ACC 307 – EXAM 2

TEST I - THEORIES

1. When a company is cash poor, a project with a short payback period but a low rate of
return may be preferred to a project with a long payback period and a high rate of return.

2. A shorter payback period does not necessarily mean that one investment is more
desirable than another.

3. In calculating the payback period where new equipment is replacing old equipment, any
salvage value to be received on disposal of the old equipment should be deducted from
the cost of the new equipment.

4. The payback method is most appropriate for projects whose cash flows do not extend
far into the future.

5. The required rate of return is the maximum rate of return that an investment project
must yield to the acceptable.

6. The cost of capital is the average rate of return that the company earns on its
investments.

7. When discounted cash flow methods of capital budgeting are used, the working capital
required for a project is ordinarily counted as a cash outflow at the beginning of the
project and as a cash inflow at the end of the project.

8. The net present value method assumes that cash flows from a project are immediately
reinvested at a rate of return equal to the internal rate of return.

9. Neither the net present value method nor the internal rate of return method can be used
as a screening tool in capital budgeting decisions.

10. If the internal rate of return is less than the required rate of return for a project, then the
net present value of that project is positive.

11. In make or buy decision, only variable costs are relevant.

12. In considering a special order that will enable a company to make use of presently idle
capacity, depreciation costs would be irrelevant.
 13. Fixed costs are fixed in total but variable per unit, variable costs are variable in total but
fixed per unit.

14. Opportunity cost is cost of a benefit expected in preference for another alternative.

15. Expected future costs that will differ among alternatives is called out-of-pocket costs.

16. Controllable costs are defined as those that are directly influenced by a given manager
within a given time span.

17. A growing organization should decentralize no matter what the costs may be.

18. A responsibility accounting system is designed primarily for costs control and
performance evaluation.

19. All controllable costs are direct costs.

20. To evaluate the performance of an investment center, the profit earned is related to the
investment in the center.

21. United Industries manufactures a number of products at its highly automated factory.
The products are very popular, with demand far exceeding the factory's capacity. To
maximize profit, management should rank products based on their:
a. gross margin
b. contribution margin
c. selling price
d. contribution margin per unit of the constrained resource

22. In a sell or process further decision, consider the following costs:

I. A variable production cost incurred prior to split-off.

II. A variable production cost incurred after split-off.
III. An avoidable fixed production cost incurred after split-off.

Which of the above costs is (are) not relevant in a decision regarding whether the
product should be processed further?
a. Only I
b. Only III
c. Only I and II
d. Only I and III

TEST II – PROBLEM SOLVING

Problem I
Lab U Company plans to replace its machinery with a new one costing P400,000 with an
estimated useful life of ten years without scrap value. The old machinery has a book value of
P40,000 and can be sold for P 50,000. The acquisition of the new machinery will yield an annual
cash savings of P 80,000 before income tax. Income tax rate is 35%

Required: Compute for the following:

23. Net investment on the new machine

24. Net income (after tax)
25. Annual net cash inflows expected from the new machine
26. Payback period (Round answer to 3 decimal places e. g. 4.358)
27. Net present value, assuming that the minimum desired rate of return is 15% (Round
present value factor to 4 decimal places; if negative enclose it in parenthesis e. g.
(55,000)
28. The discounted cash flows rate of return (Round answer to 2 decimal places e. g.
15.67%)
29. Present value payback (Round answer to 2 decimal places e. g. 10.65)

Problem 2

A firm with 14% WACC is evaluating two projects for this year capital budget. After tax cash
flows, including depreciation, are as follows:

0 1 2 3 4 5

Project A -6,000 2,000 2,000 2,000 2,000 2,000

Project B -18,000 5,600 5,600 5,600 5,600 5,600

30. What is the net present value of each project? (Round present value factor to 4
decimal places; Input your answer e. g. A850; B1,450)
31. What is the IRR of project A? (Input your answer e. g. 15.25%; Round answer to 2
decimal places)
32. Assuming the projects are mutually inclusive, which one(s) would you recommend?
(Input your answer e. g. A)

Problem 3
The Cook Corporation has two divisions--East and West. The divisions have the following
revenues and expenses:

East West
Sales P 500,000 P 550,000
Variable costs 200,000 275,000
Traceable fixed costs 150,000 180,000
Allocated common corporate costs 135,000 170,000
Net operating income (loss) P 15,000 P (75,000)

The management of Cook is considering the elimination of the West Division. If the West Division
were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would
be unaffected by this decision.

