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Quality Costs
1. The following activities are typical in production management:
1. Warranty work
2. Labor and overhead incurred for rework of defective products
found by an inspector
3. Quality training program
4. The costs of a consumer complaint department
5. In-process inspection costs
6. Reinspection of reworked products
7. Downtime attributed to quality problems
8. Product recalls
9. Lower sales due to poor product performance
10.Quality audits
To what classification of quality costs do the foregoing described
costs belong?
Prevention
Appraisal
Internal Failure External
Failure
A.
3,7,10
3,5
2
1,4,8,9
B.
3,10
5
2,6,7
1,4,8,9
C.
10
3
2,5,6
1,4,7,8,9
D.
3,10
5
1,2,10
4,7,8,9

Pre-week Quizzer

2. As a result of quality improvements, profits have increased by

A. P32,500
C. P7,500
B. P20,500
D. P5,00

Questions 2 thru 4 are based on the following information.

At the beginning of the year, Joshua Corporation initiated a quality
improvement program. The program was successful in reducing scrap
and rework costs.
To help assess the impact of the quality
improvement program, the following data was collected for the current
and preceding year.
Preceding Year
Current Year
Sales
P1,000,000
P 1,000,000
Recruiting
1,000
1,500
Packaging inspections
2,500
4,000
Downtime
20,000
15,000
Reinspection
40,000
25,000
Product inspection
5,000
10,000
Product liability
35,000
27,500
May 9, 2004

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3. If quality costs had been reduced to 2.5 percent of sales in the

current year, profits would have increased by
A. P177,000
C. P61,000
B. P58,000
D. P25,000
4. For the current year, the respective percentages based on sales of
the different quality costs, respectively, are:
Prevention
Appraisal
Internal
External
Failure
failure
A.
0.15%
1.40%
2.50%
1.50%
B.
0.15%
1.40%
4.00%
2.75%
C.
0.65%
1.00%
1.50%
4.25%
D.
0.65%
1.00%
2.50%
1.50%
Productivity Measures
Questions 5 & 6 are based on the following information.
Information about Rose Company is as follows:
2001
Output (units)
80,000
Selling price per unit
P25
Input quantities:
Materials (pounds)
4,000
Labor (hours)
3,200
Input prices:
Materials (per pound)
P5.00
Labor (per hour)
P7.00

2002
84,000
P25
4,000
3,250
P5.50
P7.50

5. What are the materials productivity, and labor productivity ratio for
2001?
A.
B.
C.
D.
Materials
20.00
100.00
25.00
20.00
Labor
25.00
95.45
24.00
24.00
6. By how much did profits change as a result of changes in
productivity related to materials, and labor, respectively?
A.
B.
C.
D.
Materials
P(1,100)
P1,100
P(625)
P625
May 9, 2004

Labor

Pre-week Quizzer
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
7. Set-ups
8. Providing space and utilities
9. Moving of inventory
Unit Level
Batch Level
Product Level Facility Level
A.
4,6,8
2,4,7
1,3
10
B.
2,6
4,5
1,7
3,10
C.
6
2,4,7,10
5
1,3,8
D.
2
1,6,7
10
3,4,5,8
9. Protex Company makes two products, X and Z. X is being
introduced this period, whereas Z has been in production for 2
years. For the period about to begin, 1,000 units of each product
are to be manufactured. The only relevant overhead item is the
cost of engineering change orders. X and Z are expected to require
eight and two change orders, respectively. X and Z are expected to
require 2 and 3 machine hours, respectively. The cost of a change
orderis P600.
If Protex applies engineering change order cost on the basis of
machine hours, the overhead cost per unit to be assigned to X and
Z, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively
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10.Zeta Co. is preparing its profit plan. As part of its

profitability of individual products, the controller
amount of overhead that should be allocated to
product lines from the information given as follows:
Wall mirrors

analysis of the
estimates the
the individual

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
P1,000
P 500
P2,000
P5,000
hours
Under activity-based
P 500
P1,000
P1,500
P2,500
costing

Life-Cycle Costing
11.Richards, Inc. developed the following budgeted life-cycle income
statement for two proposed products. Each products life cycle is
expected to be two years.
Product Product
Total
X
Y
Sales
P200,000 P200,0
P400,000
00
Cost of goods sold
( 120,00
(130,0
( 250,000)
0)
00)
Gross Profit
P 80,000
P
P150,000
70,000
Period expenses:
Research & development
( 70,000)
Marketing
( 50,000)
Life-cycle income
P 30,000

May 9, 2004

Pre-week Quizzer

A 10% return on sales is required for new products. Because the

proposed products did not have a 10% return on sales, the products
were going to be dropped.
Relative to Product Y, Product X requires more research and
development costs but fewer resources to market the product.
Sixty percent of the research and development costs are traceable
to Product X and 30 percent of the marketing costs are traceable to
Product X.
If research and development costs and marketing costs are traced
to each product, life-cycle income for Product Y would be
A. P35,000
C. P12,000
B. P20,000
D. P7,000
Cost Behavior
12.The following cost functions were developed for manufacturing
overhead costs:
Manufacturing Overhead Costs Cost Function
Electricity
P100 + P20 per direct labor
hour
Maintenance
P200 + P30 per direct labor
hour
Supervisors salaries
P10,000 per month
Indirect materials
P16 per direct labor hour

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If July production is expected to be 1,000 units requiring 1,500

direct labor hours, estimated manufacturing overhead costs would
be
A. P109,300
C. P76,300
B. P99,000
D. P10,366
Cost-Volume-Profit Analysis
13.The Ship Company is planning to produce two products, Alt and
Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit and
200,000 units of Tude at P3 a unit. Variable costs are 70% of sales
for Alt and 80% of sales for Tude. In order to realize a total profit of
P160,000, what must the total fixed costs be?
A. P80,000
C. P240,000
B. P90,000
D. P600,000
14.Glow Co. wants to sell a product at a gross margin of 20%. The cost
of the product is P2.00. The selling price should be
A. P1.60
C. P2.40
B. P2.10
D. P2.50
15.The following relates to Gloria Corporation, which produced and
sold 50,000 units during a recent accounting period:
Sales
P850,000
Fixed manufacturing costs
210,000
Variable manufacturing costs
140,000
Fixed selling and administrative expense
300,000
Variable selling and administrative expense
45,000
Income tax rate
40%
For the next accounting period, if production and sales are
expected to be 40,000 units, the company should anticipate a
contribution margin per unit of
A. P1.00
C. P3.10
B. P13.30
D. P7.30
16.Madden, Company has projected its income before taxes for next
year as shown below. Madden is subject to a 40% income tax rate.
Sales
(160,000
P8,000,000
May 9, 2004

