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# Items 14 through 18 are based on the following information:

The following is selected data for the Consumer Products division of Arron Corporations for 200X:
Sales \$50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%

a. 8%
b. 4%
c. 10%
d. 20%

a. .25
b. 10
c. 2.5
d. 8

## 16. What is the return on investment (ROI) for the division?

a. 10%
b. 8%
c. 4%
d. 2%

17. What is the amount of residual income (RI) for the division?
a. \$2,000,000
b. \$1,600,000
c. \$1,000,000
d. \$400,000

18. What is the amount of interest rate spread for the division?
a. 8%
b. 10%
c. 2%
d. 20%

## Items 19 and 20 are based on the following information:

The following data is available for Cara Corp. for 2014:
Sales \$2,000,000
Average invested capital 500,000
Net income 300,000
Required rate of return 18%

a. 60%
b. 33%
c. 18%
d. 15%

## 20. What is the residual income for Cara Corp.?

a. \$0
b. \$200,000
c. \$210,000
d. \$246,000
25. Return on investment can be increased by
a. Increasing operating assets.
b. Decreasing operating assets.
c. Decreasing revenues.
d. Both b. and c.

26. The following information pertains to Bala Co. for the year ended December 31, 2014:
Sales \$600,000
Net income 100,000
Capital investment 400,000

Which of the following equations should be used to compute Bala’s return on investment?
a. (4/6) × (6/1) = ROI
b. (6/4) × (1/6) = ROI
c. (4/6) × (1/6) = ROI
d. (6/4) × (6/1) = ROI

## 28. The following selected data pertain to the Darwin

Division of Beagle Co. for 2014:
Sales \$400,000
Net income 40,000
Capital turnover 4
Imputed interest rate 10%
What was Darwin’s 2014 residual income?
a. \$0
b. \$ 4,000
c. \$10,000
d. \$30,000

29. Division A is considering a project that will earn a rate of return which is greater than the imputed interest
charge for invested capital, but less than the division’s historical return on invested capital. Division B is
considering a project that will earn a rate of return that is greater than the division’s historical return on invested
capital, but less than the imputed interest charge for invested capital. If the objective is to maximize residual
income, should these divisions accept or reject their projects?
AB
a. Accept Accept
b. Reject Accept
c. Reject Reject
d. Accept Reject

31. Residual income is often preferred over return on investment (ROI) as a performance evaluation Because
a. Residual income is a measure over time while ROI represents the results for a single time period.
b. Residual income concentrates on maximizing absolute dollars of income rather than a percentage return as
with ROI.
c. The imputed interest rate used in calculating residual income is more easily derived than the target rate that
is compared to the calculated ROI.
d. Average investment is employed with residual income while year-end investment is employed with ROI.

57. Sago Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers
(machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were
run on a computer using one of the standard regression programs, with the following results:
Machine hours Coeffi cient
Y Intercept 2,500
B 5.0
R2= .70
Direct materials weight
Y Intercept 4,600
B 2.6
R2= .50
What regression equation should be used?
a. Y = 2,500 + 5.0X
b. Y = 2,500 + 3.5X
c. Y = 4,600 + 2.6X
d. Y = 4,600 + 1.3X

58. In its fi rst year of operations, Magna Manufacturers had the following costs when it produced 100,000 and
sold 80,000 units of its only product:
Manufacturing costs Fixed \$180,000
Variable 160,000
Selling and admin. costs Fixed 90,000
Variable 40,000

How much lower would Magna’s net income be if it used variable costing instead of full absorption costing?
a. 36,000
b. 54,000
c. 68,000
d. 94,000

59. Using the variable costing method, which of the following costs are assigned to inventory?
Variable selling and Variable factory
a. Yes Yes
b. Yes No
c. No No
d. No Yes

60. At the end of Killo Co.’s fi rst year of operations, 1,000 units of inventory remained on hand. Variable and
fixed manufacturing costs per unit were \$90 and \$20, respectively. If Killo uses absorption costing rather than
variable (direct) costing, the result would be a higher pretax income of
a. 0
b. 20,000
c. 70,000
d. 90,000

61. A manufacturing company prepares income statements using both absorption and variable costing
methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin
approximated budgeted figures, whereas net income was substantially greater than the budgeted amount.
There were no beginning or ending inventories. The most likely explanation of the net income increase is that,
compared to budget, actual
a. Manufacturing fi xed costs had increased.
c. Sales prices and variable costs had increased proportionately.
d. Sales prices had declined proportionately less than variable costs.

