent of Capacity
80 Percent
90 Percent
Direct labor hours
24,000
27,000
Variable factory overhead
P54,000
P60,750
Fixed factory overhead
P81,000
P81,000
Total factory overhead rate pre DLH
P5.625
P5.25
A. P9,000 U
C. P9,000 F
B. P15,750 U
D. P15,750 F
41. Using the information presented below, calculate the total overhead spending variance.
Budgeted fixed overhead
P10,000
Standard variable overhead (2 DLH at P2 per DLH)
P4 per unit
Actual fixed overhead
P10,300
Actual variable overhead
P19,500
Budgeted volume (5,000 units x 2 DLH)
10,000 DLH
Actual direct labor hours (DLH)
9,500
Units produced
4,500
A. P500 U
C. P1,000 U
B. P800 U
D. P1,300 U

42. STA Companys standard fixed overhead cost is P3 per direct labor hour based
on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours
per unit. During 2001, STA produced 55,000 units of product, incurred
P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
labor. What are the fixed overhead variances?
Fixed OH spending (budget) variance
Fixed OH Volume variance

A.
P15,000 U
P30,000 F

B.
P33,000 U
P30,000 F

C.
P15,000 U
P18,000 F

D.
P33,000 U
P18,000 F

Questions 43 and 44 are based on the following information.

Raff Co.s monthly normal volume is 50,000 units (100,000 direct labor hours.) Raff Co.s standard
cost system contains the following overhead costs:
Variable
P6 per unit
Fixed
8 per unit
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The following information pertains to the month of March
Units actually produced
Actual direct labor hours worked
Actual overhead incurred:
Variable
Fixed
43. For March, the unfavorable variable overhead spending variance was
A. P6,000
C. P12,000
B. P10,000
D. P22,000

CPA Review School of the Philippines

38,000
80,000
P250,000
384,000

44. For March, the fixed overhead volume variance was

A. P96,000 U
C. P80,000 U
B. P96,000 F
D. P80,000 F
45. Smile Corporation uses a standard cost system. Information for the month of April is as
follows:
Actual manufacturing overhead costs (P13,000 is fixed)
P40,000
Direct labor:
Actual hours worked
12,000 hours
Standard hours allowed
10,000 hours
Average actual labor cost per hour
P9
The factory overhead rate is based on a normal volume of 12,000 direct labor hours
Standard cost data at 12,000 direct labor hours was:
Variable factory overhead
P24,000
Fixed factory overhead
12,000
Total factory overhead
P36,000
What are the following overhead variances?
A.
B.
C.
D.
Variable OH Spending
P3,000 U
P3,000 U
P7,000 U
P7,000 U
Variable OH Efficiency
P2,000 U
P4,000 U
P2,000 U
P4,000 U
Fixed OH Spending
P4,000 U
P1,000 U
P1,000 U
P4,000 U
Questions 46 thru 48 are based on the following information.
Edney Company employs standard absorption system for product costing. The standard cost of its
product is as follows:
Raw materials
P14.50
Direct labor (2 DLH x P8)
16.00
Manufacturing overhead (2 DLH x P11)
22.00
May 9, 2004

Pre-week Quizzer

The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Edney planned to produce 25,000 units each month during the year. The budgeted annual
manufacturing overhead is
Variable
P3,600,000
Fixed
3,000,000
During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in
November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000
fixed and 315,000 variable. The total manufacturing overhead applied during November was
P572,000.
46. The variable manufacturing overhead variances for November are
A.
B.
C.
Spending
P9,000 U
P6,000 F
P4,000 U
Efficiency
P3,000 U
P9,000 U
P1,000 F

D.
P 9,000 F
P12,000 U

47. The fixed manufacturing overhead variances for November are

A.
B.
C.
Spending
P10,000 F
P10,000 U
P6,000 F
Volume
P10,000 f
P10,000 F
P3,000 U

D.
P 4,000 U
P22,000 F

48. The total variance related to efficiency of the manufacturing operation for November is:
A. P9,000 U
C. P21,000 U
B. P12,000 U
D. P12,000 U
Questions 49 thru 53 are based on the following information.
The following data are actual results for Roadtrek company for October:
Actual output
9,000 cases
Actual variable overhead
P405,000
Actual fixed overhead
P122,000
Actual machine time
40,500 machine hours
Standard cost and budget information for Roadtrek Company follows:
Standard variable overhead rate
P9.00 per MH
Standard quantity of machine hours
4 hours per case
Budgeted fixed overhead
P1,440,000 per year
Budgeted output
10,000 cases per month
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49. The variable overhead spending variance for the month of October is
A. P40,500 U
C. P45,000 U
B. P81,000 U
D. P81,000 F
50. The overhead efficiency variance is
A. P4,500 U
B. P40,500 U

C. P4,500 F
D. P40,500 F

51. The amount of fixed overhead controllable variance is

A. P2,000 U
C. P42,500 U
B. P2,000 F
D. P42,500 F
52. The amount of fixed overhead volume variance is
A. P12,000 F
C. P21,000 F
B. P12,000 U
D. P21,000 U
53. The amount variable overhead volume variance is
A. Zero
C. P12,000 F
B. P9,000 U
D. P2,250 U
Absorption Costing & Variable Costing
54. Which of the following statements is true for a firm that uses variable (direct) costing?
A. The cost of a unit of product changes because of changes in the number of units
manufactured.
B. Profits fluctuate with sales
C. An idle facility variation is calculated
D. Product costs include direct (variable) administrative costs.
55. At its present level of operations, a small manufacturing firm has total variable costs equal to
75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales
change by P1.00, income will change by
A. P0.25
C. P0.75
B. P0.12
D. P0.10

Pre-week Quizzer

Relevant Costing
56. An important concept in decision making is described as the contribution to income that is
forgone by not using a limited resources in its best alternative use. This concept is called
A. Marginal cost
C. Potential cost
B. Opportunity costs
D. Relevant cost
57. If revenues are P210,000 under alternative A and P216,000 under alternative B, and costs are
P190,000 for A and P204,000 for B, then using the basic approach in incremental analysis,
incremental revenues, costs, and net income, in comparing B to A are respectively
A. P6,000, P(14,000), P(8,000)
C. P6,000, P14,000, P8,00
B. P(6,000), P14,000, P8,000
D. P(6,000), P(14,000), P(8,000)
58. For the year ended April 30, 2003, Leba Company incurred direct costs of P800,000 based on
a particular course of action. Had a different course of action been taken, direct costs would
have been P650,000. In addition, Lebas fixed costs during the fiscal year were P110,000.
The incremental (decremental) costs was:
A. P40,000
C. P(40,000)
B. P150,000
D. P(150,000)