Pre-week Quizzer

units)
Cost of sales
Variable costs
P 2,000,000
Fixed costs
3,000,000
5,000,000
Income
before
P 3,000,000
taxes
Maddens net assets are P36,000,000. The peso sales that must be
achieved for Madden to earn a 10 percent after tax return on assets
would be
A. P8,800,000
C. P12,000,000
B. P16,000,000
D. P6,880,000
17.The following data relate to Homer Company which sells a single
product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firms salespersons would like to change their compensation
from a 10 percent commission to a 5 percent commission plus
P20,000 per month in salary. They now receive only commission.
The change in compensation plan should change the monthly
breakeven point by
A. 1,071 Increase
C. 1,538 Increase
B. 1,071 Decrease
D. 1,538 Decrease
18.Brunei Corp. is developing a new product, surge protectors for highvoltage electrical flows. The cost information for the product are:
Direct materials, P3.25 per unit; Direct labor, P4.00 per unit;
Distribution, P0.75 per unit. The company will also be absorbing
P120,000 of additional fixed costs associated with this new product.
A corporate fixed charge of P20,000 currently absorbed by other
products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must
Brunei sell at a selling price of P14 per unit to increase after-tax
income by P30,000? (effective income tax rate is 40%)
A. 10,700
C. 20,000
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B. 12,100

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D. 28,300

19.A manufacturer produces a product that sells for P10 per unit.
Variable costs per unit are P6 and total fixed costs are P12,000. At
this selling price, the company earns a profit equal to 10% of total
peso sales. By reducing its selling price to P9 per unit, the
manufacturer can increase its unit sales volume by 25%. Assume
that there are no taxes and that total fixed costs and variable costs
per unit remain unchanged. If the selling price were reduced to P9
per unit, the profit would be
A. P3,000
C. P5,000
B. P4,000
D. P6,000

Pre-week Quizzer

20.Last year, the marginal contribution rate of Lamesa Company was

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

May 9, 2004

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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 stores before tax
profit or loss assuming 23,500 pairs of shoes are sold in a year?
A. P(360,000)
C. P840,000
B. P2,930,000
D. P1,330,000

Administration
Total fixed costs
Net income before income taxes
Income taxes (40%)
Net income after income taxes

Pre-week Quizzer
45,000
247,500
P157,500
(63,000)
P 94,500

24.The breakeven volume in tons of product for the year is

A. 420
C. 1,100
B. 495
D. 550

23.BE&H Co. is considering dropping a product. Variable costs are

$6.00 per unit. Fixed overhead costs, exclusive of depreciation,
have been allocated at a rate of $3.50 per unit and will continue
whether or not production ceases. Depreciation on the equipment
is P20,000 a year. If production is stopped, the equipment can be
sold for P18,000, if production continues, however, it will be useless
at the end of 1 year and will have no salvage value. The selling
price is P10 a unit. Ignoring taxes, the minimum units to be sold in
the current year to break even on a cash flow basis is
A. 4,500 units
C. 1,800 units
B. 5,000 units
D. 36,000 units
Questions 24 through 28 are based on the Statement of Income of
Davao, Inc. which represents the operating results for the current
fiscal year ending December 31. Davao had sales of 1,800 tons of
product during the current year. The manufacturing capacity of
Davaos facilities is 3,000 tons of product. Consider each questions
situation separately.
Sales
P900,000
Variable costs
Manufacturing
P315,000
Selling costs
180,000
Total variable costs
495,000
Contribution margin
P405,000
Fixed costs
Manufacturing
P 90,000
Selling
112,500
May 9, 2004

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25.If the sales volume is estimated to be 2,100 tons in the next year,
and if the prices and costs stay at the same levels and amounts
next year, the after-tax net income that Davao can expect for the
next year is
A. P135,000
C. P110,25
B. P283,500
D. P184,500
26.Davao has a potential foreign customer that has offered to buy
1,500 tons at P450 per ton. Assume that all of Davaos costs would
be at the same levels and rates as last year. What net income after
taxes would Davao make if it took this order and rejected some
business from regular customers so as not to exceed capacity?
A. P297,500
C. P252,000
B. P211,500
D. P256,500

Pre-week Quizzer

29.Dahl Company, a clothing manufacturer, uses a standard costing

system. Each unit of finished product contains 2 yards of cloth.
However, there is unavoidable waste of 20% calculated on input
quantities, when the cloth is cut for assembly. The cost of the cloth
is P3 per yard. The standard direct material cost for cloth per unit
of finished product is:
A. P4.80
C. P7.00
B. P6.00
D. P7.50

27.Without prejudice to your answers to previous questions, and

assume that Davao plans to market its product in an new territory.
Davao estimates that an advertising and promotion program
costing P61,500 annually would need to be undertaken for the next
two or three years. In addition , a P25 per ton sales commission
over and above the current commission to the sales force in the
new territory would be required. How many tons would have to be
sold in the new territory to maintain Davaos current after-tax
income of P94,500?
A. 307.5
C. 1,095
B. 273.33
D. 1,545
28.Without prejudice to preceding questions, assume that Davao
estimates that the per ton selling price will decline 10% next year.
Variable costs will increase P40 per ton and the fixed costs will not
change. What sales volume in pesos will be required to earn an
after-tax net income of P94,500 next year?
A. P1,140,000
C. P825,000
B. P1,500,000
D. P1,350,000
Standard Costing & Variance Analysis
May 9, 2004

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30.The following information relates to Ore Companys 2003

manufacturing activities:
Standard direct labor hours per unit
2
Number of units produced
5,000
Standard variable overhead per standard direct labor hoursP3
Actual variable overhead
P28,000
Unfavorable overhead efficiency variance
P 1,500
The number of actual direct labor hours are
A. 10,500
C. 10,000
B. 11,000
D. 12,400
Questions 31 & 32 are based on the following information.
Rainbow Company uses a standard cost system. Information about its
direct labor costs for Product Lux for the month of January follows:
Standard hours allowed for actual production
1,500
Actual hourly rate paid
P61.00
Standard hourly rate
P60.00
Labor efficiency variance, Favorable
P6,000
31.How many direct labor hours were actually worked during the
month of January?
A. 1,400
C. 1,402
B. 1,498
D. 1,600
32.How much was the direct labor rate variance?
A. P1,400 F
C. P1,400 U
B. P1,600 F
D. P1,600 U
33.STA Company uses a standard cost system.
The following
information pertains to direct labor costs for the month of June:
Standard direct labor rate per hour
P10.00
Actual direct labor rate per hour
P 9.00
Labor rate variance
P12,000 favorable
Actual output
2,000 units
Standard hours allowed for actual production
10,000 hours
How many actual labor hours were worked during March for STA
Company?
May 9, 2004

A. 10,000
B. 12,000

Pre-week Quizzer
C. 8,000
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
B. P2,000 F
D. P2,000 U
37.Bacon had a P28,000 unfavorable volume variance, a P5,000
unfavorable fixed overhead budget variance, and P22,000 total
underapplied overhead. The variable overhead spending variance
was
A. P11,000 favorable
C. P11,000 unfavorable
B. P1,000 favorable
D. P23,000 unfavorable
38.Acme had a P22,000 favorable fixed overhead budget variance, a
P15,000 unfavorable variable overhead spending variance, and
P2,000 total overapplied overhead. The volume variance was
A. P13,000 overapplied
C. P5,000 overapplied
B. P13,000 underapplied
D. P5,000 underapplied