62. A single-product company prepares income statements using both absorption and variable costing
methods. Manufacturing overhead cost applied per unit produced in 2014 was the same as in 2013. The 2014
variable costing statement reported a profit whereas the 2014 absorption costing statement reported a loss.
The difference in reported income could be explained by units produced in 2014 being
a. Less than units sold in 2014.
b. Less than the activity level used for allocating overhead to the product.
c. In excess of the activity level used for allocating overhead to the product.
d. In excess of units sold in 2014.
**4. Associated Supply, Inc. is considering introducing a new product that will require a \$250,000 investment of
capital. The necessary funds would be raised through a bank loan at an inter est rate of 8%. The fi xed
operating costs associated with the product would be \$122,500 while the contribution margin per centage
would be 42%. Assuming a selling price of \$15 per unit, determine the number of units (rounded to the nearest
whole unit) Associated would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the
amount of capital in vested in the new product.
a. 35,318 units.
b. 32,143 units.
c. 25,575 units.
d. 23,276 units.

5. During 2013, Thor Lab supplied hospitals with a comprehensive diagnostic kit for \$120. At a volume of
80,000 kits, Thor had fixed costs of \$1,000,000 and a profit before income taxes of \$200,000. Due to an
adverse legal decision, Thor’s 2014 liability insurance increased by \$1,200,000 over 2013.
Assuming the volume and other costs are unchanged, whatshould the 2014 price be if Thor is to make the
same \$200,000 profit before in come taxes?
a. \$120.00
b. \$135.00
c. \$150.00
d. \$240.00

## 6. Breakeven analysis assumes that over the relevant range

a. Unit revenues are nonlinear.
b. Unit variable costs are unchanged.
c. Total costs are unchanged.
d. Total fi xed costs are nonlinear.

7. Product Cott has sales of \$200,000, a contribution margin of 20%, and a margin of safety of \$80,000. What
is Cott’s fixed cost?
a. \$16,000
b. \$24,000
c. \$80,000
d. \$96,000

8. On January 1, 2014, Lake Co. increased its direct manufacturing labor wage rates. All other budgeted costs
and revenues were unchanged. How did this increase affect Lake’s budgeted breakeven point and budgeted
margin of safety?
Budgeted Budgeted
breakeven point margin of safety
a. Increase Increase
b. Increase Decrease
c. Decrease Decrease
d. Decrease Increase

12. Thomas Company sells products X, Y, and Z. Thomas sells three units of X for each unit of Z, and two units
of Y for each unit of X. The contribution margins are \$1.00 per unit of X, \$1.50 per unit of Y, and \$3.00 per unit
of Z. Fixed costs are \$600,000. How many units of X would Thomas sell at the breakeven point?
a. 40,000
b. 120,000
c. 360,000
d. 400,000

13. In calculating the breakeven point for a multiproduct company, which of the following assumptions are
I. Sales volume equals production volume.
II. Variable costs are constant per unit.
III. A given sales mix is maintained for all volume changes.
a. I and II.
b. I and III.
c. II and III.
d. I, II, and III.

16. Mien Co. is budgeting sales of 53,000 units of product Nous for October 2014. The manufacture of one unit
of Nous requires four kilos of chemical Loire. During October 2014, Mien plans to reduce the inventory of Loire
by 50,000 kilos and increase the fi nished goods inventory of Nous by 6,000 units. There is no Nous work in
process inventory. How many kilos of Loire is Mien budgeting to purchase in October 2014?
a. 138,000
b. 162,000
c. 186,000
d. 238,000

## Items 18 and 19 are based on the following information:

Operational budgets are used by a retail company for planning and controlling its business activities. Data
regarding the company’s monthly sales for the last 6 months of the year and its projected collection patterns
are shown below.

The cost of merchandise averages 40% of its selling price. The company’s policy is to maintain an inventory
equal to 25% of the next month’s forecasted sales. The inventory balance at cost is \$80,000 as of June 30.

Forecasted Sales
July \$775,000
August 750,000
September 825,000
October 800,000
November 850,000
December 900,000

Types of Sales
Cash sales 20%
Credit sales 80%

## Collection Pattern for Credit Sales

In the month of sale 40%
In the fi rst month following the sale 57%
Uncollectible 3%

*18. The budgeted cost of the company’s purchases for the month of August would be
a. \$302,500
b. \$305,000
c. \$307,500
d. \$318,750

*19. The company’s total cash receipts from sales and collections on account that would be budgeted for the
month of September would be
a. \$757,500
b. \$771,000
c. \$793,800
d. \$856,500

## **20. Which of the following best describes tactical profit plans?

a. Detailed, short-term, broad responsibilities, qualitative.
b. Broad, short-term, responsibilities at all levels, quantitative.
c. Detailed, short-term, responsibilities at all levels, quanti tative.