59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
Product B each week by incurring a common variable costs of P400,000.
These two products can be sold as is or processed further. Further processing
of either product does not delay the production of subsequent batches of the
joint product. Data gathering there two products are as follows:
Product A Product B
Selling price per pound without further Processing
P 12.00 P 9.00
Selling price per pound with further Processing
P 15.00 P 11.00
Total separate weekly variable costs of Further processing
P50,000 P45,000
To maximize Wallace Companys manufacturing contribution margin, the total separate
variable costs of further processing that should be incurred each week are
A. P45,000
C. P95,000
B. P50,000
D. P0
60. Blue & Company sells a product for P20 with variable cost of P8 per unit. Blue could accept a
special order for 1,000 units at P14. If Blue accepted the order, how many units could it lose
at the regular price before the decision become unwise?
A. 1,000 units
C. P500 units

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B. P200 units

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D. 0 units

61. Geary Manufacturing has assembled the following data pertaining to two popular products.
Blender
Electric mixer
Direct materials
P 6
P 11
Direct labor
4
9
Factory overhead @ P16 per hour
16
32
Cost if purchased from an outside supplier
20
38
Annual demand (units)
20,000
28,000
Past experience has shown that the fixed manufacturing overhead component included in the
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it
means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal
strategy, it should
A. produce 25,000 electric mixers, and purchase all other units as needed
B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as
needed
C. produce 20,000 blenders and purchase all other units as needed
D. purchase all units as needed
62. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is
determined as follows:
Product X
Product Y
Revenue
P 130
P80
Variable costs
70
38
Contribution margin
P 60
P42
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce
resource. 42,000 machine hours are available during the year. Product X requires 6 machine
hours per unit while product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
A.
B.
C.
D.
Product X
16,000
8,000
7,000
3,000
Product Y
-04,000
-08,000
63. Wagner sells product A at a price of P21 per unit. Wagners cost per unit based on the full
capacity of 200,000 units is as follows:
Direct materials
P 4
May 9, 2004

Pre-week Quizzer

Direct labor
Overhead (2/3 of which is fixed)

5
6
P15
A special order offering to buy 20,000 units was received from a foreign distributor. The only
selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner
has sufficient existing capacity to manufacture the additional units
To achieve an increase in operating income of P40,000. Wagner should charge a selling price
of
A. P14
C. P16
B. P15
D. P18
64. Yardley Co. has considerable excess manufacturing capacity. A special job orders cost sheet
includes the following applied manufacturing overhead costs:
Variable costs
P56,250
Fixed costs
45,000
The fixed costs include a normal P6,800 allocation for in-house design costs, although no inhouse design will be done. Instead, the special job will require the use of external designers
costing P13,750. What is the minimum acceptable price of the job?
A. P63,050
C. P101,250
B. P70,000
D. P108,200
65. MC Industries manufactures a product with the following costs per unit at the expected
production of 30,000 units:
Direct materials
P 4
Direct labor
12
Variable manufacturing overhead
6
Fixed manufacturing overhead
8
The company has the capacity to produce 40,000 units. The product regularly sells for P40. A
wholesaler has offered to pay P32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income
would be
A. a P20,000 increase
C.
a P4,000 increase
B. a P16,000 decrease
D.
P0
66. Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and
allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the
effect of this discontinuance on Gatas pretax profit?
A. increase of P48,000
C. increase of P6,000
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B. decrease of P48,000

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D. increase of P6,000

67. Pili Company plans to discontinue a segment with a P32,000 segment margin. Common
expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be
eliminated if the segment were closed. The effect of closing down the segment on Pili
Companys before tax profit would be
A. P12,000 decrease
C. P12,000 increase
B. P 7,000 decrease
D. P 7,000 increase
68. Division B earns a contribution margin of P200,000 and has a divisional margin of P70,000. If
Division B is closed, all of the direct divisional expenses and P110,000 of common expenses
can be eliminated. These facts indicate that closing the division will cause the firms operating
income to
A. increase by P90,000
C. increase by P40,000
B. decrease by P90,000
D. decrease by P40,000
69. Consider the following portion of a segmented income statement for the year just ended.
Assume that the fixed expenses of Division X include P30,000 of direct expenses and that the
discontinuance of the department will not affect the sales of the other departments nor reduce
the common expenses:
Net sales
P100,000
Variable manufacturing costs
60,000
Gross profit
P 40,000
Fixed expenses (direct and allocated)
50,000
Loss from operations
P (10,000)
What would be the effect on the firms operating income if Division X were discontinued?
A. increase of P10,000
C. decrease of P100,000
B. decrease of P40,000
D. decrease of P10,000
70. Condensed monthly operating income data for Cosmo Inc. for November 2000 is presented
below. Additional information regarding Cosmos operation follows the statement.
Total
Hall Store
Town Store
Sales
P200,000
P80,000
P120,000
Less Variable costs
116,000
32,000
84,000
Contribution margin
P 84,000
P48,000
P 36,000
Less direct fixed expense
60,000
20,000
40,000
Store segment margin
P 24,000
P28,000
P ( 4,000)
Less common fixed expenses
10,000
4,000
6,000
May 9, 2004