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39.Aldorp had a P10,000 unfavorable fixed overhead budget variance,

a P6,000 unfavorable variable overhead spending variance, and a
P2,000 favorable volume variance. The total overhead was
A. P14,000 overapplied
C. P18,000 overapplied
B. P14,000 underapplied
D. P18,000 underapplied

Pre-week Quizzer

40.Fidelity Company uses a flexible budget system and prepared the

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

42. STA Companys standard fixed overhead cost is P3 per direct labor hour
based on budgeted fixed costs of P300,000. The standard allows 2 direct labor
hours per unit. During 2001, STA produced 55,000 units of product, incurred
P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
labor. What are the fixed overhead variances?
Fixed OH spending (budget)
variance
Fixed OH Volume variance
May 9, 2004

A.
P15,00
0U
P30,00
0F

B.
P33,00
0U
P30,00
0F

C.
D.
P15,00 P33,000
0U
U
P18,00 P18,000
0F
F
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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

Pre-week Quizzer

The following information pertains to the month of March

Units actually produced
38,000
Actual direct labor hours worked
80,000
Actual overhead incurred:
Variable
P250,000
Fixed
384,000
43.For March, the unfavorable variable overhead spending variance
was
A. P6,000
C. P12,000
B. P10,000
D. P22,000
44.For March, the fixed overhead volume variance was
A. P96,000 U
C. P80,000 U
B. P96,000 F
D. P80,000 F
45.Smile Corporation uses a standard cost system. Information for the
month of April is as follows:
Actual manufacturing overhead costs (P13,000 is fixed)P40,000
Direct labor:
Actual hours worked
12,000 hours
Standard hours allowed
10,000 hours
Average actual labor cost per hour
P9
The factory overhead rate is based on a normal volume of 12,000
direct labor hours
Standard cost data at 12,000 direct labor hours was:
Variable factory overhead
P24,000
Fixed factory overhead
12,000
Total factory overhead
P36,000
What are the following overhead variances?
A.
B.
C.
D.
Variable
OH
P3,000 U
P3,000 U
P7,000 U
P7,000 U
Spending
Variable
OH P2,000 U
P4,000 U
P2,000 U
P4,000 U
Efficiency
Fixed
OH
P4,000 U
P1,000 U
P1,000 U
P4,000 U
Spending

May 9, 2004

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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.

Actual variable overhead

Actual fixed overhead
Actual machine time

Pre-week Quizzer
P405,000
P122,000
40,500 machine hours

Standard cost and budget information for Roadtrek Company follows:

Standard variable overhead rate
P9.00 per MH
Standard quantity of machine hours
4 hours per case
Budgeted fixed overhead
P1,440,000 per year
Budgeted output
10,000 cases per month

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
Efficiency
P3,000 U
P9,000 U
P1,000 F
P12,000 U
47.The fixed manufacturing overhead variances for November are
A.
B.
C.
D.
Spending
P10,000 F
P10,000 U
P6,000 F
P 4,000 U
Volume
P10,000 f
P10,000 F
P3,000 U
P22,000 F
48.The total variance related to efficiency of the manufacturing
operation for November is:
A. P9,000 U
C. P21,000 U
B. P12,000 U
D. P12,000 U
Questions 49 thru 53 are based on the following information.
The following data are actual results for Roadtrek company for
October:
Actual output
9,000 cases
May 9, 2004

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49.The variable overhead spending variance for the month of October

is
A. P40,500 U
C. P45,000 U
B. P81,000 U
D. P81,000 F
50.The overhead efficiency variance is
A. P4,500 U
C. P4,500 F
B. P40,500 U
D. P40,500 F
51.The amount of fixed overhead controllable variance is
A. P2,000 U
C. P42,500 U
B. P2,000 F
D. P42,500 F
52.The amount of fixed overhead volume variance is
A. P12,000 F
C. P21,000 F
B. P12,000 U
D. P21,000 U
53.The amount variable overhead volume variance is
A. Zero
C. P12,000 F
B. P9,000 U
D. P2,250 U
Absorption Costing & Variable Costing
54.Which of the following statements is true for a firm that uses
variable (direct) costing?
A. The cost of a unit of product changes because of changes in the
number of units manufactured.
B. Profits fluctuate with sales
C. An idle facility variation is calculated
D. Product costs include direct (variable) administrative costs.
55.At its present level of operations, a small manufacturing firm has
total variable costs equal to 75% of sales and total fixed costs equal
to 15% of sales. Based on variable costing, if sales change by
P1.00, income will change by
A. P0.25
C. P0.75
B. P0.12
D. P0.10
May 9, 2004

Pre-week Quizzer

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

59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
Product B each week by incurring a common variable costs of P400,000.
These two products can be sold as is or processed further. Further processing
of either product does not delay the production of subsequent batches of the
joint product. Data gathering there two products are as follows:
Product Product
A
B
Selling price per pound without further
P
P 9.00
Processing
12.00
Selling price per pound with further
P
P 11.00
Processing
15.00
Total separate weekly variable costs of P50,00 P45,000
Further processing
0
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To maximize Wallace Companys manufacturing contribution

margin, the total separate variable costs of further processing that
should be incurred each week are
A. P45,000
C. P95,000
B. P50,000
D. P0
60.Blue & Company sells a product for P20 with variable cost of P8 per
unit. Blue could accept a special order for 1,000 units at P14. If
Blue accepted the order, how many units could it lose at the regular
price before the decision become unwise?
A. 1,000 units
C. P500 units
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
16
32
hour
Cost if purchased from an
20
38
outside supplier
Annual demand (units)
20,000
28,000
Past experience has shown that the fixed manufacturing overhead
component included in the cost per machine hour averages P10.
Geary has a policy of filling all sales orders, even if it means
purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing
desires to follow an optimal strategy, it should
A. produce 25,000 electric mixers, and purchase all other units as
needed
B. produce 20,000 blenders and 15,000 electric mixers, and
purchase all other units as needed
C. produce 20,000 blenders and purchase all other units as needed
D. purchase all units as needed
May 9, 2004

Pre-week Quizzer

62.The Hingis Corporation manufactures two products: X and Y.

