MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Quality Costs 3. If quality costs had been reduced to 2.5 percent of sales in the current year, profits would
1. The following activities are typical in production management: have increased by
1. Warranty work A. P177,000 C. P61,000
2. Labor and overhead incurred for rework of defective products found by an inspector B. P58,000 D. P25,000
3. Quality training program
4. The costs of a consumer complaint department 4. For the current year, the respective percentages based on sales of the different quality costs,
5. In-process inspection costs respectively, are:
6. Reinspection of reworked products Prevention Appraisal Internal Failure External failure
7. Downtime attributed to quality problems A. 0.15% 1.40% 2.50% 1.50%
8. Product recalls B. 0.15% 1.40% 4.00% 2.75%
9. Lower sales due to poor product performance C. 0.65% 1.00% 1.50% 4.25%
10. Quality audits D. 0.65% 1.00% 2.50% 1.50%
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 Productivity Measures
B. 3,10 5 2,6,7 1,4,8,9 Questions 5 & 6 are based on the following information.
C. 10 3 2,5,6 1,4,7,8,9 Information about Rose Company is as follows:
D. 3,10 5 1,2,10 4,7,8,9 2001 2002
Output (units) 80,000 84,000
Questions 2 thru 4 are based on the following information. Selling price per unit P25 P25
At the beginning of the year, Joshua Corporation initiated a quality improvement program. The Input quantities:
program was successful in reducing scrap and rework costs. To help assess the impact of the Materials (pounds) 4,000 4,000
quality improvement program, the following data was collected for the current and preceding Labor (hours) 3,200 3,250
year. Input prices:
Materials (per pound) P5.00 P5.50
Preceding Year Current Year
Labor (per hour) P7.00 P7.50
Sales P1,000,000 P 1,000,000
Recruiting 1,000 1,500
Packaging inspections 2,500 4,000 5. What are the materials productivity, and labor productivity ratio for 2001?
Downtime 20,000 15,000 A. B. C. D.
Reinspection 40,000 25,000
Product inspection 5,000 10,000 Materials 20.00 100.00 25.00 20.00
Product liability 35,000 27,500 Labor 25.00 95.45 24.00 24.00

2. As a result of quality improvements, profits have increased by 6. By how much did profits change as a result of changes in productivity related to materials,
A. P32,500 C. P7,500 and labor, respectively?
B. P20,500 D. P5,00 A. B. C. D.
Materials P(1,100) P1,100 P(625) P625
Labor P (825) P 825 P 625 P625

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
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7. Set-ups Relative to Product Y, Product X requires more research and development costs but fewer
8. Providing space and utilities resources to market the product. Sixty percent of the research and development costs are
9. Moving of inventory traceable to Product X and 30 percent of the marketing costs are traceable to Product X.
Unit Level Batch Level Product Level Facility Level If research and development costs and marketing costs are traced to each product, life-cycle
A. 4,6,8 2,4,7 1,3 10 income for Product Y would be
B. 2,6 4,5 1,7 3,10 A. P35,000 C. P12,000
C. 6 2,4,7,10 5 1,3,8 B. P20,000 D. P7,000
D. 2 1,6,7 10 3,4,5,8
Cost Behavior
9. Protex Company makes two products, X and Z. X is being introduced this period, whereas Z 12. The following cost functions were developed for manufacturing overhead costs:
has been in production for 2 years. For the period about to begin, 1,000 units of each Manufacturing Overhead Costs Cost Function
product are to be manufactured. The only relevant overhead item is the cost of engineering Electricity P100 + P20 per direct labor hour
change orders. X and Z are expected to require eight and two change orders, respectively. Maintenance P200 + P30 per direct labor hour
X and Z are expected to require 2 and 3 machine hours, respectively. The cost of a change Supervisors’ salaries P10,000 per month
orderis P600. Indirect materials P16 per direct labor hour
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
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 product’s 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.

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If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated The change in compensation plan should change the monthly breakeven point by
manufacturing overhead costs would be A. 1,071 Increase C. 1,538 Increase
A. P109,300 C. P76,300 B. 1,071 Decrease D. 1,538 Decrease
B. P99,000 D. P10,366
18. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows.
Cost-Volume-Profit Analysis The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00
13. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of
100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are additional fixed costs associated with this new product. A corporate fixed charge of P20,000
70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, currently absorbed by other products will be allocated to this new product.
what must the total fixed costs be? How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling
A. P80,000 C. P240,000 price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is
B. P90,000 D. P600,000 40%)
A. 10,700 C. 20,000
14. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. B. 12,100 D. 28,300
The selling price should be
A. P1.60 C. P2.40 19. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6
B. P2.10 D. P2.50 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
15. The following relates to Gloria Corporation, which produced and sold 50,000 units during a increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
recent accounting period: costs and variable costs per unit remain unchanged. If the selling price were reduced to P9
Sales P850,000 per unit, the profit would be
Fixed manufacturing costs 210,000 A. P3,000 C. P5,000
Variable manufacturing costs 140,000 B. P4,000 D. P6,000
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
Madden’s 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

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 firm’s 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.