33. Given these data, the elimination of the West Division would result in an overall
company net operating income (loss) of:

a. 15,000
b. (155,000)
c. (75,000)
d. (60,000)
e. None of the choices

Problem 4
Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in one of the
company's products. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

Per Unit
Direct materials P 6.70
Direct labor 8.10
Variable manufacturing overhead 1.10
Supervisor's salary 2.00
Depreciation of special equipment 4.20
Allocated general overhead 2.10

An outside supplier has offered to make and sell the part to the company for P21.20 each. If this
offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can
be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company. If the outside supplier's offer were accepted, only P2,000 of these allocated
general overhead costs would be avoided. In addition, the space used to produce part G25 would
be used to make more of one of the company's other products, generating an additional segment
margin of P16,000 per year for that product.

34. The annual financial advantage (disadvantage) for the company as a result of
buying part G25 from the outside supplier should be:

a. (8,400)
b. 16,000
c. (8,000)
d. (40,000)
e. None of the choices

Problem 5
A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product
S47 for P20.50 a unit. While the product would be modified slightly for the special order, product
S47's normal unit product cost is P14.40:

Direct materials P 3.10

Direct labor 1.50
Variable manufacturing overhead 6.40
Fixed manufacturing overhead 3.40
Unit product cost P 14.40

Assume that direct labor is a variable cost. The special order would have no effect on the
company's total fixed manufacturing overhead costs. The customer would like modifications made
to product S47 that would increase the variable costs by P5.00 per unit and that would require an
investment of P36,000 in special molds that would have no salvage value. This special order
would have no effect on the company's other sales. The company has ample spare capacity for
producing the special order.

35. The annual financial advantage (disadvantage) for the company as a result of
accepting this special order should be:

a. (9,900)
b. 4,500
c. 54,900
d. (26,100)
e. None of the choices

Problem 6
Banfield Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:

VP YI WX
Selling price per unit P 248.04 P 230.66 P 505.44
Variable cost per unit P 190.71 P 172.14 P 388.80
Centiliters of compound W 3.90 3.80 8.10

36. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized. (Round your intermediate calculations to 2 decimal places.)

a. WX, VP, YI
b. YI, VP, WX
c. WX, YI, VP
d. VP, WX, YI
e. None of the choices

Problem 7
WP Corporation produces products X, Y, and Z from a single raw material input in a joint
production process. Budgeted data for the next month is as follows:

Product Product Product

X Y Z
Units produced 1,500 2,000 3,000
Per unit sales value at split-off P 19.00 P 21.00 P 24.00
Added processing costs per unit P 7.00 P 7.50 P 7.00
Per unit sales value if processed further P 29.00 P 29.00 P 30.00

The cost of the joint raw material input is $149,000.

37. Which of the products should be processed beyond the split-off point?

Product X Product Y Product Z

A) Yes Yes No
B) No Yes No
C) Yes No Yes
D) No Yes Yes

a. Choice A
b. Choice B
c. Choice C
d. Choice D
e. None of the choices

Problem 8
Faustina Chemical Corporation manufactures three chemicals (TX14, NJ35, and KS63) from a
joint process. The three chemicals are in industrial grade form at the split-off point. They can
either be sold at that point or processed further into premium grade. Costs related to each batch
of this chemical process is as follows:

TX14 NJ35 KS63

Sales value at split-off point P 16,000 P 12,000 P 5,000
Allocated joint costs P 6,000 P 6,000 P 6,000
Sales value after further processing P 20,000 P 18,000 P 9,000
Cost of further processing P 5,000 P 3,000 P 2,000

38. For which product(s) above would it be more profitable for Faustina to sell at the
split-off point rather than process further?

a. TX14 only
b. KS63 only
c. TX14 and KS63 only
d. NJ35 and KS63 only
e. None of the choices

Problem 9
Division A’s manager is held accountable for the division’s costs, revenues and investments. To
evaluate the division’s performance, its profit for a certain accounting period is related to the total
assets in the center so that the top management may know how well the division manager
employed the assets in operating revenue for the division.
For the month of June, 2021, the total assets employed in Division A averaged P1,500,000. Total
sales during the month amounted to P2,200,000 from which the company earned net profit of
396,000.
39. Determine the rate of return on investment for Division A. (Input your answer e. g.
30.7%)
40. If Division A’s goal for the month of June is 20% of average investment, how much
is the division’s residual income?