Contribution margin per unit is determined as follows:
Product X
Product Y
Revenue
P 130
P80
Variable costs
70
38
Contribution
P 60
P42
margin
Total demand for X is 16,000 units and for Y is 8,000 units. Machine
hours is a scarce resource. 42,000 machine hours are available
during the year. Product X requires 6 machine hours per unit while
product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
A.
B.
C.
D.
Product X
16,000
8,000
7,000
3,000
Product Y
-04,000
-08,000
63.Wagner sells product A at a price of P21 per unit. Wagners cost
per unit based on the full capacity of 200,000 units is as follows:
Direct materials
P 4
Direct labor
5
Overhead (2/3 of which is fixed)
6
P15
A special order offering to buy 20,000 units was received from a
foreign distributor. The only selling costs that would be incurred on
this order would be P3 per unit for shipping. Wagner has sufficient
existing capacity to manufacture the additional units
To achieve an increase in operating income of P40,000. Wagner
should charge a selling price of
A. P14
C. P16
B. P15
D. P18
64.Yardley Co. has considerable excess manufacturing capacity. A
special job orders cost sheet includes the following applied
manufacturing overhead costs:
Variable costs
P56,250
Fixed costs
45,000
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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 costing
P13,750. What is the minimum acceptable price of the job?
A. P63,050
C. P101,250
B. P70,000
D. P108,200
65.MC Industries manufactures a product with the following costs per
unit at the expected production of 30,000 units:
Direct materials
P 4
Direct labor
12
Variable manufacturing overhead
6
Fixed manufacturing overhead
8
The company has the capacity to produce 40,000 units. The
product regularly sells for P40. A wholesaler has offered to pay P32
a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the
effect on operating income would be
A. a P20,000 increase
C. a P4,000 increase
B. a P16,000 decrease
D. P0
66.Gata Co. plans to discontinue a department with a P48,000
contribution to overhead, and allocated overhead of P96,000, of
which P42,000 cannot be eliminated. What would be the effect of
this discontinuance on Gatas pretax profit?
A. increase of P48,000
C. increase of P6,000
B. decrease of P48,000
D. increase of P6,000
67.Pili Company plans to discontinue a segment with a P32,000
segment margin. Common expenses allocated to the segment
amounted to P45,000, of which P20,000 cannot be eliminated if the
segment were closed. The effect of closing down the segment on
Pili Companys before tax profit would be
A. P12,000 decrease
C. P12,000 increase
B. P 7,000 decrease
D. P 7,000 increase

May 9, 2004

Pre-week Quizzer

68.Division B earns a contribution margin of P200,000 and has a

divisional margin of P70,000. If Division B is closed, all of the direct
divisional expenses and P110,000 of common expenses can be
eliminated. These facts indicate that closing the division will cause
the firms operating income to
A. increase by P90,000
C. increase by P40,000
B. decrease by P90,000
D. decrease by P40,000
69.Consider the following portion of a segmented income statement for
the year just ended. Assume that the fixed expenses of Division X
include P30,000 of direct expenses and that the discontinuance of
the department will not affect the sales of the other departments
nor reduce the common expenses:
Net sales
P100,000
Variable manufacturing costs
60,000
Gross profit
P 40,000
Fixed expenses (direct and allocated)
50,000
Loss from operations
P (10,000)
What would be the effect on the firms operating income if Division
X were discontinued?
A. increase of P10,000
C. decrease of P100,000
B. decrease of P40,000
D. decrease of P10,000
70.Condensed monthly operating income data for Cosmo Inc. for
November 2000 is presented below.
Additional information
regarding Cosmos operation follows the statement.
Total
Hall
Town
Store
Store
Sales
P200,000
P80,000 P120,000
Less Variable costs
116,00
32,000
84,00
0
0
Contribution margin
P 84,000
P48,000
P
36,000
Less direct fixed expense
60,00
20,000
40,00
0
0
Store segment margin
P 24,000
P28,000
P
( 4,000)
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Less
common
expenses
Operating income

fixed

10,00
0
P 14,000

CPA Review School of the Philippines

4,000

6,00
0
P24,000
P
(10,000)
One-fourth of each stores direct fixed expenses would continue
through December 31, 2001, if either store were closed.
Management estimates that closing the Town Store would result in
a ten percent decrease in Hall Store. Hall Store would not affect
Town Store sales. The operating results for November 2000 are
representative of all months.
A decision of Cosmo, Inc. to close the Town Store would result in a
monthly increase (decrease) in Cosmos operating income during
2001 of
A. P4,000
C. (P800)
B. (P10,800)
D. (P6,000)

Pre-week Quizzer

Manufacturing overhead (150% of direct labor)

12,000
Material handling represents the direct variable costs of the Receiving
department that are applied to direct materials and purchased
components on the basis of their cost. This is a separate charge in
addition to manufacturing overhead. Lelands annual manufacturing
overhead budget is one-third variable and two-thirds fixed. Scott
Supply, one of Lelands reliable vendors, has offered to supply Part No.
KJ137 at a unit price of P15,000.
72.If Leland purchases the KJ37 units from Scott, the capacity Leland
used to manufacture these parts would be idle. Should Leland
decide to purchase the parts from Scott, the unit cost of KJ37 would
A. increase by P4,800
C. decrease by P3,200
B. decrease by P6,200
D. increase by P1,800

71.Peluso Company, a manufacturer of snowmobiles, is operating at 70

percent of plant capacity. Pelusos plant manager is considering
making the headlights now being purchased for P1,100 each, a
price that is not expected to change in the near future. The Peluso
plant has the equipment and labor force required to manufacture
the headlights. The design engineer estimates that each headlight
requires P400 of direct materials and P300 of direct labor. Pelusos
plant overhead rate is 200 percent of direct labor costs, and 40
percent of the overhead is fixed cost.
A decision by Peluso
Company to manufacture the headlights will result in a gain (loss)
for each headlight of
A. P(200)
C. P40
B. P160
D. P280
Questions 72 thru 74 are based on the following information:
Leland Manufacturing uses 10 units of Part Number KJ37 each month in
the production of radar equipment. The unit cost to manufacture one
unit of KJ37 is presented below.
Direct materials
P1,000
Materials handling (20% of direct material cost)
200
Direct labor
8,000
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73.Assume Leland Manufacturing is able to rent all idle capacity for

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

Fixed costs
Profit
Investment:
Plant equipment
Working capital

Pre-week Quizzer
12.00
P 7.84

P19.51
14.88
P34.39
ROI P7.84/P34.39
22.80%
The division has a target ROI of 30 percent, and the manager has
asked you to determine how much sales volume the division would
need to reach that. He states that the sales mix is relatively
constant so variable costs should be close to 60 percent of sales,
fixed cost and plant and equipment should remain constant, and
working capital (cash, receivables, and inventories) should vary
closely with sales in the percentage reflected above. The peso
sales that the division needs in order to reach the 30 percent ROI
target is
A. P19,829,032
C. P57,590,322
B. P44,373,871
D. P59,510,000
78.Ace Division of Card, Inc. expects the following result for 2004:
Unit sales
70,000
Unit selling price
P
10
Unit variable cost
P
4
Total fixed costs
P 300,000
Total investment
P 500,000
The minimum required ROI is 15 percent, and divisions are
evaluated on residual income. A foreign customer has approached
Houstons manager with an offer to buy 10,000 units at P7 each.
Houston Division has capacity of 75,000 units and the foreign
customer will not accept fewer than 10,000 units. Accepting the
order would increase fixed costs by P10,000 and investment by
P40,000.
At the price of P7 offered by foreign customer, what is the
maximum number of units in regular sales that Houston could
sacrifice and still maintain its expected residual income?
A. 2,333
C. 2,667
B. 3,333
D. 3,667
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79. Family Company has two division, Ma and Pa. Information for each division
is as follows:
Ma
P20,000
P50,000
15%
10%
12%