Pre-week Quizzer

Operating income
P 14,000
P24,000
P (10,000)
One-fourth of each stores direct fixed expenses would continue through December 31, 2001,
if either store were closed. Management estimates that closing the Town Store would result in
a ten percent decrease in Hall Store. Hall Store would not affect Town Store sales. The
operating results for November 2000 are representative of all months.
A decision of Cosmo, Inc. to close the Town Store would result in a monthly increase
(decrease) in Cosmos operating income during 2001 of
A. P4,000
C. (P800)
B. (P10,800)
D. (P6,000)
71. Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity.
Pelusos plant manager is considering making the headlights now being purchased for P1,100
each, a price that is not expected to change in the near future. The Peluso plant has the
equipment and labor force required to manufacture the headlights. The design engineer
estimates that each headlight requires P400 of direct materials and P300 of direct labor.
Pelusos plant overhead rate is 200 percent of direct labor costs, and 40 percent of the
overhead is fixed cost. A decision by Peluso Company to manufacture the headlights will
result in a gain (loss) for each headlight of
A. P(200)
C. P40
B. P160
D. P280
Questions 72 thru 74 are based on the following information:
Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar
equipment. The unit cost to manufacture one unit of KJ37 is presented below.
Direct materials
P1,000
Materials handling (20% of direct material cost)
200
Direct labor
8,000
Manufacturing overhead (150% of direct labor)
12,000
Material handling represents the direct variable costs of the Receiving department that are applied
to direct materials and purchased components on the basis of their cost. This is a separate charge
in addition to manufacturing overhead. Lelands annual manufacturing overhead budget is onethird variable and two-thirds fixed. Scott Supply, one of Lelands reliable vendors, has offered to
supply Part No. KJ137 at a unit price of P15,000.
72. If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these
parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of
KJ37 would
A. increase by P4,800
C. decrease by P3,200
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B. decrease by P6,200

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D. increase by P1,800

Pre-week Quizzer

73. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If Leland
decided to purchase the 10 units from Scott Supply, Lelands monthly cost for KJ37 would
A. increase P48,000
C. decrease P7,000
B. increase P23,000
D. decrease P57,000
74. Assume that Leland does not wish to commit to a rental agreement but could use idle capacity
to manufacture another product that would contribute P52,000 per month. If Leland elects to
manufacture KJ37 in order to maintain quality control, Lelands opportunity cost is
A. P18,000
C. P4,000
B. (P20,000)
D. (P48,000)
Responsibility Accounting & Transfer Pricing
75. A management decision may be beneficial for a given profit center, but not for the entire
company. From the overall company viewpoint, this decision would lead to
A. goal congruence
C. suboptimization
B. centralization
D. maximization
76. Company L had its operating asset turnover increased by 50% and the operating income
margin increased by 50%. Company U had its operating asset turnover increased by 30% and
the operating income margin decreased by 30%. What changes are expected for ROI of
Company L and Company U, respectively?
A.
B.
C.
D.
Company L
50% increase
125% increase
225% increase
125% increase
Company U
9% decrease
9% decrease
no change
no change
77. The manager of the Queen Division of Pusoy Company expects the following results in 2004
(pesos in millions):
Sales
P49.60
Variable costs (60%)
29.76
Contribution margin
P19.84
Fixed costs
12.00
Profit
P 7.84
Investment:
Plant equipment
P19.51
Working capital
14.88
P34.39
ROI P7.84/P34.39
22.80%

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The division has a target ROI of 30 percent, and the manager has asked you to determine how
much sales volume the division would need to reach that. He states that the sales mix is
relatively constant so variable costs should be close to 60 percent of sales, fixed cost and
plant and equipment should remain constant, and working capital (cash, receivables, and
inventories) should vary closely with sales in the percentage reflected above. The peso sales
that the division needs in order to reach the 30 percent ROI target is
A. P19,829,032
C. P57,590,322
B. P44,373,871
D. P59,510,000
78. Ace Division of Card, Inc. expects the following result for 2004:
Unit sales
70,000
Unit selling price
P
10
Unit variable cost
P
4
Total fixed costs
P 300,000
Total investment
P 500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Houstons manager with an offer to buy 10,000 units at P7
each. Houston Division has capacity of 75,000 units and the foreign customer will not accept
fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and
investment by P40,000.
At the price of P7 offered by foreign customer, what is the maximum number of units in regular
sales that Houston could sacrifice and still maintain its expected residual income?
A. 2,333
C. 2,667
B. 3,333
D. 3,667

79. Family Company has two division, Ma and Pa. Information for each division
is as follows:
Ma
Net earnings for division
P20,000
Asset base for division
P50,000
Target rate of return
15%
Operating income margin
10%
Weighted average cost of capital
12%
What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000
C. P12,500, P11,000
B. P14,000, P29,000
D. P20,000, P29,000
May 9, 2004

Pa
P65,000
P300,000
18%
20%
12%

Pre-week Quizzer

80. An appropriate transfer price between two divisions of the Star Corporation can be determined
from the following data:
Fabrication Division
Market price of subassembly
P50
Variable cost of subassembly
P20
Excess capacity (in units)
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50
C.
Any amount less than P50
B. Between P50 and P70
D.
P50 is the only acceptable price
81. Pacific Company has three plants: one located in Malaysia, one in India and another plant
located in the Philippines. Both plants manufactures a component used in a finished product
manufactured in the Philippine plant. Currently, both plants are operating at 70 percent
capacity. In Malaysia the income tax rate is 42% while in India the tax rate 35%; in the
Philippines, the corporate income tax rate is 40%.
The market price of the component, in peso equivalent, is P100 and the foreign plants costs to
manufacture the component are as follows:
Direct materials
P10
Direct labor
20
Variable overhead
5
Fixed overhead
25
Which transfer price would be in the best interest of the overall corporation?
A.
B.
C.
D.
Malaysia
P35
P 35
P100
P100
India
P35
P100
P100
P 35
82. The Engine Division provides motors for the Auto Division of a company. The standard unit
costs for Engine Division are as follows:
Direct materials
10,000
Direct labor
20,000
Variable Overhead
5,000
Fixed Overhead
2,500
Market price
P45,500
What is the best transfer price to avoid transfer price problems?
A. P45,500
C. P35,000
B. P30,000
D. P37,500
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83. To avoid waste and maximize efficiency when transferring products among divisions in a
competitive economy, a large diversified corporation should base transfer prices on:
A. Full cost
C. variable costs
B. replacement cost
D. market price
Product Pricing Decision
84. Garden Corp. had the following information:
Revenues
Cost of goods sold:
Direct materials
Direct labor
Overhead
Gross profit
Selling and admin expenses
Operating income
What are the mark up based on:
A.
B.
Cost of goods sold
66.7%
166.7%
Prime costs
185.7%
42.9%
Direct materials
400.0%
500.0%

