The Islamic University of Gaza

Faculty of Commerce

Department of Accounting
Advanced Managerial Accounting.
Second Term Final Exam (2011/2012).
Master for Accounting and Finance &
Master of Business Administration.

Please read
the

following instructions before answering the questions:

(a) Time Allowed for this exam: Three hours.
(b) Answer Eight Questions only.
(c) For each Question 6.25 Mark.
(d) Use the provided answer book.

(e) Insert your name and student No. below.

Student Name……………………………………………………

Student No………………………………………………………

Prof. Salem Abdalla Helles

29 May, 2012
Question One:

Multimedia Technology does business in three different business segments: (1)

Entertainment, (2) Publishing, and (3) Commercial Finance. Results for a recent
year were (in thousands):

Revenues Operating income Total Assets

Entertainment $ 1,272 $223 $ 1,120
Publishing $ 705 $122 $ 1,308
Commercial Finance $ 1,235 $244 $ 924
1. Compute the following for each business segment: Margin, Turnover,
and Return on Investment (ROI).
2. Comment on the differences in ROI among the business segments, Include
reasons for the differences.
3. Compute the Residual Income for each business segment, while cost of
capital 15%.

Question Two:

Air Products and Chemicals Company is considering building a new lights –out
facility and has gathered the following information:

Purchase price $ 600,000

Salvage value $ 100,000
Desired payback period 3 years
Minimum rate of return 15%
The cash flow estimates are as follows:
Year Cash inflows Cash Net Projected
outflows Cash inflows Net Income
1 $ 500,000 $260,000 $240,000 $115,000
2 450,000 240,000 210,000 90,000
3 400,000 220,000 180,000 60,000
4 350,000 200,00 150,000 35,000
Total $1,700,000 $920,000 $780,000 $300,000
Required: 1) Analyze the company's investment in the new facility using (a) the
net present value method, (b) the payback period method, and (c) the
accounting rate of return method.

2) Summarize your findings from requirement 1, and recommend a

course of action.
 Question Three:

The cordless phone manufacturing division of a Denver-based consumer

electronics company uses activity-based costing. For simplicity, assume that its
accountants have identified only the following three activities and related cost
drivers for indirect production costs:

Activity Cost Driver

Materials handling Direct-materials cost
Engineering Engineering change notices
Power Kilowatt hours
Three types of cordless phones are produced: SA2, SA5, and SA9. Direct
costs and cost-driver activity for each product for a recent month are as follows:

SA2 SA5 SA9

Direct-materials cost $25,000 $50,000 $125,000
Direct-labor cost $4,000 $1,000 $3,000
Kilowatt hours 50,000 200,000 150,000
Engineering change notices 13 5 2
Indirect production cost for the month was:

Materials handling $ 8,000

Engineering 20,000
Power 16,000
Total indirect production cost $44,000
1- Compute the indirect production cost allocated to each product with the
activity-based costing system.
2- Suppose all indirect production costs had been allocated to products in
proportion to their direct-labor costs. Compute the indirect production
costs allocated to each product.
3- In which product costs, those in number 1 or those in number 2, do you
have the most confidence? Why?
Question Four

(A) MA Company management wants to maintain a minimum monthly cash

balance of $15,000. At the beginning of March, the cash balance is $16,500,
expected cash receipts for March are $210,000 and cash disbursements are
expected to be $220,000. How much cash, if any, must be borrowed to
maintain the desired minimum monthly balance?

(B) The standard cost of W Walkers includes two units of direct materials at $8.00
per unit. During July, the company buys 22,000 units of direct materials at $7.50
and uses those materials to produce 10,000 Walkers. Compute the total, price,
and quantity variances for materials.

Question Five

(A) Watertown Paper Corporation is considering adding another machine for the
manufacture of corrugated cardboard. The machine would cost $900,000. It would
have an estimated life of 6 years and no salvage value. The company estimates that
annual cash inflows would increase by $400,000 and that annual cash outflows
would increase by $190,000. Management has a required rate of return of 9%.
Calculate the net present value on this project and discuss whether it should
be accepted.

(B) Watertown paper corporation is considering adding another machine for the
manufacture of corrugated cardboard. The machine would cost $900,000. It would
have an estimated life of 6 years and no salvage value. The company estimates that
annual revenues would increase by $430,000 and that annual expenses excluding
depreciation would increase by $190,000. It uses the straight-line method to
compute depreciation expense. Management has a required rate of return of 9%.
Compute the accounting rate of return.

Question Six

Cornfield company is considering a long-term capital investment project in laser

equipment. This will require an investment of $280,000, and it will have a useful
life of 5 years. Annual net income is expected to be $ 16,000 a year. Depreciation
is computed by the straight-line method with no salvage value. The company's cost
of capital is 10%.
Instructions

a) Compute the cash payback period for the project.

b) Compute the net present value for the project.
c) Compute the accounting rate of return for the project.
d) Should the project be accepted? Why?