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

Net earnings for division

Asset base for division
Target rate of return
Operating income margin
Weighted average cost of
capital
What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000
C. P12,500, P11,000
B. P14,000, P29,000
D. P20,000, P29,000

Pre-week Quizzer

80.An appropriate transfer price between two divisions of the Star

Corporation can be determined from the following data:
Fabrication Division
Market price of subassembly
P50
Variable cost of subassembly
P20
Excess capacity (in units)
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50
C. Any amount less than
P50
B. Between P50 and P70
D. P50
is
the
only
acceptable price
81.Pacific Company has three plants: one located in Malaysia, one in
India and another plant located in the Philippines. Both plants
manufactures a component used in a finished product
manufactured in the Philippine plant. Currently, both plants are
operating at 70 percent capacity. In Malaysia the income tax rate is
42% while in India the tax rate 35%; in the Philippines, the
corporate income tax rate is 40%.
The market price of the component, in peso equivalent, is P100 and
the foreign plants costs to manufacture the component are as
follows:
Direct materials
P10
Direct labor
20
Variable overhead
5
Fixed overhead
25
Which transfer price would be in the best interest of the overall
corporation?
A.
B.
C.
D.
Malaysia
P35
P 35
P100
P100
India
P35
P100
P100
P 35
82.The Engine Division provides motors for the Auto Division of a
company. The standard unit costs for Engine Division are as
follows:

May 9, 2004

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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

Pre-week Quizzer

83.To avoid waste and maximize efficiency when transferring products

among divisions in a competitive economy, a large diversified
corporation should base transfer prices on:
A. Full cost
C. variable costs
B. replacement cost
D. market price
Product Pricing Decision
84.Garden Corp. had the following information:
Revenues
Cost of goods sold:
Direct materials
P100,000
Direct labor
75,000
Overhead
125,000
Gross profit
Selling and admin expenses
Operating income
What are the mark up based on:
A.
B.
C.
Cost of goods
66.7%
166.7%
66.7%
sold
Prime costs
185.7%
42.9%
42.9%
Direct
400.0%
500.0%
400.0%
materials

P500,000

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

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

A. 670,560
B. 691,525

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C. 665,720
D. 675,925

Pre-week Quizzer

Questions 87 & 88 concern Paradise Company, which budgets on

annual basis for its fiscal year. The following beginning and ending
inventory levels (in units) are planned for the fiscal year of July 1, 2000
through June 30, 2001.
July 1, 2000
June 30, 2001
Raw material*
40,000
50,000
Work-in-process
10,000
10,000
Finished goods
80,000
50,000
*Two (2) units of raw material are needed to produce each unit of
finished product.
87.If Paradise Company plans to sell 480,000 units during the 2002001 fiscal year, the number of units it would have to manufacture
during the year would be
A. 440,000
C. 510,000
B. 480,000
D. 450,000
88.If 500,000 finished units were to be manufactured during the 20002001 fiscal year by Paradise Company, the units of raw material
needed to be purchased would be
A. 1,000,000 units
C. 1,020,000 units
B. 1,010,000 units
D. 990,000 units
89.The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000
in July, and P6,100,000 in August. On average, 30% of its sales are
cash, 50% of credit sales are collected in one month, and 45% are
collected in the second month. The remainder are written off to
bad debt in the third month after sale. What are the expected cash
inflow for August and expected receivable balance on August 31?
A.
B.
C.
D.
Cash Inflow
P5,050,00 P4,084,00 P1,830,00 P5,071,00
0
0
0
0
Aug
31
AR P7,140,00 P6,093,50 P7,232,00 P6,279,00
Balance
0
0
0
0
90.Dolyar, Inc. prepared the following sales budget:
Month
Cash Sales

May 9, 2004

Credit Sales
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February
March
April
May
June

P 80,000
100,000
90,000
120,000
110,000

CPA Review School of the Philippines

P340,000
400,000
370,000
460,000
380,000

Pre-week Quizzer

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

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C. implicitly assumes that the company is able to reinvest cash

flows from the project at the internal rate of return
D. fails to consider the timing of cash flows

Pre-week Quizzer

94.Sensitivity analysis, if used with capital projects,

A. Is used extensively when cash flows are known with certainty
B. Measures the change in the discounted cash flows when using
the discounted payback method rather than the net present
value method.
C. Is a what-if technique that asks how a given outcome will
change if the original estimates of the capital budgeting model
are changed.
D. Is a technique used to rank capital expenditure requests.
95.If Sol Company expects to get a one-year loan to help cover the
initial financing of capital project, the analysis of the project should
A. offset the loan against any investment in inventory or receivable
required by the project
B. show the loan as an increase in the investment
C. show the loan as a cash outflow in the second year of the
projects life
D. ignore the loan
96.Royal Industries is replacing a grinder purchased 5 years ago for
P15,000 with a new one costing P25,000 cash. The original grinder
is being depreciated on a straight-line basis over 15 years to a zero
salvage value. Royal will sell this old equipment for P6,000 cash.
The new equipment will be depreciated on a straight-line basis over
10 years to a zero salvage value. Assuming a 40% marginal tax
rate, Royals net cash investment at the time of purchase is the old
grinder is sold and the new one purchased is
A. P19,000
C. P17,400
B. P15,000
D. P25,000
97.Flow Industries is analyzing a capital investment proposal for new
machinery to produce a new product over the next 10 years. At the
end of the 10 years, the machinery must be disposed of with a net
zero book value but with a scrap salvage value of P20,000. It will
require some P30,0000 to remove the machinery. The applicable
tax rate is 35%. The appropriate end of life cash flow based on
the foregoing information is

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A. inflow of P30,000
B. outflow of P6,500

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C. outflow of P10,000
D. outflow of P17,000

98.Sarah Company is planning to purchase a new machine for

P600,000. Depreciation for tax purposes will be P100,000 annually
for six years. The new machine is expected to produce cash flow
from operations, net of income taxes, of P150,000 a year in each of
the next six years. The accounting (book value) rate of return on
the initial investment is expected to be
A. 8.3%
C. 16.7%
B. 12.0%
D. 25.0%

Pre-week Quizzer

99.Barf is considering a 10-year capital investment project with

forecasted revenues of P40,000 per year and forecasted cash
operating expenses of P29,000 per year. The initial cost of the
equipment of the project is P23,000 and Barfield expects to sell the
equipment for P9,000 at the end of the tenth year. The equipment
will be depreciated over 7 years. The project requires a working
capital investment of P7,000 at its inception and another P5,000 at
the end of year 5. Using a 40% marginal tax rate, the expected net
cash flow from the project in the tenth year is
A. P32,000
C. P20,000
B. P24,000
D. P11,000
100. Brand is considering, an investment in a new cheese-cutting
machine to replace its existing cheese cutter. Information on the
existing machine and the replacement machine follow:
Cost of the new machine
P40,000
Net annual savings in operating costs
9,000
Salvage value now of the old machine
6,000
Salvage value of the old machine in 8 years
0
Salvage value of the new machine in 8 years
5,000
Estimated life of the new machine
8 years
What is the expected payback period for the new machine?
A. 4.44 years
C. 8.50 years
B. 2.67 years
D. 3.78 years
101. Cause Company is planning to invest in a machine with a useful
life of five years and no salvage value. The machine is expected to
produce cash flow from operations, net of income taxes, of P20,000
in each of the five years. Causes expected rate of return is 10%.
Information on present value and future amount factors is as
follows:
1
2
3
4
5
Present value of P1
.909
.826
.751
.683
.621
at 10%
Present value of an
annuity of P1 at
.909 1.736 2.487 3.170
3.791
10%

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Future amount of P1
1.100
at 10%
Future amount of an
annuity of P1 at
1.000
10%
How much will the machine cost?
A. P32,220
C.
B. P62,100
D.