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20. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed Questions 24 through 28 are based on the Statement of Income of Davao, Inc. which represents
costs are expected to be P120,000, the same as last year, and sales are forecasted at the operating results for the current fiscal year ending December 31. Davao had sales of 1,800
P550,000 a 10% increase over last year. For the company to increase income by P15,000 in tons of product during the current year. The manufacturing capacity of Davao’s facilities is 3,000
the coming year, the marginal contribution margin rate must be tons of product. Consider each question’s situation separately.
A. 20% C. 40% Sales P900,000
B. 30% D. 70% Variable costs
Manufacturing P315,000
21. Wilson Co. prepared the following preliminary forecast concerning product G for next year Selling costs 180,000
assuming no expenditure for advertising: Total variable costs 495,000
Selling price per unit P 10 Contribution margin P405,000
Units sales 100,000 Fixed costs
Variable costs P600,000 Manufacturing P 90,000
Fixed costs P300,000 Selling 112,500
Based on a market study in December of this year, Wilson estimated that it could increase Administration 45,000
the unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were Total fixed costs 247,500
spent on advertising. Assuming that Wilson incorporates these changes in its forecast, what Net income before income taxes P157,500
should be the operating income from product G? Income taxes (40%) (63,000)
A. P175,000 C. P205,000 Net income after income taxes P 94,500
B. P190,000 D. P365,000
24. The breakeven volume in tons of product for the year is
22. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many A. 420 C. 1,100
styles of shoes that are all sold at the same price. To encourage sales personnel to be B. 495 D. 550
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 company’s
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
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 store’s
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

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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 30. The following information relates to Ore Company’s 2003 manufacturing activities:
stay at the same levels and amounts next year, the after-tax net income that Davao can Standard direct labor hours per unit 2
expect for the next year is Number of units produced 5,000
A. P135,000 C. P110,25 Standard variable overhead per standard direct labor hours P3
B. P283,500 D. P184,500 Actual variable overhead P28,000
Unfavorable overhead efficiency variance P 1,500
26. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. The number of actual direct labor hours are
Assume that all of Davao’s costs would be at the same levels and rates as last year. What A. 10,500 C. 10,000
net income after taxes would Davao make if it took this order and rejected some business B. 11,000 D. 12,400
from regular customers so as not to exceed capacity?
A. P297,500 C. P252,000 Questions 31 & 32 are based on the following information.
B. P211,500 D. P256,500 Rainbow Company uses a standard cost system. Information about its direct labor costs for
Product Lux for the month of January follows:
27. Without prejudice to your answers to previous questions, and assume that Davao plans to Standard hours allowed for actual production 1,500
market its product in an new territory. Davao estimates that an advertising and promotion Actual hourly rate paid P61.00
program costing P61,500 annually would need to be undertaken for the next two or three Standard hourly rate P60.00
years. In addition , a P25 per ton sales commission over and above the current commission Labor efficiency variance, Favorable P6,000
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 Davao’s current after-tax income of P94,500? 31. How many direct labor hours were actually worked during the month of January?
A. 307.5 C. 1,095 A. 1,400 C. 1,402
B. 273.33 D. 1,545 B. 1,498 D. 1,600

28. Without prejudice to preceding questions, assume that Davao estimates that the per ton 32. How much was the direct labor rate variance?
selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed A. P1,400 F C. P1,400 U
costs will not change. What sales volume in pesos will be required to earn an after-tax net B. P1,600 F D. P1,600 U
income of P94,500 next year?
A. P1,140,000 C. P825,000 33. STA Company uses a standard cost system. The following information pertains to direct labor
B. P1,500,000 D. P1,350,000 costs for the month of June:
Standard direct labor rate per hour P10.00
Standard Costing & Variance Analysis Actual direct labor rate per hour P 9.00
29. Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of Labor rate variance P12,000 favorable
finished product contains 2 yards of cloth. However, there is unavoidable waste of 20% Actual output 2,000 units
calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 Standard hours allowed for actual production 10,000 hours
per yard. The standard direct material cost for cloth per unit of finished product is: How many actual labor hours were worked during March for STA Company?
A. P4.80 C. P7.00 A. 10,000 C. 8,000
B. P6.00 D. P7.50 B. 12,000 D. 10,500

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
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B. P2,000 F D. P2,000 U 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
37. Bacon had a P28,000 unfavorable volume variance, a P5,000 unfavorable fixed overhead overhead based on the 90 percent capacity level. Assuming that actual factory overhead
budget variance, and P22,000 total underapplied overhead. The variable overhead spending was equal to the budgeted amount of overhead, how much was the overhead volume
variance was variance for the year?
A. P11,000 favorable C. P11,000 unfavorable Percent of Capacity 80 Percent 90 Percent
B. P1,000 favorable D. P23,000 unfavorable Direct labor hours 24,000 27,000
Variable factory overhead P54,000 P60,750
38. Acme had a P22,000 favorable fixed overhead budget variance, a P15,000 unfavorable Fixed factory overhead P81,000 P81,000
variable overhead spending variance, and P2,000 total overapplied overhead. The volume Total factory overhead rate pre DLH P5.625 P5.25
variance was A. P9,000 U C. P9,000 F
A. P13,000 overapplied C. P5,000 overapplied B. P15,750 U D. P15,750 F
B. P13,000 underapplied D. P5,000 underapplied
41. Using the information presented below, calculate the total overhead spending variance.
39. Aldorp had a P10,000 unfavorable fixed overhead budget variance, a P6,000 unfavorable Budgeted fixed overhead P10,000
variable overhead spending variance, and a P2,000 favorable volume variance. The total Standard variable overhead (2 DLH at P2 per DLH) P4 per unit
overhead was Actual fixed overhead P10,300
A. P14,000 overapplied C. P18,000 overapplied Actual variable overhead P19,500
B. P14,000 underapplied D. P18,000 underapplied 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 Company’s 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?
A. B. C. D.
Fixed OH spending (budget) variance P15,000 U P33,000 U P15,000 U P33,000 U
Fixed OH Volume variance P30,000 F P30,000 F P18,000 F 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 Efficiency P3,000 U P9,000 U P1,000 F P12,000 U
Units actually produced 38,000
Actual direct labor hours worked 80,000 47. The fixed manufacturing overhead variances for November are
Actual overhead incurred: A. B. C. D.
Variable P250,000 Spending P10,000 F P10,000 U P6,000 F P 4,000 U
Fixed 384,000 Volume P10,000 f P10,000 F P3,000 U P22,000 F
43. For March, the unfavorable variable overhead spending variance was
A. P6,000 C. P12,000 48. The total variance related to efficiency of the manufacturing operation for November is:
B. P10,000 D. P22,000 A. P9,000 U C. P21,000 U
B. P12,000 U D. P12,000 U
44. For March, the fixed overhead volume variance was
A. P96,000 U C. P80,000 U Questions 49 thru 53 are based on the following information.
B. P96,000 F D. P80,000 F The following data are actual results for Roadtrek company for October:
Actual output 9,000 cases
45. Smile Corporation uses a standard cost system. Information for the month of April is as Actual variable overhead P405,000
follows: Actual fixed overhead P122,000
Actual manufacturing overhead costs (P13,000 is fixed) P40,000 Actual machine time 40,500 machine hours
Direct labor:
Actual hours worked 12,000 hours Standard cost and budget information for Roadtrek Company follows:
Standard hours allowed 10,000 hours Standard variable overhead rate P9.00 per MH
Average actual labor cost per hour P9 Standard quantity of machine hours 4 hours per case
The factory overhead rate is based on a normal volume of 12,000 direct labor hours Budgeted fixed overhead P1,440,000 per year
Standard cost data at 12,000 direct labor hours was: Budgeted output 10,000 cases per month
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
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. D.
Spending P9,000 U P6,000 F P4,000 U P 9,000 F