Question Seven

Gaza Corporation manufactures and sells three different types of high-quality

sealed ball bearings. The bearings vary in terms of their quality specifications-
primarily with respect to their smoothness and roundness. They are referred to as
fine, Extra-fine, and super-fine bearings. Machine time is limited. More machine
time is required to manufacture the Extra- fine and super-fine bearings. Additional
information is provided below.

Product
Fine Extra- Super-
Fine Fine
Selling price $6.00 $10.00 $16.00
Variable costs and 4.00 6.50 11.00
expenses
Contribution margin $2.00 $3.50 $5.00
Machine hours 0.02 0.04 0.08
required
Total fixed costs: $234,000
Instructions:

Answer each of the following questions.

(a) Ignoring the machine time constraint, what strategy would appear optimal?
(b) What is the contribution margin per unit of limited resource for each type of
bearing?
(c) If additional machine time could be obtained, how should the additional
capacity be used?
 Question Eight
LG Products markets two computer games: A and B. A contribution format income
statement for a recent month for the two games appears below:
A B Total
Sales $30,000 $70,000 $100,000
Less variable expenses 20,000 50,000 70,000
Contribution margin $10,000 $20,000 30,000
Less fixed expenses 24,000
Net operating income $6,000

Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company in sales dollars.
3. Compute the break- even point for each computer games in sales dollars.
Question Nine:
WA Company produces kitchen cabinets for homebuilders across the Arab World.
The cost of producing 5,000 cabinets is as follows.

Materials $ 500,000
Labor 250,000
Variable 100,000
overhead
Fixed overhead 400,000
Total $1,250,000

WA also incurs selling expenses of $20 per cabinet. Palestine Corp. has
offered WA $165 per cabinet for a special order of 1,000 cabinets. The cabinets
would be sold to homebuilders in Gaza Strip and thus would not conflict with
WA's current sales. Selling expenses per cabinet would be only $5 per cabinet.
WA has available capacity to do the work.

Instructions:

(a) Prepare an incremental analysis for the special order.

(b) Should WA accept the special order? Why or why not?
Question Ten

Suppose a loan officer at Bank of Palestine has been analyzing Home Services, Inc., to
determine whether the bank should grant it a loan. Home Service has been in business
for ten years, and its services now include tree trimming and auto, boat, and title floor
repair. The following data pertaining to those services were available for analysis:

Home Services, Inc.

Segmented Income Statement
For the Year Ended December 31, 2011
Title
Auto Boat Floor Tree Total
Repair Repair Repair Trimming Impact
Sales $297,500 $114,300 $126,400 $97.600 $635,800
Less Variable costs:
Direct labor $119,000 $40,005 $44,240 $34,160 $237,405
Operating supplies 14,785 5,715 6,320 4,880 31,790
Small tools 11,900 4,572 5,056 7,808 29,336
Replacement parts 59,500 22,860 25,280 - 107,640
Truck costs - 11,430 12,640 14,640 38,710
Selling costs 44,625 17,145 18,960 9,760 90,490
Other variable costs 5,950 2,286 2,528 1,952 12,716
Contribution margin $41,650 $10,287 $11,376 $24,400 $87,713
Less direct fixed costs 35,800 16,300 24,100 5,200 81,400
Segment margin $5,850 ($6,013) ($12,724) $19,200 $6,313
(-)Common fixed Costs 32,100
Operating income/loss ($25,787)
Home Services' profitability has decreased over the past two years, and to increase the
likelihood that the company will qualify for a loan, the loan officer has advised its owner
to determine which service lined are not meeting the company's profit targets. Once the
owner has identified the unprofitable service lines, he can either eliminate them or set
higher prices. If he sets higher prices, those prices will have to cover all variable and
fixed operating, selling, and general administration costs.

Required:

1- Analyze the performance of the four service lines. Should the owner
eliminate any of them? Explain your answer.
2- Why might the owner want to continue providing unprofitable service lines?
Question Eleven

MW Company makes a cologne called Allure. The standard cost for one bottle of
Allure is as follows.

Standard

Manufacturing Cost Elements Quantity × Price = Cost

Direct materials 6 oz. × $ 0.90= $ 5.40

Direct labor 0.5 hrs. × $12.00= 6.00

Manufacturing overhead 0.5 hrs. × $ 4.80= 2.40

$ 13.80

During the month, the following transactions occurred in manufacturing 10,000

bottles of Allure.

1. 58,000 ounces of materials were purchased at $1.00 per ounce.

2. All the materials purchased were used to produce the 10,000 bottles of Allure.
3. 4,900 direct labor hours were worked at a total labor cost of $ 56,350.
4. Variable manufacturing overhead incurred was $15,000 and fixed overhead
incurred was $ 10,400.

The manufacturing overhead rate of $4.80 is based on a normal capacity of

5,200 direct labor hours. The total budget at this capacity is $ 10,400 fixed and $
14,560 variable.

Instructions:

(a) Compute the total variance and the variance for direct material and
direct labor elements.
(b) Compute the total variance for manufacturing overhead.

Good Luck