P500,000
P100,000
75,000
125,000

C.
66.7%
42.9%
400.0%

300,000
P200,000
75,000
P125,000
D.
166.7%
185.7%
500.0%

Master Budget
85. The method of budgeting which adds one months budget to the end of the plan when the
current months budget is dropped from the plan refers to
A. Long-term budget
C. Incremental budget
B. Operations budget
D. Continuous budget
86. Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a
growth in sales of 5 percent per month. The target ending inventory in units of the product is
80% of the next months estimated sales. There are 150,000 units in inventory as of the end of
September. The production requirement in units of Batik for the quarter ending December 31
would be
A. 670,560
C. 665,720
B. 691,525
D. 675,925

May 9, 2004

Pre-week Quizzer

Questions 87 & 88 concern Paradise Company, which budgets on annual basis for its fiscal year.
The following beginning and ending inventory levels (in units) are planned for the fiscal year of July
1, 2000 through June 30, 2001.
July 1, 2000
June 30, 2001
Raw material*
40,000
50,000
Work-in-process
10,000
10,000
Finished goods
80,000
50,000
*Two (2) units of raw material are needed to produce each unit of finished product.
87. If Paradise Company plans to sell 480,000 units during the 200-2001 fiscal year, the number of
units it would have to manufacture during the year would be
A. 440,000
C. 510,000
B. 480,000
D. 450,000
88. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by
Paradise Company, the units of raw material needed to be purchased would be
A. 1,000,000 units
C. 1,020,000 units
B. 1,010,000 units
D. 990,000 units
89. The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000 in July, and P6,100,000 in
August. On average, 30% of its sales are cash, 50% of credit sales are collected in one
month, and 45% are collected in the second month. The remainder are written off to bad debt
in the third month after sale. What are the expected cash inflow for August and expected
receivable balance on August 31?
A.
B.
C.
D.
Cash Inflow
P5,050,000
P4,084,000
P1,830,000
P5,071,000
Aug 31 AR Balance
P7,140,000
P6,093,500
P7,232,000
P6,279,000
90. Dolyar, Inc. prepared the following sales budget:
Month
Cash Sales
February
P 80,000
March
100,000
April
90,000
May
120,000
June
110,000

Credit Sales
P340,000
400,000
370,000
460,000
380,000

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Collection pattern is: 40% percent in the month of sale, 45% in the month following the sale,
and 10% two months following the sale. The remaining 5% is expected to be uncollectible.
The companys total budgeted collection from April to June amounts to
A. P1,090,000
C. P1,468,500
B. P1,325,500
D. P1,397,500
91. Beta Co. has the following sales forecasts for the selected three-month period in 2004
April
P120,000
May
70,000
June
80,000
Seventy percent of sales are collected in the month of the sale, and the remainder are
collected in the following month.
Accounts receivable balance (April 1, 2004)
P100,000
Cash balance (April 1, 2004)
50,000
Minimum cash balance is P50,000. Cash can be borrowed in P10,000 increments from the
local bank (assume no interest charges).
What is the cash balance at the end of April, assuming that cash is received only from
customers and that P200,000 out during April?
A. P34,000
C. P54,000
B. P50,000
D. P55,000
Capital Budgeting
92. Which of the following would decrease the net present value of a project?
A. A decrease in the income tax rate
B. A decrease in the initial investment
C. An increase in the useful life of the project
D. An increase in the discount rate
93. A weakness of the internal rate of return method for screening investment projects is that it:
A. does not consider the time value of money
B. implicitly assumes that the company is able to reinvest cash flows from the project at the
companys discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the
internal rate of return
D. fails to consider the timing of cash flows

May 9, 2004

Pre-week Quizzer

94. Sensitivity analysis, if used with capital projects,

A. Is used extensively when cash flows are known with certainty
B. Measures the change in the discounted cash flows when using the discounted payback
method rather than the net present value method.
C. Is a what-if technique that asks how a given outcome will change if the original estimates
of the capital budgeting model are changed.
D. Is a technique used to rank capital expenditure requests.
95. If Sol Company expects to get a one-year loan to help cover the initial financing of capital
project, the analysis of the project should
A. offset the loan against any investment in inventory or receivable required by the project
B. show the loan as an increase in the investment
C. show the loan as a cash outflow in the second year of the projects life
D. ignore the loan
96. Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one
costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over
15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new
equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value.
Assuming a 40% marginal tax rate, Royals net cash investment at the time of purchase is the
old grinder is sold and the new one purchased is
A. P19,000
C. P17,400
B. P15,000
D. P25,000
97. Flow Industries is analyzing a capital investment proposal for new machinery to produce a new
product over the next 10 years. At the end of the 10 years, the machinery must be disposed of
with a net zero book value but with a scrap salvage value of P20,000. It will require some
P30,0000 to remove the machinery. The applicable tax rate is 35%. The appropriate end of
life cash flow based on the foregoing information is
A. inflow of P30,000
C. outflow of P10,000
B. outflow of P6,500
D. outflow of P17,000
98. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax
purposes will be P100,000 annually for six years. The new machine is expected to produce
cash flow from operations, net of income taxes, of P150,000 a year in each of the next six
years. The accounting (book value) rate of return on the initial investment is expected to be
A. 8.3%
C. 16.7%
B. 12.0%
D. 25.0%
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99. Barf is considering a 10-year capital investment project with forecasted revenues of P40,000
per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the
equipment of the project is P23,000 and Barfield expects to sell the equipment for P9,000 at
the end of the tenth year. The equipment will be depreciated over 7 years. The project
requires a working capital investment of P7,000 at its inception and another P5,000 at the end
of year 5. Using a 40% marginal tax rate, the expected net cash flow from the project in the
tenth year is
A. P32,000
C. P20,000
B. P24,000
D. P11,000
100.Brand is considering, an investment in a new cheese-cutting machine to replace its existing
cheese cutter. Information on the existing machine and the replacement machine follow:
Cost of the new machine
P40,000
Net annual savings in operating costs
9,000
Salvage value now of the old machine
6,000
Salvage value of the old machine in 8 years
0
Salvage value of the new machine in 8 years
5,000
Estimated life of the new machine
8 years
What is the expected payback period for the new machine?
A. 4.44 years
C. 8.50 years
B. 2.67 years
D. 3.78 years
101.Cause Company is planning to invest in a machine with a useful life of five years and no
salvage value. The machine is expected to produce cash flow from operations, net of income
taxes, of P20,000 in each of the five years. Causes expected rate of return is 10%.
Information on present value and future amount factors is as follows:
1
2
3
4
5
Present value of P1 at 10%
.909
.826
.751
.683
.621
Present value of an annuity of
P1 at 10%
.909
1.736
2.487
3.170
3.791
Future amount of P1 at 10%
1.100
1.210
1.33
1.464
1.611
Future amount of an annuity
of P1 at 10%
1.000
2.100
3.310
4.641
6.105
How much will the machine cost?
A. P32,220
C. P75,820
B. P62,100
D. P122,100