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49. The variable overhead spending variance for the month of October is Relevant Costing
A. P40,500 U C. P45,000 U 56. An important concept in decision making is described as the contribution to income that is
B. P81,000 U D. P81,000 F forgone by not using a limited resources in its best alternative use. This concept is called
A. Marginal cost C. Potential cost
50. The overhead efficiency variance is B. Opportunity costs D. Relevant cost
A. P4,500 U C. P4,500 F
B. P40,500 U D. P40,500 F 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,
51. The amount of fixed overhead controllable variance is incremental revenues, costs, and net income, in comparing B to A are respectively
A. P2,000 U C. P42,500 U A. P6,000, P(14,000), P(8,000) C. P6,000, P14,000, P8,00
B. P2,000 F D. P42,500 F B. P(6,000), P14,000, P8,000 D. P(6,000), P(14,000), P(8,000)

52. The amount of fixed overhead volume variance is 58. For the year ended April 30, 2003, Leba Company incurred direct costs of P800,000 based on
A. P12,000 F C. P21,000 F a particular course of action. Had a different course of action been taken, direct costs would
B. P12,000 U D. P21,000 U have been P650,000. In addition, Leba’s fixed costs during the fiscal year were P110,000.
The incremental (decremental) costs was:
53. The amount variable overhead volume variance is A. P40,000 C. P(40,000)
A. Zero C. P12,000 F B. P150,000 D. P(150,000)
B. P9,000 U D. P2,250 U

Absorption Costing & Variable Costing

59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
54. Which of the following statements is true for a firm that uses variable (direct) costing? Product B each week by incurring a common variable costs of P400,000.
A. The cost of a unit of product changes because of changes in the number of units These two products can be sold as is or processed further. Further processing
manufactured.
B. Profits fluctuate with sales of either product does not delay the production of subsequent batches of the
C. An idle facility variation is calculated joint product. Data gathering there two products are as follows:
D. Product costs include “direct” (variable) administrative costs.
Product A Product B
55. At its present level of operations, a small manufacturing firm has total variable costs equal to Selling price per pound without further Processing P 12.00 P 9.00
75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales Selling price per pound with further Processing P 15.00 P 11.00
change by P1.00, income will change by Total separate weekly variable costs of Further processing P50,000 P45,000
A. P0.25 C. P0.75 To maximize Wallace Company’s manufacturing contribution margin, the total separate
B. P0.12 D. P0.10 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
B. P200 units 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