CPA Review School of the Philippines

1.210

1.33

1.464

1.611

2.100

3.310

4.641

6.105

P75,820
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 companys payback goal, the sorter must
generate reductions in annual cash operating costs of
A. P60,000
C. P150,000
B. P100,000
D. P190,000

Pre-week Quizzer

discount rate, the net present value of the cash flows associated
with just the tangible costs and benefits is a negative P184,350.
How large would the annual net cash inflows from the intangible
benefits have to be to make this a financially acceptable
investment?
A. P18,435
C. P35,000
B. P30,000
D. P37,236
Questions 105 thru 107 are based on the following information.
A firm must choose between leasing a new asset of purchasing it with
funds from a term loan. Under the purchase option, the firm will pay
five equal principal payments of P1,000 each and 6% interest on the
unpaid balance. Principal and interest are due at the end of each year
for five years. Alternatively, the firm can lease the asset for five years
at an annual rental cost of P1,400 with payments due at the beginning
of each year. The corporate tax rate is 35% and the appropriate after
tax cost of capital is 12%.

103. Moorman Products Company is considering a new product that

will sell for P100 and have a variable cost of P60. Expected volume
is 20,000 units. New equipment costing P1,500 and having a fiveyear useful life and no salvage value is needed, and will be
depreciated using the straight-line method. The machine has cash
operating costs of P20,000 per year. The firm is in the 40 percent
tax bracket and has cost of capital of 12 percent. The present
value of 1, end of five periods is 0.56743; present value of annuity
of 1 for 5 periods is 3.60478.
How many units per year the firm must sell for the investment to
earn 12 percent internal rate of return?
A. 12,838
C. 8,225
B. 10,403
D. 7,625
104. Highpoint, Inc., is considering investing in automated equipment
with a ten-year useful life. Managers at Highpoint have estimated
the cash flows associated with the tangible costs and benefits of
automation, but have been unable to estimate the cash flows
associated with the intangible benefits. Using the companys 10%
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105. Which of the following is closest to the PV of the after-tax

interest payment?
A. P360
C. P640
B. P453
D. P726

B. 3.0 years

Pre-week Quizzer
D. 5.0 years

110.Logos expected IRR on its investment in this machine is

A. 3.3%
C. 12.0%
B. 10.0%
D. 15.3%

106. Which of the following is closes to the present value of cost if

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

an investment of P4,000,000 in new equipment and plant
modifications.
Lawtons sales are expected to increase by
P3,000,000 per year as a result of the expansion. Cash investment
in current assets averages 30% of sales; accounts payable and
other current liabilities are 10% sales. What is the estimated total
investment for this expansion?
A. P3,400,000
C. P4,600,000
B. P4,300,000
D. P4,000,000
112.Par Co. is reviewing the following data relating to an energy saving
investment proposal:
Investment
P50,000
Residual value at the end of 5 years
10,000
Present value of an annuity of 1 at 12% for 5 years
3.60
Present value of 1 due in 5 years at 12%
0.57
What would be the annual savings needed to make the investment
realize a 12% yield?
A. P8,189
C. P12,306
B. P11,111
D. P13,889

98)
Profitability index
98%
101%
Internal rate of
11%
13%
return
Which project(s) should Investors, Inc. select
year under each budgeted amount of funds?
No
Budget P600,000 Available
Restriction
Funds
A. Projects 2, 3 & 4
Projects 3 & 4
B. Projects 1, 2 & 3
Projects 2, 3 & 4
C. Projects 1, 3 & 4
Projects 2 & 3
D. Projects 3 & 4
Projects 2 & 4

Pre-week Quizzer
106%
14%

105%
15%

during the upcoming

P300,000Available
Funds
Project 3
Projects 3 & 4
Project 2
Projects 2 & 4

113.Investors Inc. uses a 12% hurdle rate for all capital expenditures
and has done the following analysis for four projects for the
upcoming year.
Project Project 2 Project 3 Project
1
4
Initial cash outlay
P200,0
P298,00 P248,000 P272,0
00
0
00
Annual net cash
inflows
Year 1
P
P100,00 P 80,000
P
65,000
0
95,000
Year 2
70,000
135,000
95,000 125,00
0
Year 3
80,000
90,000
90,000 90,000
Year 4
40,000
65,000
80,000 60,000
Net present value (
3,7
4,276
14,064 14,662
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Questions 114 thru 117 are based on the following information.

In order to increase production capacity, Gunning Industries is
considering replacing an existing production machine with a new
technologically improved machine effective January 1, 2002. The
following information is being considered by Gunning Industries:
The new machine would be purchased for P160,000 in cash.
Shipping installation, and testing would cost an additional P30,000.
The new machine is expected to increase annual sales by
20,000 units at a sales price of P40 per unit. Incremental operating
costs include P30 per unit in variable costs and total fixed costs of
P40,000 per year.
The investment in the new machine will require an immediate
increase in working capital of P35,000. This cash outflow will be
recovered at the end or year 5.
Gunning uses straight-line depreciation for financial reporting
and tax reporting purposes.
The new machine has an estimated useful life of 5 years and
zero salvage value
Gunning is subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments
and will employ the following factors and rates:
Period
PV of 1 at 10%
PV of an ordinary annuity of 1 at
10%
1
.909
.909
2
.826
1.736
3
.751
2.487
4
.683
3.170
5
.621
3.791

B. P16,762

Pre-week Quizzer
D. P22,800

116.The acquisition of the new production machine by Gunning will

contribute a discounted net-of-tax contribution margin of
A. P242,624
C. P363,936
B. P303,280
D. P454,920

114.Gunning Industries net cash outflow in a capital budgeting

decision is
A. P190,000
C. P204,525
B. P195,000
D. P225,000
115.Gunning Industries discounted annual depreciation tax shield for
the year 2002 is
A. P13,817
C. P20,725
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117.The overall discounted cash flow impact of Gunnings working

capital investment for the new production machine would be
A. P(7,959)
C. P(13,265)
B. P(10,080)
D. P(35,000)

Inventory turnover (based on

Gross profit margin
Sheridans net sales for the year
A. P800,000
B. P480,000

Pre-week Quizzer
cost of sales)