May 9, 2004

Pre-week Quizzer

102.Janet Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is
being evaluated that costs P450,000 and has a 5-year life. Straight-line depreciation will be
used; no salvage value is anticipated. Janet is subject to a 40% income tax rate. To meet the
companys payback goal, the sorter must generate reductions in annual cash operating costs
of
A. P60,000
C. P150,000
B. P100,000
D. P190,000
103.Moorman Products Company is considering a new product that will sell for P100 and have a
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
having a five-year useful life and no salvage value is needed, and will be depreciated using the
straight-line method. The machine has cash operating costs of P20,000 per year. The firm is
in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1,
end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
How many units per year the firm must sell for the investment to earn 12 percent internal rate
of return?
A. 12,838
C. 8,225
B. 10,403
D. 7,625
104.Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life.
Managers at Highpoint have estimated the cash flows associated with the tangible costs and
benefits of automation, but have been unable to estimate the cash flows associated with the
intangible benefits. Using the companys 10% discount rate, the net present value of the cash
flows associated with just the tangible costs and benefits is a negative P184,350. How large
would the annual net cash inflows from the intangible benefits have to be to make this a
financially acceptable investment?
A. P18,435
C. P35,000
B. P30,000
D. P37,236
Questions 105 thru 107 are based on the following information.
A firm must choose between leasing a new asset of purchasing it with funds from a term loan.
Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6%
interest on the unpaid balance. Principal and interest are due at the end of each year for five
years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400
with payments due at the beginning of each year. The corporate tax rate is 35% and the
appropriate after tax cost of capital is 12%.

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105.Which of the following is closest to the PV of the after-tax interest payment?

A. P360
C. P640
B. P453
D. P726
106.Which of the following is closes to the present value of cost if leasing the asset?
A. P3,694
C. P3,849
B. P3,779
D. P3,992
107.Which of the following is closest to the PV of cost of purchasing the new asset with a term
loan?
A. P3,777
C. P4,058
B. P3,952
D. P4,153
Questions 108 through 110 are based on the following information:
Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes,
this machine will be depreciated P8,000 each year for five years. Logo estimates that this machine
will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. Logos desired
rate of return on its investments is 12%. At the following discount rates, the NPVs of the
investment in this machine are:
Discount rate
NPV
12%
+P3,258
14%
+ 1,197
16%
- 708
18%
- 2,474
108.Logos accounting rate of return on its initial investment in this machine is expected to be
A. 30%
C. 12%
B. 15%
D. 10%
109.Logos expected payback period for its investment in this machine is
A. 2.0 years
C. 3.3 years
B. 3.0 years
D. 5.0 years
110.Logos expected IRR on its investment in this machine is
A. 3.3%
C. 12.0%
B. 10.0%
D. 15.3%

May 9, 2004

Pre-week Quizzer

111.Lawton Co. is expanding its manufacturing plant, which requires an investment of P4,000,000
in new equipment and plant modifications. Lawtons sales are expected to increase by
P3,000,000 per year as a result of the expansion. Cash investment in current assets
averages 30% of sales; accounts payable and other current liabilities are 10% sales. What is
the estimated total investment for this expansion?
A. P3,400,000
C. P4,600,000
B. P4,300,000
D. P4,000,000
112.Par Co. is reviewing the following data relating to an energy saving investment proposal:
Investment
P50,000
Residual value at the end of 5 years
10,000
Present value of an annuity of 1 at 12% for 5 years
3.60
Present value of 1 due in 5 years at 12%
0.57
What would be the annual savings needed to make the investment realize a 12% yield?
A. P8,189
C. P12,306
B. P11,111
D. P13,889
113.Investors Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year.
Project 1
Project 2
Project 3
Project 4
Initial cash outlay
P200,000
P298,000
P248,000 P272,000
Annual net cash inflows
Year 1
P 65,000
P100,000
P 80,000 P 95,000
Year 2
70,000
135,000
95,000
125,000
Year 3
80,000
90,000
90,000
90,000
Year 4
40,000
65,000
80,000
60,000
Net present value
( 3,798)
4,276
14,064
14,662
Profitability index
98%
101%
106%
105%
Internal rate of return
11%
13%
14%
15%
Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
amount of funds?
No Budget Restriction
P600,000 Available Funds
P300,000Available Funds
A. Projects 2, 3 & 4
Projects 3 & 4
Project 3
B. Projects 1, 2 & 3
Projects 2, 3 & 4
Projects 3 & 4
C. Projects 1, 3 & 4
Projects 2 & 3
Project 2
D. Projects 3 & 4
Projects 2 & 4
Projects 2 & 4
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Questions 114 thru 117 are based on the following information.