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Past experience has shown that the fixed manufacturing overhead component included in the 65. MC Industries manufactures a product with the following costs per unit at the expected
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it production of 30,000 units:
means purchasing units from outside suppliers. Direct materials P 4
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal Direct labor 12
strategy, it should Variable manufacturing overhead 6
A. produce 25,000 electric mixers, and purchase all other units as needed Fixed manufacturing overhead 8
B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as The company has the capacity to produce 40,000 units. The product regularly sells for P40.
needed A wholesaler has offered to pay P32 a unit for 2,000 units.
C. produce 20,000 blenders and purchase all other units as needed If the firm is at capacity and the special order is accepted, the effect on operating income
D. purchase all units as needed would be
A. a P20,000 increase C. a P4,000 increase
62. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is B. a P16,000 decrease D. P0
determined as follows:
Product X Product Y 66. Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and
Revenue P 130 P80 allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the
Variable costs 70 38 effect of this discontinuance on Gata’s pretax profit?
Contribution margin P 60 P42 A. increase of P48,000 C. increase of P6,000
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce B. decrease of P48,000 D. increase of P6,000
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. 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
How many units of X and Y should Hingis Corporation produce? eliminated if the segment were closed. The effect of closing down the segment on Pili
A. B. C. D. Company’s before tax profit would be
Product X 16,000 8,000 7,000 3,000 A. P12,000 decrease C. P12,000 increase
Product Y -0- 4,000 -0- 8,000 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
63. Wagner sells product A at a price of P21 per unit. Wagner’s cost per unit based on the full
Division B is closed, all of the direct divisional expenses and P110,000 of common expenses
capacity of 200,000 units is as follows:
can be eliminated. These facts indicate that closing the division will cause the firm’s
Direct materials P 4
operating income to
Direct labor 5
A. increase by P90,000 C. increase by P40,000
Overhead (2/3 of which is fixed) 6
B. decrease by P90,000 D. decrease by P40,000
P15
A special order offering to buy 20,000 units was received from a foreign distributor. The only
69. Consider the following portion of a segmented income statement for the year just ended.
selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner
Assume that the fixed expenses of Division X include P30,000 of direct expenses and that the
has sufficient existing capacity to manufacture the additional units
discontinuance of the department will not affect the sales of the other departments nor
To achieve an increase in operating income of P40,000. Wagner should charge a selling price
reduce the common expenses:
of
Net sales P100,000
A. P14 C. P16
Variable manufacturing costs 60,000
B. P15 D. P18
Gross profit P 40,000
Fixed expenses (direct and allocated) 50,000
64. Yardley Co. has considerable excess manufacturing capacity. A special job order’s cost sheet
Loss from operations P (10,000)
includes the following applied manufacturing overhead costs:
What would be the effect on the firm’s operating income if Division X were discontinued?
Variable costs P56,250
A. increase of P10,000 C. decrease of P100,000
Fixed costs 45,000
B. decrease of P40,000 D. decrease of P10,000
The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-
house design will be done. Instead, the special job will require the use of external designers
70. Condensed monthly operating income data for Cosmo Inc. for November 2000 is presented
costing P13,750. What is the minimum acceptable price of the job?
below. Additional information regarding Cosmo’s operation follows the statement.
A. P63,050 C. P101,250
B. P70,000 D. P108,200 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
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Less direct fixed expense 60,000 20,000 40,000 73. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If
Store segment margin P 24,000 P28,000 P ( 4,000) Leland decided to purchase the 10 units from Scott Supply, Leland’s monthly cost for KJ37
Less common fixed expenses 10,000 4,000 6,000 would
Operating income P 14,000 P24,000 P (10,000) A. increase P48,000 C. decrease P7,000
One-fourth of each store’s direct fixed expenses would continue through December 31, 2001, B. increase P23,000 D. decrease P57,000
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 74. Assume that Leland does not wish to commit to a rental agreement but could use idle
operating results for November 2000 are representative of all months. capacity to manufacture another product that would contribute P52,000 per month. If Leland
A decision of Cosmo, Inc. to close the Town Store would result in a monthly increase elects to manufacture KJ37 in order to maintain quality control, Leland’s opportunity cost is
(decrease) in Cosmo’s operating income during 2001 of A. P18,000 C. P4,000
A. P4,000 C. (P800) B. (P20,000) D. (P48,000)
B. (P10,800) D. (P6,000)
Responsibility Accounting & Transfer Pricing
71. Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant 75. A management decision may be beneficial for a given profit center, but not for the entire
capacity. Peluso’s plant manager is considering making the headlights now being purchased company. From the overall company viewpoint, this decision would lead to
for P1,100 each, a price that is not expected to change in the near future. The Peluso plant A. goal congruence C. suboptimization
has the equipment and labor force required to manufacture the headlights. The design B. centralization D. maximization
engineer estimates that each headlight requires P400 of direct materials and P300 of direct
labor. Peluso’s plant overhead rate is 200 percent of direct labor costs, and 40 percent of the 76. Company L had its operating asset turnover increased by 50% and the operating income
overhead is fixed cost. A decision by Peluso Company to manufacture the headlights will margin increased by 50%. Company U had its operating asset turnover increased by 30%
result in a gain (loss) for each headlight of and the operating income margin decreased by 30%. What changes are expected for ROI of
A. P(200) C. P40 Company L and Company U, respectively?
B. P160 D. P280 A. B. C. D.
Company L 50% increase 125% increase 225% increase 125% increase
Questions 72 thru 74 are based on the following information: Company U 9% decrease 9% decrease no change no change
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. 77. The manager of the Queen Division of Pusoy Company expects the following results in 2004
Direct materials P1,000 (pesos in millions):
Materials handling (20% of direct material cost) 200 Sales P49.60
Direct labor 8,000 Variable costs (60%) 29.76
Manufacturing overhead (150% of direct labor) 12,000 Contribution margin P19.84
Material handling represents the direct variable costs of the Receiving department that are Fixed costs 12.00
applied to direct materials and purchased components on the basis of their cost. This is a Profit P 7.84
separate charge in addition to manufacturing overhead. Leland’s annual manufacturing overhead Investment:
budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland’s reliable vendors, Plant equipment P19.51
has offered to supply Part No. KJ137 at a unit price of P15,000. Working capital 14.88
P34.39
72. If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these ROI P7.84/P34.39 22.80%
parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of The division has a target ROI of 30 percent, and the manager has asked you to determine
KJ37 would how much sales volume the division would need to reach that. He states that the sales mix is
A. increase by P4,800 C. decrease by P3,200 relatively constant so variable costs should be close to 60 percent of sales, fixed cost and
B. decrease by P6,200 D. increase by P1,800 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

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Total fixed costs P 300,000 80. An appropriate transfer price between two divisions of the Star Corporation can be
Total investment P 500,000 determined from the following data:
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A Fabrication Division
foreign customer has approached Houston’s manager with an offer to buy 10,000 units at P7 Market price of subassembly P50
each. Houston Division has capacity of 75,000 units and the foreign customer will not accept Variable cost of subassembly P20
fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and Excess capacity (in units) 1,000
investment by P40,000. Assembling Division
At the price of P7 offered by foreign customer, what is the maximum number of units in Number of units needed 900
regular sales that Houston could sacrifice and still maintain its expected residual income? What is the natural bargaining range for the two divisions?
A. 2,333 C. 2,667 A. Between P20 and P50 C. Any amount less than P50
B. 3,333 D. 3,667 B. Between P50 and P70 D. P50 is the only acceptable price