8 times
40%

were
C. P1,200,000
D. P672,000

Financial Statement Analysis

118. Sales (in millions) for a three year period are: Year 1 P4, Year 2
P4.6, and Year 3 P5.0.
Using Year 1 as the base year the
percentage increase in sales in Years 2 and 3 are, respectively
A. 115% and 125%
C. 115% and 130%
B. 115% and 109%
D. 87% and 80%
119. A company has total sales of P300,000 with a gross profit ratio
of 35%. Inventory at the beginning of the period was P50,000 and
at the end of the period was P70,000. Net income is P40,000.
Inventory turnover is
A. 5 times
C. 1.75 times
B. 3.25 times
D. 0.67 times
120. The times interest earned ratio of McHoggan Company is
4.5times. The interest expense for the year was P20,000 and the
companys tax rate is 40%. The companys net income is:
A. P22,000
C. P42,000
B. P54,000
D. P66,000
121. If the North Division of Alliance Products Company had an
operating asset turnover of 4.2 and an operating income margin of
0.10, the return on investment would be
A. 23.8%
C. 42.0%
B. 420.0%
D. 4.2%
122. Selected data from Sheridan Corporations year-end financial
statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P120,000
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123. Jade Corporation has a practical production capacity of a million

units.
The current years master budget was based on the
production and sales of 700,000 units during the current year.
Actual production for the current year was 720,000 units, while
actual sales amounted to only 600,000 units. The units are sold for
P20 each and the contribution margin ratio is 30%. The peso
amount that best qualifies the Marketing Departments failure to
achieve budgeted performance for the current year is:
A. P720,000 unfavorable
C. P2,400,000 unfavorable
B. P600,000 unfavorable
D. P2,000,000 unfavorable
124. The gross profit of Rea Company for each of the years ended as
indicated follow:
2001
2000
Sales
P792,000
P800,000
Cost of goods sold
463,000
480,000
Gross profit
P328,000
P320,000
Assuming that 2001 selling price was 10% lower, what would be the
decrease in gross profit due to change in the selling price?
A. P8,000
C. P79,200
B. P72,000
D. P88,000
125. Garfield Company, which sells a single product, provided the
following data from its income statements for the years 2001 and
2000:
2001
2000
Sales (150,000 units in 2001; 180,000 P750,000 P720,0
units in 2000)
00
Cost of goods sold
525,00
575,0
0
00
Gross profit
P225,000 P145,0
00
In an analysis of variation in gross profit between the two years,
what would be the effects of changes in sales price and sales
volume, respectively?
A. P150,000 F; P120,000 U
C. P180,000 F; P150,000 U
B. P150,000 U; P120,000 F
D. P180,000 U; P150,000 F
May 9, 2004

Pre-week Quizzer

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 companys manufacturing and selling expenses are
70% of sales, and its effective tax rate is 40%. If Lyman should
accept this opportunity, the companys after tax profits would
increase by
A. P6,000
C. P10,200
B. P10,000
D. P14,400
128.The following information regarding a change in credit policy was
assembled by the Willis Company. The company has a required
rate of return of 10% and a variable cost ratio of 60%.
Old Credit Policy New Credit Policy
Sales
P3,600,000
P3,960,000
Average
Collection
30 days
36 days
period
The pretax cost of carrying the additional investment in receivable,
using 360-day year would be
A. P5,760
C. P8,160
B. P9,600
D. P960
129. The sales director of Lloyd Company suggested that certain
credit terms be modified. He estimates the following effects:

Sales will increase by at least 20%

Accounts receivable turnover will be reduced to 8 times

from the present turnover of 10 times
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Bad debts, now at 1% of sales will increase to 1.5%

Sales before the proposed changes is at P900,000. Variable cost
ratio is 55% and the desired rate of return is 20%. Fixed expenses
amount to P150,000.
Should the company allow revision of its credit terms?
A. Yes, because income will increase by P64,800
B. Yes, because losses will be reduced by P73,800
C. No, because income will be reduced by P13,000
D. No, because losses will be increased by P28,000
130.A spindle manufacturer uses about 200 cases of raw wood per
month. It pays a broker P50.00 to locate a supplier and handle the
ordering and delivery arrangements. Storage and handling costs
are P0.02 per case per month. If each case costs P0.78 the most
economical order quantity (rounded to the next whole number) is
A. 884 cases
C. 1,133 cases
B. 625 cases
D. 1,000 cases

Pre-week Quizzer

131.Expected annual usage of a particular raw material is 2,000,000

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

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135.The Manunuba Company was recently quoted terms on a

commercial bank loan of 7% interest with 20% compensating
balance. The term of the loan is one year. The effective cost of
borrowing (rounded to the nearest hundredth) for each interest
arrangements are:
A.
B.
C.
D.
Discounted
9.59%
8.75%
7.53%
7.53%
interest
Payable
upon
8.75%
9.59%
8.75%
9.59%
maturity
Cost of Capital & Risk
136. For 2003, Bee Company increased earnings before interest and
taxes by 17%. During the same period, net income after tax
increased by 42%. The degree of financial leverage that existed
during 2003 is
A. 1.70
C. 2.47
B. 4.20
D. 5.90
137.Mars Company plans to issue some P100 preferred stock with an
11 percent dividend. The stock is selling on the market for P97, and
Mars must pay flotation costs of 5 percent of the market price. The
company is under the 40 percent corporate tax rate.
The cost of preferred stock for Mars Company is
A. 7.16 percent
C. 11.34 percent
B. 6.80 percent
D. 11.94 percent
138.ABC Corp. stocks beta is .50. If the market return is 16%, and the
risk-free rate is 6%, what is the required rate of return on ABC
stock?
A. 11%
C. 13%
B. 12%
D. 14%
139.The following data are related to WXY stock:
Required return on WXY common
Beta coefficient
May 9, 2004

15 percent
1.5

Risk-free rate
The required market return is
A. 13.0 percent
B. 25.0 percent

Pre-week Quizzer
9.0 percent
C. 18.0 percent
D. 16.0 percent

140. The Taurus Companys last dividend was P3.00; its growth rate
is 6 percent and the stock now sells for P36. New stock can be sold
to net the firm P32.40 per share.
What is the Taurus Companys cost of retained earnings?
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
141. The Leonard Companys last dividend was P3.00; its growth rate
is 6 percent and the stock now sells for P36. New stock can be sold
to net the firm P32.40 per share.
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
142.Williams Co. is interested in measuring its overall cost of capital
and has gathered the following data. Under the terms described
below, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling P1,000, 8%, 20-year bonds
with annual interest payments. In selling the issue, an average
premium of P30 per bond would be received, and the firm must
pay flotation costs of P30 per bond. The after-tax cost of funds
is estimated to be 4.8%.
Williams can sell 8% preferred stock at P105 per share. The cost
of issuing and selling the preferred stock is expected to be P5
per share.
Williams common stock is currently selling for P100 per share.
The firm expects to pay cash dividends of P7 per share next
year, and the dividends are expected to remain constant. The
stock will have to be underpriced by P3 per share, and flotation
costs are expected to amount to P5 per share.
Williams expects to have available P100,000 of retained
earnings in the coming year; once these retained earnings are
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exhausted, the firm will use new common stock as the form of
common stock equity financing.
Williams preferred capital structure is
Long-term debt
30%
Preferred stock
20%
Common stock
50%
What are the corresponding weighted-average cost of capital under
each financing needs?
A.
B.
C.
D.
P200,000
6.5%
6.8%
4.5%
7.3%
P1,000,000
6.8%
4.8%
6.5%
9.1%

144.Using the dividend growth model,

retained earnings for Larry Technics,
A. 10.44 percent
C.
B. 9.30 percent
D.