In order to increase production capacity, Gunning Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1, 2002. The
following information is being considered by Gunning Industries:
The new machine would be purchased for P160,000 in cash. Shipping installation, and testing
would cost an additional P30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of P40
per unit. Incremental operating costs include P30 per unit in variable costs and total fixed
costs of P40,000 per year.
The investment in the new machine will require an immediate increase in working capital of
P35,000. This cash outflow will be recovered at the end or year 5.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of 5 years and zero salvage value
Gunning is subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the following
factors and rates:
Period
PV of 1 at 10%
PV of an ordinary annuity of 1 at 10%
1
.909
.909
2
.826
1.736
3
.751
2.487
4
.683
3.170
5
.621
3.791
114.Gunning Industries net cash outflow in a capital budgeting decision is
A. P190,000
C. P204,525
B. P195,000
D. P225,000
115.Gunning Industries discounted annual depreciation tax shield for the year 2002 is
A. P13,817
C. P20,725
B. P16,762
D. P22,800
116.The acquisition of the new production machine by Gunning will contribute a discounted net-oftax contribution margin of
A. P242,624
C. P363,936
B. P303,280
D. P454,920

May 9, 2004

Pre-week Quizzer

117.The overall discounted cash flow impact of Gunnings working capital investment for the new
production machine would be
A. P(7,959)
C. P(13,265)
B. P(10,080)
D. P(35,000)
Financial Statement Analysis
118. Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0. Using
Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectively
A. 115% and 125%
C. 115% and 130%
B. 115% and 109%
D. 87% and 80%
119. A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the
beginning of the period was P50,000 and at the end of the period was P70,000. Net income is
P40,000. Inventory turnover is
A. 5 times
C. 1.75 times
B. 3.25 times
D. 0.67 times
120.The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for
the year was P20,000 and the companys tax rate is 40%. The companys net income is:
A. P22,000
C. P42,000
B. P54,000
D. P66,000
121.If the North Division of Alliance Products Company had an operating asset turnover of 4.2 and
an operating income margin of 0.10, the return on investment would be
A. 23.8%
C. 42.0%
B. 420.0%
D. 4.2%
122.Selected data from Sheridan Corporations year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P120,000
Inventory turnover (based on cost of sales)
8 times
Gross profit margin
40%
Sheridans net sales for the year were
A. P800,000
C. P1,200,000
B. P480,000
D. P672,000
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Pre-week Quizzer

123.Jade Corporation has a practical production capacity of a million units. The current years
master budget was based on the production and sales of 700,000 units during the current
year. Actual production for the current year was 720,000 units, while actual sales amounted to
only 600,000 units. The units are sold for P20 each and the contribution margin ratio is 30%.
The peso amount that best qualifies the Marketing Departments failure to achieve budgeted
performance for the current year is:
A. P720,000 unfavorable
C. P2,400,000 unfavorable
B. P600,000 unfavorable
D. P2,000,000 unfavorable

127.Lyman Company has the opportunity to increase annual sales P100,000 by selling to a new
riskier group of customers. The uncollectible expense is expected to be 15% and collection
costs will be 5%. The companys manufacturing and selling expenses are 70% of sales, and
its effective tax rate is 40%. If Lyman should accept this opportunity, the companys after tax
profits would increase by
A. P6,000
C. P10,200
B. P10,000
D. P14,400

124.The gross profit of Rea Company for each of the years ended as indicated follow:
2001
2000
Sales
P792,000
P800,000
Cost of goods sold
463,000
480,000
Gross profit
P328,000
P320,000
Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit
due to change in the selling price?
A. P8,000
C. P79,200
B. P72,000
D. P88,000

128.The following information regarding a change in credit policy was assembled by the Willis
Company. The company has a required rate of return of 10% and a variable cost ratio of 60%.
Old Credit Policy
New Credit Policy
Sales
P3,600,000
P3,960,000
Average Collection period
30 days
36 days
The pretax cost of carrying the additional investment in receivable, using 360-day year would
be
A. P5,760
C. P8,160
B. P9,600
D. P960

125.Garfield Company, which sells a single product, provided the following data from its income
statements for the years 2001 and 2000:
2001
2000
Sales (150,000 units in 2001; 180,000 units in 2000)
P750,000 P720,000
Cost of goods sold
525,000
575,000
Gross profit
P225,000 P145,000
In an analysis of variation in gross profit between the two years, what would be the effects of
changes in sales price and sales volume, respectively?
A. P150,000 F; P120,000 U
C. P180,000 F; P150,000 U
B. P150,000 U; P120,000 F
D. P180,000 U; P150,000 F

129.The sales director of Lloyd Company suggested that certain credit terms be modified. He
estimates the following effects:
Sales will increase by at least 20%
Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
times
Bad debts, now at 1% of sales will increase to 1.5%
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the desired
rate of return is 20%. Fixed expenses amount to P150,000.
Should the company allow revision of its credit terms?
A. Yes, because income will increase by P64,800
B. Yes, because losses will be reduced by P73,800
C. No, because income will be reduced by P13,000
D. No, because losses will be increased by P28,000

Working Capital Management

126.Gear Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly.
Gear has the opportunity to invest the money of 24% per annum. The company spends, on
the average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000
C. P55,000
B. P45,000
D. P72,500
May 9, 2004

130.A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker P50.00
to locate a supplier and handle the ordering and delivery arrangements. Storage and handling
costs are P0.02 per case per month. If each case costs P0.78 the most economical order
quantity (rounded to the next whole number) is
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A. 884 cases
B. 625 cases

CPA Review School of the Philippines

C. 1,133 cases
D. 1,000 cases

Pre-week Quizzer

131.Expected annual usage of a particular raw material is 2,000,000 units and the standard order
size is 10,000 units. The invoice cost of each unit is P500, and the cost to place one purchase
order is P80. The estimated annual order costs is
A. P16,000
C. P32,000
B. P100,000
D. P50,000
132.The Handy Company has the following information available concerning one of its inventory
items:
Cost of placing an order
P 32.00
Unit of carrying cost per year
P 4.00
Annual unit demand
5,625
Safety stock
100
Average daily demand
25
Normal lead time in days
10
The reorder point for the inventory item is
A. 250
C. 350
B. 600
D. 300
133.The G Corporation purchases 60,000 headbands per year. The average purchase lead time is
20 working days. Maximum lead time is 27 working days. The corporation works 240 days
per year. The appropriate safety stock level and the reorder point for the company are:
A.
B.
C.
D.
Safety Stock
1,750
1,750
1,167
1,167
Reorder Point
6,750
5,250
6,750
5,250
134.Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
annum. The bank requires 10 percent of loan as compensating balance in its new checking
account. The loan is payable at the end of 6 months. The effective interest rate of this loan is
A. 28.21 percent
C. 27.27 percent
B. 14.29 percent
D. 15.38 percent
135.The Manunuba Company was recently quoted terms on a commercial bank loan of 7% interest
with 20% compensating balance. The term of the loan is one year. The effective cost of
borrowing (rounded to the nearest hundredth) for each interest arrangements are:
A.
B.
C.
D.
Discounted interest
9.59%
8.75%
7.53%
7.53%
Payable upon maturity
8.75%
9.59%
8.75%
9.59%