79. Family Company has two division, Ma and Pa. Information for each division 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
is as follows: manufactured in the Philippine plant. Currently, both plants are operating at 70 percent
Ma Pa 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%.
Net earnings for division P20,000 P65,000 The market price of the component, in peso equivalent, is P100 and the foreign plant’s costs
Asset base for division P50,000 P300,000 to manufacture the component are as follows:
Target rate of return 15% 18% Direct materials P10
Operating income margin 10% 20% Direct labor 20
Weighted average cost of capital 12% 12% Variable overhead 5
What is the Economic Value Added for Ma and Pa, respectively? Fixed overhead 25
A. P20,000, P36,000 C. P12,500, P11,000 Which transfer price would be in the best interest of the overall corporation?
B. P14,000, P29,000 D. P20,000, P29,000 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 Questions 87 & 88 concern Paradise Company, which budgets on annual basis for its fiscal year.
competitive economy, a large diversified corporation should base transfer prices on: The following beginning and ending inventory levels (in units) are planned for the fiscal year of
A. Full cost C. variable costs July 1, 2000 through June 30, 2001.
B. replacement cost D. market price July 1, 2000 June 30, 2001
Raw material* 40,000 50,000
Product Pricing Decision Work-in-process 10,000 10,000
84. Garden Corp. had the following information: Finished goods 80,000 50,000
Revenues P500,000 *Two (2) units of raw material are needed to produce each unit of finished product.
Cost of goods sold:
Direct materials P100,000 87. If Paradise Company plans to sell 480,000 units during the 200-2001 fiscal year, the number
Direct labor 75,000 of units it would have to manufacture during the year would be
Overhead 125,000 300,000 A. 440,000 C. 510,000
Gross profit P200,000 B. 480,000 D. 450,000
Selling and admin expenses 75,000
Operating income P125,000 88. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by
What are the mark up based on: Paradise Company, the units of raw material needed to be purchased would be
A. B. C. D. A. 1,000,000 units C. 1,020,000 units
B. 1,010,000 units D. 990,000 units
Cost of goods sold 66.7% 166.7% 66.7% 166.7%
Prime costs 185.7% 42.9% 42.9% 185.7% 89. The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000 in July, and P6,100,000 in
Direct materials 400.0% 500.0% 400.0% 500.0% 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
Master Budget debt in the third month after sale. What are the expected cash inflow for August and
85. The method of budgeting which adds one month’s budget to the end of the plan when the expected receivable balance on August 31?
current month’s budget is dropped from the plan refers to A. B. C. D.
A. Long-term budget C. Incremental budget Cash Inflow P5,050,000 P4,084,000 P1,830,000 P5,071,000
B. Operations budget D. Continuous budget Aug 31 AR Balance P7,140,000 P6,093,500 P7,232,000 P6,279,000

86. Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a 90. Dolyar, Inc. prepared the following sales budget:
growth in sales of 5 percent per month. The target ending inventory in units of the product is Month Cash Sales Credit Sales
80% of the next month’s estimated sales. There are 150,000 units in inventory as of the end February P 80,000 P340,000
of September. The production requirement in units of Batik for the quarter ending December March 100,000 400,000
31 would be April 90,000 370,000
A. 670,560 C. 665,720 May 120,000 460,000
B. 691,525 D. 675,925 June 110,000 380,000

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Collection pattern is: 40% percent in the month of sale, 45% in the month following the sale, 94. Sensitivity analysis, if used with capital projects,
and 10% two months following the sale. The remaining 5% is expected to be uncollectible. A. Is used extensively when cash flows are known with certainty
The company’s total budgeted collection from April to June amounts to B. Measures the change in the discounted cash flows when using the discounted payback
A. P1,090,000 C. P1,468,500 method rather than the net present value method.
B. P1,325,500 D. P1,397,500 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.
91. Beta Co. has the following sales forecasts for the selected three-month period in 2004 D. Is a technique used to rank capital expenditure requests.
April P120,000
May 70,000 95. If Sol Company expects to get a one-year loan to help cover the initial financing of capital
June 80,000 project, the analysis of the project should
Seventy percent of sales are collected in the month of the sale, and the remainder are A. offset the loan against any investment in inventory or receivable required by the project
collected in the following month. B. show the loan as an increase in the investment
Accounts receivable balance (April 1, 2004) P100,000 C. show the loan as a cash outflow in the second year of the project’s life
Cash balance (April 1, 2004) 50,000 D. ignore the loan
Minimum cash balance is P50,000. Cash can be borrowed in P10,000 increments from the
local bank (assume no interest charges). 96. Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one
What is the cash balance at the end of April, assuming that cash is received only from costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over
customers and that P200,000 out during April? 15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new
A. P34,000 C. P54,000 equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value.
B. P50,000 D. P55,000 Assuming a 40% marginal tax rate, Royal’s net cash investment at the time of purchase is
the old grinder is sold and the new one purchased is
Capital Budgeting A. P19,000 C. P17,400
92. Which of the following would decrease the net present value of a project? B. P15,000 D. P25,000
A. A decrease in the income tax rate
B. A decrease in the initial investment 97. Flow Industries is analyzing a capital investment proposal for new machinery to produce a
C. An increase in the useful life of the project new product over the next 10 years. At the end of the 10 years, the machinery must be
D. An increase in the discount rate 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
93. A weakness of the internal rate of return method for screening investment projects is that it: appropriate “end of life” cash flow based on the foregoing information is
A. does not consider the time value of money A. inflow of P30,000 C. outflow of P10,000
B. implicitly assumes that the company is able to reinvest cash flows from the project at the B. outflow of P6,500 D. outflow of P17,000
company’s discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the 98. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax
internal rate of return purposes will be P100,000 annually for six years. The new machine is expected to produce
D. fails to consider the timing of cash flows 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 having a five-year useful life and no salvage value is needed, and will be depreciated using
per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the the straight-line method. The machine has cash operating costs of P20,000 per year. The
equipment of the project is P23,000 and Barfield expects to sell the equipment for P9,000 at firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present value
the end of the tenth year. The equipment will be depreciated over 7 years. The project of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
requires a working capital investment of P7,000 at its inception and another P5,000 at the How many units per year the firm must sell for the investment to earn 12 percent internal
end of year 5. Using a 40% marginal tax rate, the expected net cash flow from the project in rate of return?
the tenth year is A. 12,838 C. 8,225
A. P32,000 C. P20,000 B. 10,403 D. 7,625
B. P24,000 D. P11,000
104.Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life.
100.Brand is considering, an investment in a new cheese-cutting machine to replace its existing Managers at Highpoint have estimated the cash flows associated with the tangible costs and
cheese cutter. Information on the existing machine and the replacement machine follow: benefits of automation, but have been unable to estimate the cash flows associated with the
Cost of the new machine P40,000 intangible benefits. Using the company’s 10% discount rate, the net present value of the
Net annual savings in operating costs 9,000 cash flows associated with just the tangible costs and benefits is a negative P184,350. How
Salvage value now of the old machine 6,000 large would the annual net cash inflows from the intangible benefits have to be to make this
Salvage value of the old machine in 8 years 0 a financially acceptable investment?
Salvage value of the new machine in 8 years 5,000 A. P18,435 C. P35,000
Estimated life of the new machine 8 years B. P30,000 D. P37,236
What is the expected payback period for the new machine?
A. 4.44 years C. 8.50 years Questions 105 thru 107 are based on the following information.
B. 2.67 years D. 3.78 years 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%
101. Cause Company is planning to invest in a machine with a useful 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
life of five years and no salvage value. The machine is expected to with payments due at the beginning of each year. The corporate tax rate is 35% and the
produce cash flow from operations, net of income taxes, of P20,000 appropriate after tax cost of capital is 12%.
in each of the five years. Cause’s 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