## 21. Which of the following budgeting systems focuses on improving operations?

a. Responsibility budgeting.
b. Activity-based budgeting.
c. Operational budgeting.
d. Kaizen budgeting.

## 22. Which of the following is included in a firm’s financial budget?

a. Budgeted income statement.
b. Capital budget.
c. Production schedule.
d. Cost of goods sold budget.

23. Rolling Wheels purchases bicycle components in the month prior to assembling them into bicycles.
Assembly is scheduled one month prior to budgeted sales. Rolling pays 75% of compo nent costs in the month
of purchase and 25% of the costs in the following month. Component cost included in budgeted cost of sales
are
April May June July August
\$5,000 \$6,000 \$7,000 \$8,000 \$8,000

## What is Rolling’s budgeted cash payment for components in May?

a. \$5,750
b. \$6,750
c. \$7,750
d. \$8,000

24. A 2014 cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are
Cost of goods sold for 2014 \$300,000
Accounts payable 1/1/14 20,000
Inventory—1/1/14 30,000
12/31/14 42,000

Purchases will be made in twelve equal monthly amounts and paid for in the following month. What is the 2014
budgeted cash payment for purchases of Toyi?
a. \$295,000
b. \$300,000
c. \$306,000
d. \$312,000

**25. Trumbull Company budgeted sales on account of \$120,000 for July, \$211,000 for August, and \$198,000
for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after
the sale, 36% the sec ond month, and 4% will be uncollectible. The cash from ac counts receivable that should
be budgeted for September would be
a. \$169,800
b. \$194,760
c. \$197,880
d. \$198,600

26. Cook Co.’s total costs of operating five sales offices last year were \$500,000, of which \$70,000 represented
fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices
operated. Last year’s costs and number of sales offices can be used as the bases for predicting annual costs.
What would be the budgeted costs for the coming year if Cook were to operate seven sales offices?
a. \$700,000
b. \$672,000
c. \$614,000
d. \$586,000

## Items 30 thru 32 are based on the following information:

In preparing the annual profi t plan for the coming year, Wilkens Company wants to determine the cost
behaviour pattern of the maintenance costs. Wilkens has decided to use linear re gression by employing the
equation y = a + bx for maintenance costs. The prior year’s data regarding maintenance hours and costs, and
the result of the regression analysis are given below.
Average cost per hour \$9.00
A 684.65
B 7.2884
Standard error of a 49.515
Standard error of b .12126
Standard error of the estimate 34.469
R2 .99724

## Hours of activity Maintenance costs

January 480 \$ 4,200
February 320 3,000
March 400 3,600
April 300 2,820
May 500 4,350
June 310 2,960
July 320 3,030
August 520 4,470
September 490 4,260
October 470 4,050
November 350 3,300
December 340 3,160
Sum 4,800 \$43,200
Average 400 \$ 3,600

*30. In the standard regression equation y = a + bx, the letter b is best described as a(n)
a. Independent variable.
b. Dependent variable.
c. Constant coefficient.
d. Variable coefficient.

*31. The letter x in the standard regression equation is best described as a(n)
a. Independent variable.
b. Dependent variable.
c. Constant coefficient.
d. Coefficient of determination.

*32. Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean
the maintenance costs (rounded to the nearest dollar) would be budgeted at
a. \$3,780
b. \$3,600
c. \$3,790
d. \$3,746

## 44. Controllable revenue would be included in a performance report for a

Profit center Cost center
a. No No
b. No Yes
c. Yes No
d. Yes Yes

45. The following is a summarized income statement of Carr Co.’s profit center No. 43 for March 2014:
Contribution margin \$70,000
Period expenses:
Manager’s salary \$20,000
Facility depreciation 8,000
Corporate expense allocation 5,000 33,000
Profit center income \$37,000
Which of the following amounts would most likely be subject to the control of the profit center’s manager?
a. \$70,000
b. \$50,000
c. \$37,000
d. \$33,000
46. Wages earned by machine operators in producing the firm’s product should be categorized as
Direct Controllable by the machine
Labor operators’ foreman
a. Yes Yes
b. Yes No
c. No Yes
d. No No