May 9, 2004

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Cost of Capital & Risk

136.For 2003, Bee Company increased earnings before interest and taxes by 17%. During the
same period, net income after tax increased by 42%. The degree of financial leverage that
existed during 2003 is
A. 1.70
C. 2.47
B. 4.20
D. 5.90
137.Mars Company plans to issue some P100 preferred stock with an 11 percent dividend. The
stock is selling on the market for P97, and Mars must pay flotation costs of 5 percent of the
market price. The company is under the 40 percent corporate tax rate.
The cost of preferred stock for Mars Company is
A. 7.16 percent
C. 11.34 percent
B. 6.80 percent
D. 11.94 percent
138.ABC Corp. stocks beta is .50. If the market return is 16%, and the risk-free rate is 6%, what is
the required rate of return on ABC stock?
A. 11%
C. 13%
B. 12%
D. 14%
139.The following data are related to WXY stock:
Required return on WXY common
Beta coefficient
Risk-free rate
The required market return is
A. 13.0 percent
B. 25.0 percent

15 percent
1.5
9.0 percent
C. 18.0 percent
D. 16.0 percent

140.The Taurus Companys last dividend was P3.00; its growth rate is 6 percent and the stock now
sells for P36. New stock can be sold to net the firm P32.40 per share.
What is the Taurus Companys cost of retained earnings?
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
141.The Leonard Companys last dividend was P3.00; its growth rate is 6 percent and the stock
now sells for P36. New stock can be sold to net the firm P32.40 per share.
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
May 9, 2004

Pre-week Quizzer

142.Williams Co. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described below, the company can sell unlimited amounts of
all instruments.
Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest
payments. In selling the issue, an average premium of P30 per bond would be received,
and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is
estimated to be 4.8%.
Williams can sell 8% preferred stock at P105 per share. The cost of issuing and selling
the preferred stock is expected to be P5 per share.
Williams common stock is currently selling for P100 per share. The firm expects to pay
cash dividends of P7 per share next year, and the dividends are expected to remain
constant. The stock will have to be underpriced by P3 per share, and flotation costs are
expected to amount to P5 per share.
Williams expects to have available P100,000 of retained earnings in the coming year;
once these retained earnings are exhausted, the firm will use new common stock as the
form of common stock equity financing.
Williams preferred capital structure is
Long-term debt
30%
Preferred stock
20%
Common stock
50%
What are the corresponding weighted-average cost of capital under each financing needs?
A.
B.
C.
D.
P200,000
6.5%
6.8%
4.5%
7.3%
P1,000,000
6.8%
4.8%
6.5%
9.1%
Questions 143 & 144 are based on the following information.
The earnings, dividends, and stock price of Larry Technics, Inc. are expected to grow at 7 percent
per year after this year. Larrys common stock sells for P23 per share, its last dividend was P2.00
and the company pay P2.14 at the end of the current year. Larry should pay P2.50 flotation cost.
143. If the firms beta is 1.75, the risk-free rate is 8 percent, and the average return on the market is
12 percent, what will be the firms cost of equity using the CAPM approach?
A. 16.05 percent
C. 15.00 percent
B. 14.27 percent
D. 14.00 percent

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144.Using the dividend growth model, what is the expected cost of retained earnings for Larry
Technics, Inc.?
A. 10.44 percent
C. 16.30 percent
B. 9.30 percent
D. 17.44 percent
Quantitative Methods
145.Reina, Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor
is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
batch take?
A. 360 hours
C. 140.63 hours
B. 57.6 hours
D. 230.4 hours
146.A company is designing a new regional distribution warehouse. To minimize delays in loading
and unloading trucks, an adequate number of loading docks must be built. The most relevant
technique to assist in determining the proper number docks is
A. Cost-volume-profit analysis
C. PERT/CPM analysis
B. Linear programming
D. Queuing theory
147.Following is a table for two separate product lines, X and Y:
Probability
X Profit
20%
P5,000
70%
3,000
10%
6,000
The product line to obtain maximum utility for a risk-averse decision maker is
A. X because it has the highest expected profit.
B. Y because it has the highest dispersion
C. Y because it has the highest expected profit
D. X because it has the lowest dispersion

Y Profit
P 500
4,000
8,000

148.Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of
muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular
stores are sold through Doughs thrift store for P1. Dough assigns the following probabilities to
selling additional boxes:
Additional sales
Probability
60
.6
100
.4

May 9, 2004

Pre-week Quizzer

What is the expected value of Doughs decision to buy 100 additional boxes of muffins?
A. P28
C. P52
B. P40
D. P68
149.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft
drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
cold, the profit will be P2,000. The probability of cold weather on a given day at this time is
60%.
The expected payoff for either selling coffee or soft drinks and the expected payoff if the
vendor has perfect information are
A.
B.
C.
D.
Coffee
P1,360
P1,960
P2,200
P3,900
Soft drinks
P1,600
P1,600
P1,900
P1,900
Perfect Information.
P3,000
P2,200
P1,360
P1,960
150.A construction contractor has been invited to submit a bid on a large and complicated
construction project. The preparation of the bid proposal will cost about P20,000.
Management feels that if the company bids low enough to result in a net profit of P50,000,
there would be a 60% chance of getting the job. If the company bids high enough to result in a
P100,000 net profit, the chance of getting the contract would be only 20%. What should the
company do?
A. Bid only high enough to allow for P50,000 profit because the expected value of the payoff
is P22,000.
B. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is
P4,000
C. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is
P20,000.
D. Make no bid.
151.Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large,
complex projects by determining the critical path from a single time estimate for each event in
a project. The critical path:
A. Is the shortest path from the first event to the last event for a project.
B. Is an activity within the path that requires the most number of time.
C. Is the earliest time to complete the project.
D. Is the maximum amount of time an activity may be delayed without delaying the total
project beyond its target time.
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152.Clara Building Corporation uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job 181, which is subject to a P10,500-perweek completion penalty. Path A-B-C-F-G-H-I has normal completion time of 20 weeks, and
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities
can be crashed:
Activities
Cost to Crash 1 Week
Cost to Crash 2 Weeks
BC
P 8,000
P15,000
DE
10,000
19,600
EF
8,800
19,500
Clara desires to reduce the normal completion time of Job 181 and, at the same time, report
the highest possible income for the year. Clara should crash
A. BC 1 week and EF 1 week
C. EF 2 weeks
B. BC 2 weeks
D. DE 1 week and EF 1week
Information Systems
153.A major advantage of obtaining a package of applications programs from a software vendor is
A. the likelihood of reducing the time span from planning to implementation
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance the programs will be written in a high-level language