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 company’s 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
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105.Which of the following is closest to the PV of the after-tax interest payment? 111.Lawton Co. is expanding its manufacturing plant, which requires an investment of P4,000,000
A. P360 C. P640 in new equipment and plant modifications. Lawton’s sales are expected to increase by
B. P453 D. P726 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
106.Which of the following is closes to the present value of cost if leasing the asset? the estimated total investment for this expansion?
A. P3,694 C. P3,849 A. P3,400,000 C. P4,600,000
B. P3,779 D. P3,992 B. P4,300,000 D. P4,000,000

107.Which of the following is closest to the PV of cost of purchasing the new asset with a term 112.Par Co. is reviewing the following data relating to an energy saving investment proposal:
loan? Investment P50,000
A. P3,777 C. P4,058 Residual value at the end of 5 years 10,000
B. P3,952 D. P4,153 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
Questions 108 through 110 are based on the following information: What would be the annual savings needed to make the investment realize a 12% yield?
Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes, A. P8,189 C. P12,306
this machine will be depreciated P8,000 each year for five years. Logo estimates that this B. P11,111 D. P13,889
machine will yield an annual cash inflow, net of depreciation and income taxes, of P12,000.
Logo’s desired rate of return on its investments is 12%. At the following discount rates, the NPVs 113.Investor’s Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
of the investment in this machine are: analysis for four projects for the upcoming year.
Discount rate NPV Project 1 Project 2 Project 3 Project 4
12% +P3,258 Initial cash outlay P200,000 P298,000 P248,000 P272,000
14% + 1,197 Annual net cash inflows
16% - 708 Year 1 P 65,000 P100,000 P 80,000 P 95,000
18% - 2,474 Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
108.Logo’s accounting rate of return on its initial investment in this machine is expected to be Year 4 40,000 65,000 80,000 60,000
A. 30% C. 12% Net present value ( 3,798 4,276 14,064 14,662
B. 15% D. 10% )
Profitability index 98% 101% 106% 105%
109.Logo’s expected payback period for its investment in this machine is Internal rate of return 11% 13% 14% 15%
A. 2.0 years C. 3.3 years Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
B. 3.0 years D. 5.0 years amount of funds?
No Budget Restriction P600,000 Available Funds P300,000Available Funds
110.Logo’s expected IRR on its investment in this machine is A. Projects 2, 3 & 4 Projects 3 & 4 Project 3
A. 3.3% C. 12.0% B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4
B. 10.0% D. 15.3% 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. 117.The overall discounted cash flow impact of Gunning’s working capital investment for the new
In order to increase production capacity, Gunning Industries is considering replacing an existing production machine would be
production machine with a new technologically improved machine effective January 1, 2002. The A. P(7,959) C. P(13,265)
following information is being considered by Gunning Industries: B. P(10,080) D. P(35,000)
 The new machine would be purchased for P160,000 in cash. Shipping installation, and
testing would cost an additional P30,000. Financial Statement Analysis
 The new machine is expected to increase annual sales by 20,000 units at a sales price of 118.Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0. Using
P40 per unit. Incremental operating costs include P30 per unit in variable costs and total Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectively
fixed costs of P40,000 per year. A. 115% and 125% C. 115% and 130%
 The investment in the new machine will require an immediate increase in working capital B. 115% and 109% D. 87% and 80%
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 119.A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the
purposes. 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
 The new machine has an estimated useful life of 5 years and zero salvage value
A. 5 times C. 1.75 times
 Gunning is subject to a 40% corporate income tax rate.
B. 3.25 times D. 0.67 times
Gunning uses the net present value method to analyze investments and will employ the following
factors and rates:
120.The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for
Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10% the year was P20,000 and the company’s tax rate is 40%. The company’s net income is:
1 .909 .909 A. P22,000 C. P42,000
2 .826 1.736 B. P54,000 D. P66,000
3 .751 2.487
4 .683 3.170 121.If the North Division of Alliance Products Company had an operating asset turnover of 4.2 and
5 .621 3.791 an operating income margin of 0.10, the return on investment would be
A. 23.8% C. 42.0%
114.Gunning Industries’ net cash outflow in a capital budgeting decision is B. 420.0% D. 4.2%
A. P190,000 C. P204,525
B. P195,000 D. P225,000 122.Selected data from Sheridan Corporation’s year-end financial statements are presented
below. The difference between average and ending inventory is immaterial.
115.Gunning Industries’ discounted annual depreciation tax shield for the year 2002 is Current ratio 2.0
A. P13,817 C. P20,725 Quick ratio 1.5
B. P16,762 D. P22,800 Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
116.The acquisition of the new production machine by Gunning will contribute a discounted net- Gross profit margin 40%
of-tax contribution margin of Sheridan’s net sales for the year were
A. P242,624 C. P363,936 A. P800,000 C. P1,200,000
B. P303,280 D. P454,920 B. P480,000 D. P672,000