Pre-week Quizzer
what is the expected cost of
Inc.?
16.30 percent
17.44 percent

Quantitative Methods
145.Reina, Inc. has a target total labor cost of P3,600 for the first four
batches of a product. Labor is paid P10 an hour. If Soft expects an
80% learning curve, how many hours should the first batch take?
A. 360 hours
C. 140.63 hours
B. 57.6 hours
D. 230.4 hours

Questions 143 & 144 are based on the following information.

The earnings, dividends, and stock price of Larry Technics, Inc. are
expected to grow at 7 percent per year after this year. Larrys
common stock sells for P23 per share, its last dividend was P2.00 and
the company pay P2.14 at the end of the current year. Larry should
pay P2.50 flotation cost.

146. A company is designing a new regional distribution warehouse.

To minimize delays in loading and unloading trucks, an adequate
number of loading docks must be built.
The most relevant
technique to assist in determining the proper number docks is
A. Cost-volume-profit analysis
C. PERT/CPM analysis
B. Linear programming
D. Queuing theory

143. If the firms beta is 1.75, the risk-free rate is 8 percent, and the
average return on the market is 12 percent, what will be the firms
cost of equity using the CAPM approach?
A. 16.05 percent
C. 15.00 percent
B. 14.27 percent
D. 14.00 percent

147.

Following is a table for two separate product lines, X and Y:

Probabilit
X Profit
Y Profit
y
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 Doughs thrift store for P1. Dough assigns the
following probabilities to selling additional boxes:
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Additional sales
60
100

CPA Review School of the Philippines

Probability
.6
.4

Pre-week Quizzer

What is the expected value of Doughs decision to buy 100

additional boxes of muffins?
A. P28
C. P52
B. P40
D. P68
149.A beverage stand can sell either soft drinks or coffee on any given
day. If the stand sells soft drinks and the weather is hot, it will
make P2,500; if the weather is cold, the profit will be P1,000. If the
stand sells coffee and the weather is hot, it will make P1,900; if the
weather is cold, the profit will be P2,000. The probability of cold
weather on a given day at this time is 60%.
The expected payoff for either selling coffee or soft drinks and the
expected payoff if the vendor has perfect information are
A.
B.
C.
D.
Coffee
P1,360
P1,960
P2,200
P3,900
Soft drinks
P1,600
P1,600
P1,900
P1,900
Perfect
P3,000
P2,200
P1,360
P1,960
Information.
150.A construction contractor has been invited to submit a bid on a
large and complicated construction project. The preparation of the
bid proposal will cost about P20,000. Management feels that if the
company bids low enough to result in a net profit of P50,000, there
would be a 60% chance of getting the job. If the company bids high
enough to result in a P100,000 net profit, the chance of getting the
contract would be only 20%. What should the company do?
A. Bid only high enough to allow for P50,000 profit because the
expected value of the payoff is P22,000.
B. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P4,000
C. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P20,000.
D. Make no bid.
151.Critical Path Method (CPM) is a technique for analyzing, planning,
and scheduling large, complex projects by determining the critical

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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.

Pre-week Quizzer

152.Clara Building Corporation uses the critical path method to monitor

construction jobs.
The company is currently 2 weeks behind
schedule on Job 181, which is subject to a P10,500-per-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 can be
crashed:
Activities
Cost to Crash 1 Week
Cost to Crash 2
Weeks
BC
P 8,000
P15,000
DE
10,000
19,600
EF
8,800
19,500
Clara desires to reduce the normal completion time of Job 181 and,
at the same time, report the highest possible income for the year.
Clara should crash
A. BC 1 week and EF 1 week
C. EF 2 weeks
B. BC 2 weeks
D. DE 1 week and EF 1week
Information Systems
153. A major advantage of obtaining a package of applications
programs from a software vendor is
A. the likelihood of reducing the time span from planning to
implementation
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance the programs will be written in a high-level
language

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Answer Key
1. B
11. D
2. B
12. A
3. B
13. A
4. B
14. D
5. A
15. B
6. B
16. C
7. C
17. A
8. C
18. D
9. A
19. A
10. A
20. B

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

C
B
A
B
A
C
A
D
D
A

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

A
B
B
A
A
C
A
D
B
A

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

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

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

C
A
B
C
C
B
C
A
B
A

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

B
A
D
A
D
C
D
B
D
C

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

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

A
B
A
B
A
B
A
B
A
C
C
D
A
B
B
A
C
D
C
D

151. C
May 9, 2004

61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.

A
A
C
B
B
C
B
C
D
B
C
C
A
D
A
D
C
A
B
C

152. D

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

C
A
B
D
A
C
A
A
A
D

153. A

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

A
C
A
D
A
C
D
A
A
A

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

B
A
B
A
B
B
B
C
A
B

C
A
C
D
C
D
D
C
B
C

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 companys
investment banker has quoted the following flotation costs to
Gasco: P2.50 per share for preferred stock and P2.20 per share for
common stock.
On the advice of its investment banker, Gasco has kept its debt at
50 percent of assets and its equity at 50 percent. Gasco sees no
need to sell either common or preferred stock in the foreseeable
future as it generated enough internal funds for its investment
needs when these funds are combined with debt financing. Gascos
corporate tax rate is 40 percent.
Compute the cost of capital for the following:
1. Bond (debt)
2. Preferred stock
3. Common equity in the form of retained earnings
4. New common stock
5. Weighted average cost of capital
2. Andres Company has a single product called Kad. The company
normally produces and sells 60,000 Kads each year at a selling
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CPA Review School of the Philippines

price of P32 per unit. The companys unit costs at this level of
activity are given below:
Direct materials
P10.00
Direct Labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00 (P300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50 (P210,000 total)

Pre-week Quizzer

A number of questions relating to the production and sales of Kads

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

May 9, 2004

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CPA Review School of the Philippines

Pre-week Quizzer

5. An outside manufacturer has offered to produce Kads for Andres

Company and to ship them directly to Andres customers. If
Andres accepts this offer, the facilities that it uses to produce
Kads would be idle; however, fixed overhead costs would be
reduced by 75% to their present value. Since the outside
manufacturer would pay for all the costs of shipping, the
variable selling costs would be only two-thirds of their present
amount.
What the unit cost figure that is relevant for
comparison to whatever quoted price is received from the
outside manufacturer?

May 9, 2004

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