Answer Key
1. B
2. B
3. B
4. B
5. A
6. B
7. C
8. C
9. A
10. A

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

D
A
A
D
B
C
A
D
A
B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

C
B
A
B
A
C
A
D
D
A

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
B
B
A
A
C
A
D
B
A

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.

51.
52.
53.
54.
55.
56.
57.
58.
59.
60.

61.
62.
63.
64.
65.
66.
67.
68.
69.
70.

A
A
C
B
B
C
B
C
D
B

71.
72.
73.
74.
75.
76.
77.
78.
79.
80.

C
A
B
C
C
B
C
A
B
A

81.
82.
83.
84.
85.
86.
87.
88.
89.
90.

B
A
D
A
D
C
D
B
D
C

91. C
92. D
93. C
94. C
95. D
96. C
97. B
98. A
99. B
100. D

A
B
A
B
A
B
A
B
A
C

101.
102.
103.
104.
105.
106.
107.
108.
109.
110.

C
D
A
B
B
A
C
D
C
D

151. C
May 9, 2004

Pre-week Quizzer

111.
112.
113.
114.
115.
116.
117.
118.
119.
120.

C
C
A
D
A
D
C
A
B
C

152. D

121.
122.
123.
124.
125.
126.
127.
128.
129.
130.

C
A
B
D
A
C
A
A
A
D

131.
132.
133.
134.
135.
136.
137.
138.
139.
140.

A
C
A
D
A
C
D
A
A
A

B
A
B
A
B
B
B
C
A
B

141.
142.
143.
144.
145.
146.
147.
148.
149.
150.

C
A
C
D
C
D
D
C
B
C

153. A
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COMPREHENSIVE:
1. Gasco Co. is a very large company with common stock listed on the Philippine Stock
Exchange and bonds traded over the counter. As of the current balance sheet, it has three
bond issues outstanding:
P150 million of 10 percent series
2013
P50 million of 7 percent series
2007
P75 million of 5 percent series
2004
The vice president of finance is planning to sell P75 million of bonds next year to replace the
debt due to expire in 2004. Present market yields on similar Baa-rated bonds are 12.1
percent. Gasco also has P90 million of 7.5 percent noncallable preferred stock outstanding,
and it has no intentions of selling any preferred stock at any time in the future. The preferred
stock is currently priced at P80 per share, and its dividend per share is P7.80.
The company has had very volatile earnings, but its dividends per share have had a very
stable growth rate of 8 percent and this will continue. The expected dividend is P1.90 per
share, and the common stock is selling for P40 per share. The companys investment banker
has quoted the following flotation costs to Gasco: P2.50 per share for preferred stock and
P2.20 per share for common stock.
On the advice of its investment banker, Gasco has kept its debt at 50 percent of assets and its
equity at 50 percent. Gasco sees no need to sell either common or preferred stock in the
foreseeable future as it generated enough internal funds for its investment needs when these
funds are combined with debt financing. Gascos corporate tax rate is 40 percent.
Compute the cost of capital for the following:
1. Bond (debt)
2. Preferred stock
3. Common equity in the form of retained earnings
4. New common stock
5. Weighted average cost of capital
2. Andres Company has a single product called Kad. The company normally produces and sells
60,000 Kads each year at a selling price of P32 per unit. The companys unit costs at this level
of activity are given below:
Direct materials
P10.00
Direct Labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00 (P300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50 (P210,000 total)
May 9, 2004

Pre-week Quizzer

A number of questions relating to the production and sales of Kads follow. Each question is
independent.
1. Assume that Andres Company has sufficient capacity to produce 90,000 Kads each year
without any increase in fixed manufacturing overhead costs. The company could
increasein sales by 25% above the present 60,000 units each year if it were willing to
increase the fixed selling expenses by P80,000. What would be the effect of the increase
in both sales and fixed expenses on the company profit?
2. Assume again that Andres Company has sufficient capacity to produce 90,000 Kads each
year. A customer in a foreign market wants to purchase 20,000 Kads. Import duties on
the Kads would be P1.70 per unit, and costs for permits and licenses would be P9,000.
The only selling costs that would be associated with the order would be P3.20 per unit
shipping costs. What is the breakeven price on this order?
3. The company has 1,000 Kads on hand that have some irregularities and are therefore
considered to be seconds. Due to the irregularities, it will be impossible to sell these
units at the normal price through regular distribution channels. What unit costs figure is
relevant for setting a minimum selling price?
4. Due to a strike in its suppliers plant, Andres Company is unable to purchase more
material for the production of Kads. The strike is expected to last for two months. Andres
Company has enough material on hand to continue to operate at 30% of normal levels for
the two-month period. As an alternative, Andres could close its plant down entirely for the
two months. If the plant were closed, fixed overhead costs would continue at 60% of their
normal level during the two-month period; the fixed selling costs would be reduced by
20% while the plant was closed. What would be the peso advantage or disadvantage of
closing the plant for the two-month period?
5. An outside manufacturer has offered to produce Kads for Andres Company and to ship
them directly to Andres customers. If Andres accepts this offer, the facilities that it uses to
produce Kads would be idle; however, fixed overhead costs would be reduced by 75% to
their present value. Since the outside manufacturer would pay for all the costs of
shipping, the variable selling costs would be only two-thirds of their present amount. What
the unit cost figure that is relevant for comparison to whatever quoted price is received
from the outside manufacturer?

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