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

123.Jade Corporation has a practical production capacity of a million units. The current year’s Average Collection period 30 days 36 days
master budget was based on the production and sales of 700,000 units during the current The pretax cost of carrying the additional investment in receivable, using 360-day year would
year. Actual production for the current year was 720,000 units, while actual sales amounted be
to only 600,000 units. The units are sold for P20 each and the contribution margin ratio is A. P5,760 C. P8,160
30%. The peso amount that best qualifies the Marketing Department’s failure to achieve B. P9,600 D. P960
budgeted performance for the current year is:
A. P720,000 unfavorable C. P2,400,000 unfavorable 129.The sales director of Lloyd Company suggested that certain credit terms be modified. He
B. P600,000 unfavorable D. P2,000,000 unfavorable estimates the following effects:
 Sales will increase by at least 20%
124.The gross profit of Rea Company for each of the years ended as indicated follow:  Accounts receivable turnover will be reduced to 8 times from the present
2001 2000 turnover of 10 times
Sales P792,000 P800,000  Bad debts, now at 1% of sales will increase to 1.5%
Cost of goods sold 463,000 480,000 Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the desired
Gross profit P328,000 P320,000 rate of return is 20%. Fixed expenses amount to P150,000.
Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit Should the company allow revision of its credit terms?
due to change in the selling price? A. Yes, because income will increase by P64,800
A. P8,000 C. P79,200 B. Yes, because losses will be reduced by P73,800
B. P72,000 D. P88,000 C. No, because income will be reduced by P13,000
D. No, because losses will be increased by P28,000
125.Garfield Company, which sells a single product, provided the following data from its income
statements for the years 2001 and 2000: 130.A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker
2001 2000 P50.00 to locate a supplier and handle the ordering and delivery arrangements. Storage and
Sales (150,000 units in 2001; 180,000 units in 2000) P750,000 P720,000 handling costs are P0.02 per case per month. If each case costs P0.78 the most economical
Cost of goods sold 525,000 575,000 order quantity (rounded to the next whole number) is
Gross profit P225,000 P145,000 A. 884 cases C. 1,133 cases
In an analysis of variation in gross profit between the two years, what would be the effects of B. 625 cases D. 1,000 cases
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

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

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 company’s manufacturing and selling expenses are 70% of sales, and
its effective tax rate is 40%. If Lyman should accept this opportunity, the company’s after
tax profits would increase by
A. P6,000 C. P10,200
B. P10,000 D. P14,400

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

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

131.Expected annual usage of a particular raw material is 2,000,000 units and the standard order A. 1.70 C. 2.47
size is 10,000 units. The invoice cost of each unit is P500, and the cost to place one purchase B. 4.20 D. 5.90
order is P80. The estimated annual order costs is
A. P16,000 C. P32,000 137.Mars Company plans to issue some P100 preferred stock with an 11 percent dividend. The
B. P100,000 D. P50,000 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.
132.The Handy Company has the following information available concerning one of its inventory The cost of preferred stock for Mars Company is
items: A. 7.16 percent C. 11.34 percent
Cost of placing an order P 32.00 B. 6.80 percent D. 11.94 percent
Unit of carrying cost per year P 4.00
Annual unit demand 5,625 138.ABC Corp. stock’s beta is .50. If the market return is 16%, and the risk-free rate is 6%, what
Safety stock 100 is the required rate of return on ABC stock?
Average daily demand 25 A. 11% C. 13%
Normal lead time in days 10 B. 12% D. 14%
The reorder point for the inventory item is
A. 250 C. 350 139.The following data are related to WXY stock:
B. 600 D. 300 Required return on WXY common 15 percent
Beta coefficient 1.5
133.The G Corporation purchases 60,000 headbands per year. The Risk-free rate 9.0 percent
The required market return is
average purchase lead time is 20 working days. Maximum lead A. 13.0 percent C. 18.0 percent
time is 27 working days. The corporation works 240 days per year. B. 25.0 percent D. 16.0 percent
The appropriate safety stock level and the reorder point for the 140.The Taurus Company’s last dividend was P3.00; its growth rate is 6 percent and the stock
company are: now sells for P36. New stock can be sold to net the firm P32.40 per share.
A. B. C. D. What is the Taurus Company’s cost of retained earnings?
A. 14.83 percent C. 15.81 percent
Safety Stock 1,750 1,750 1,167 1,167
B. 15.26 percent D. 9.69 percent
Reorder Point 6,750 5,250 6,750 5,250
141.The Leonard Company’s last dividend was P3.00; its growth rate is 6 percent and the stock
134.Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent per now sells for P36. New stock can be sold to net the firm P32.40 per share.
annum. The bank requires 10 percent of loan as compensating balance in its new checking A. 14.83 percent C. 15.81 percent
account. The loan is payable at the end of 6 months. The effective interest rate of this loan is B. 15.26 percent D. 9.69 percent
A. 28.21 percent C. 27.27 percent
B. 14.29 percent D. 15.38 percent 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
135.The Manunuba Company was recently quoted terms on a all instruments.
commercial bank loan of 7% interest with 20% compensating  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,
balance. The term of the loan is one year. The effective cost of and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is
borrowing (rounded to the nearest hundredth) for each interest estimated to be 4.8%.
arrangements are:  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.
A. B. C. D.
 Williams’ common stock is currently selling for P100 per share. The firm expects to pay
Discounted interest 9.59% 8.75% 7.53% 7.53% cash dividends of P7 per share next year, and the dividends are expected to remain
Payable upon maturity 8.75% 9.59% 8.75% 9.59% constant. The stock will have to be underpriced by P3 per share, and flotation costs are
expected to amount to P5 per share.
Cost of Capital & Risk  Williams expects to have available P100,000 of retained earnings in the coming year;
136.For 2003, Bee Company increased earnings before interest and taxes by 17%. During the once these retained earnings are exhausted, the firm will use new common stock as the
same period, net income after tax increased by 42%. The degree of financial leverage that form of common stock equity financing.
existed during 2003 is  Williams’ preferred capital structure is