50. The standard direct material cost to produce a unit of Lem is four meters of material at \$2.50 per meter.
During May 2014, 4,200 meters of material costing \$10,080 were purchased and used to produce 1,000 units
of Lem. What was the material price variance for May 2014?
a. \$400 favorable.
b. \$420 favorable.
c. \$ 80 unfavorable.
d. \$480 unfavorable
.
51. Dahl Co. uses a standard costing system in connection with the manufacture of a “one size fi ts all” article
of clothing.
Each unit of finished product contains two yards of direct material. However, a 20% direct material spoilage
calculated on input quantities occurs during the manufacturing process.
The cost of the direct material is \$3 per yard. The standard direct material cost per unit of fi nished product is
a. \$4.80
b. \$6.00
c. \$7.20
d. \$7.50

52. Carr Co. had an unfavorable materials usage variance of \$900. What amounts of this variance should be
charged to each department?
a. \$0 \$0 \$900
b. \$0 \$900 \$0
c. \$300 \$300 \$300
d. \$900 \$0 \$0

53. Yola Co. manufactures one product with a standard direct manufacturing labor cost of four hours at \$12.00
per hour. During June, 1,000 units were produced using 4,100 hours at \$12.20 per hour. The unfavorable direct
labor efficiency variance was
a. \$1,220
b. \$1,200
c. \$ 820
d. \$ 400

54. The following direct manufacturing labor information pertains to the manufacture of product Glu:
Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker \$500
Workers’ benefi ts treated as direct
manufacturing labor costs 20% of wages
What is the standard direct manufacturing labor cost per unit of product Glu?
a. \$30
b. \$24
c. \$15
d. \$12

57. Baby Frames, Inc. evaluates manufacturing overhead in its factory by using variance analysis. The
following information applies to the month of May:
Actual Budgeted
Number of frames
manufactured 19,000 20,000
\$4,100
\$2 per direct labor
hour
Direct labor hours 2,100 0.1 hour per frame
What is the fixed overhead spending variance?
a. \$1,000 favorable.
b. \$1,000 unfavorable.
c. \$2,000 favorable.
d. \$2,000 unfavorable.

69. The budget for Klunker Auto Repair Shop for the year is as follows:
Direct labor per hour \$ 30
Total labor hours 10,000
Materials handling and storage \$ 10,000
Other (rent, utilities, depreciation, insurance) \$120,000
Direct materials cost \$500,000
Klunker allocates materials handling and storage costs per dollar of direct materials cost. Other overhead is
allocated based on total labor hours. In addition, Klunker adds a charge of \$8 per labor hour to cover profit
margin. Tardy Trucking Co. has brought one of its trucks to Klunker for an engine overhaul. If the overhaul
requires twelve labor hours and \$800 parts, what price should Klunker charge Tardy for these repair services?
a. \$1,160
b. \$1,256
c. \$1,416
d. \$1,472

## 73. Which of the following statements regarding transfer pricing is false?

a. When idle capacity exists, there is no opportunity cost to producing intermediate products for another
division.
b. Market-based transfer prices should be reduced by any costs avoided by selling internally rather than
externally.
c. No contribution margin is generated by the transferring division when variable cost-based transfer prices
are used.
d. The goal of transfer pricing is to provide segment man agers with incentive to maximize the profits of
their divisions.

## Items 19 and 20 are based on the following information:

The operating results in summarized form for a retail computer store for 2008 are
Revenue:
Hardware sales \$4,800,000
Software sales 2,000,000
Maintenance contracts 1,200,00
Total revenue \$8,000,000
Costs and expenses
Cost of hardware sales \$3,360,000
Cost of software sales 1,200,000
Marketing expenses 600,000
Customer maintenance costs 640,000
Total costs and expenses \$6,920,000
Operating income \$1,080,000
The computer store is in the process of formulating its operating budget for 2009 and has made the following
assumptions:
• The selling prices of hardware are expected to increase 10% but there will be no selling price increases for
software and maintenance contracts.
• Hardware unit sales are expected to increase 5% with a corresponding 5% growth in the number of
maintenance contracts; growth in unit software sales is estimated at 8%.
• The cost of hardware and software is expected to increase 4%.
• Marketing expenses will be increased 5% in the coming year.
• Three technicians will be added to the customer maintenance operations in the coming year, increasing the
customer maintenance costs by \$120,000.
• Administrative costs will be held at the same level.

19. The retail computer store’s budgeted total revenue for 2009 would be
a. \$8,804,000
b. \$8,460,000
c. \$8,904,000
d. \$8,964,000

20. The retail computer store’s budgeted total costs and expenses for the coming year would be
a. \$7,252,400
b. \$7,526,960
c. \$7,558,960
d. \$7,893,872