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Long-term debt 30% 144.Using the dividend growth model, what is the expected cost of retained earnings for Larry
Preferred stock 20% Technics, Inc.?
Common stock 50% A. 10.44 percent C. 16.30 percent
What are the corresponding weighted-average cost of capital under B. 9.30 percent D. 17.44 percent
each financing needs? Quantitative Methods
A. B. C. D. 145.Reina, Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor
P200,000 6.5% 6.8% 4.5% 7.3% is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
P1,000,000 6.8% 4.8% 6.5% 9.1% batch take?
A. 360 hours C. 140.63 hours
B. 57.6 hours D. 230.4 hours
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
146.A company is designing a new regional distribution warehouse. To minimize delays in
per year after this year. Larry’s common stock sells for P23 per share, its last dividend was P2.00
loading and unloading trucks, an adequate number of loading docks must be built. The most
and the company pay P2.14 at the end of the current year. Larry should pay P2.50 flotation cost.
relevant technique to assist in determining the proper number docks is
A. Cost-volume-profit analysis C. PERT/CPM analysis
143. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the average return on the
B. Linear programming D. Queuing theory
market is 12 percent, what will be the firm’s cost of equity using the CAPM approach?
A. 16.05 percent C. 15.00 percent
147.Following is a table for two separate product lines, X and Y:
B. 14.27 percent D. 14.00 percent
Probability X Profit Y Profit
20% P5,000 P 500
70% 3,000 4,000
10% 6,000 8,000
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

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 Dough’s thrift store for P1. Dough assigns the following probabilities
to selling additional boxes:
Additional sales Probability
60 .6
100 .4

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins? 152.Clara Building Corporation uses the critical path method to monitor construction jobs. The
A. P28 C. P52 company is currently 2 weeks behind schedule on Job 181, which is subject to a P10,500-per-
B. P40 D. P68 week 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
149.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft can be crashed:
drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be Activities Cost to Crash 1 Week Cost to Crash 2 Weeks
P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is BC P 8,000 P15,000
cold, the profit will be P2,000. The probability of cold weather on a given day at this time is DE 10,000 19,600
60%. EF 8,800 19,500
The expected payoff for either selling coffee or soft drinks and the expected payoff if the Clara desires to reduce the normal completion time of Job 181 and, at the same time, report
vendor has perfect information are the highest possible income for the year. Clara should crash
A. B. C. D. A. BC 1 week and EF 1 week C. EF 2 weeks
Coffee P1,360 P1,960 P2,200 P3,900 B. BC 2 weeks D. DE 1 week and EF 1week
Soft drinks P1,600 P1,600 P1,900 P1,900
Perfect Information. P3,000 P2,200 P1,360 P1,960 Information Systems
153.A major advantage of obtaining a package of applications programs from a software vendor
150.A construction contractor has been invited to submit a bid on a large and complicated is
construction project. The preparation of the bid proposal will cost about P20,000. A. the likelihood of reducing the time span from planning to implementation
Management feels that if the company bids low enough to result in a net profit of P50,000, B. the ability to more easily satisfy the unique needs of users
there would be a 60% chance of getting the job. If the company bids high enough to result in C. greater operating efficiency from the computer
a P100,000 net profit, the chance of getting the contract would be only 20%. What should D. the assurance the programs will be written in a high-level language
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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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Answer Key
1. B 11. D 21. C 31. A 41. B
2. B 12. A 22. B 32. B 42. A
3. B 13. A 23. A 33. B 43. B
4. B 14. D 24. B 34. A 44. A
5. A 15. B 25. A 35. A 45. B
6. B 16. C 26. C 36. C 46. B
7. C 17. A 27. A 37. A 47. B
8. C 18. D 28. D 38. D 48. C
9. A 19. A 29. D 39. B 49. A
10. A 20. B 30. A 40. A 50. B

51. A 61. A 71. C 81. B 91. C

52. B 62. A 72. A 82. A 92. D
53. A 63. C 73. B 83. D 93. C
54. B 64. B 74. C 84. A 94. C
55. A 65. B 75. C 85. D 95. D
56. B 66. C 76. B 86. C 96. C
57. A 67. B 77. C 87. D 97. B
58. B 68. C 78. A 88. B 98. A
59. A 69. D 79. B 89. D 99. B
60. C 70. B 80. A 90. C 100. D

101. C 111. C 121. C 131. A 141. C

102. D 112. C 122. A 132. C 142. A
103. A 113. A 123. B 133. A 143. C
104. B 114. D 124. D 134. D 144. D
105. B 115. A 125. A 135. A 145. C
106. A 116. D 126. C 136. C 146. D
107. C 117. C 127. A 137. D 147. D
108. D 118. A 128. A 138. A 148. C
109. C 119. B 129. A 139. A 149. B
110. D 120. C 130. D 140. A 150. C

151. C 152. D 153. A

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

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 company’s 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. Gasco’s 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
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 supplier’s 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?

2. Andres Company has a single product called Kad. The company normally produces and sells 5. An outside manufacturer has offered to produce Kads for Andres Company and to ship
60,000 Kads each year at a selling price of P32 per unit. The company’s unit costs at this them directly to Andres’ customers. If Andres accepts this offer, the facilities that it uses
level of activity are given below: to produce Kads would be idle; however, fixed overhead costs would be reduced by 75%
Direct materials P10.00 to their present value. Since the outside manufacturer would pay for all the costs of
Direct Labor 4.50 shipping, the variable selling costs would be only two-thirds of their present amount.
Variable manufacturing overhead 2.30 What the unit cost figure that is relevant for comparison to whatever quoted price is
Fixed manufacturing overhead 5.00 (P300,000 total) received from the outside manufacturer?
Variable selling expenses 1.20
Fixed selling expenses 3.50 (P210,000 total)

May 9, 2004 Page 22 of 22