NAME:__________________ Score:_____________

MIDTERM EXAMINATION IN MANAGERIAL SERVICES

PROBLEM 1
Langley Corporation

Langley Corporation has the following standard costs associated with the
manufacture and sale of one of its products:

Direct material $3.00 per unit

Direct labor 2.50 per unit
Variable manufacturing overhead 1.80 per unit
Fixed manufacturing overhead 4.00 per unit (based on an
estimate
of 50,000 units per year)
Variable selling expenses .25 per unit
Fixed SG&A expense $75,000 per year

During its first year of operations Langley manufactured 51,000

units and sold 48,000. The selling price per unit was $25. All costs
were equal to standard.

1. Refer to Langley Corporation. Under absorption costing, the standard

production cost per unit for the current year was
a. $11.30.
b. $ 7.30.
c. $11.55.
d. $13.05.

2. Refer to Langley Corporation. Under variable costing, the standard

production cost per unit for the current year was
a. $11.30.
b. $ 7.30.
c. $ 7.55.
d. $11.55.

3. Refer to Langley Corporation. Based on variable costing, the income

before income taxes for the year was
a. $570,600.
b. $560,000.
c. $562,600.
d. $547,500.

Ford Company

The following information is available for Ford Company for its first year
of operations:

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Sales in units 5,000
Production in units 8,000
Manufacturing costs:
Direct labor $3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead $100,000
Net income (absorption method) $30,000
Sales price per unit $40

4. Refer to Ford Company. If Ford Company had used variable costing,

what amount of income before income taxes would it have reported?
a. $30,000
b. ($7,500)
c. $67,500
d. can't be determined from the information given

5. Refer to Ford Company. What was the total amount of Selling,General

and Administrative expense incurred by Ford Company?
a. $30,000
b. $62,500
c. $6,000
d. can't be determined from the information given

6. Refer to Ford Company. If Ford Company were using variable costing,

what would it show as the value of ending inventory?
a. $120,000
b. $ 64,500
c. $ 27,000
d. $ 24,000

Clinton Corporation

The following information has been extracted from the financial records of
Clinton Corporation for its first year of operations:

Units produced 10,000

Units sold 7,000
Variable costs per unit:
Direct material $8
Direct labor 9
Manufacturing overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead $70,000
SG&A 30,000

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 7. Refer to Clinton Corporation. Based on absorption costing, Clinton
Corporation's income in its first year of operations will be
a. $21,000 higher than it would be under variable costing.
b. $70,000 higher than it would be under variable costing.
c. $30,000 higher than it would be under variable costing.
d. higher than it would be under variable costing, but the exact
difference cannot be determined from the information given.

8. Refer to Clinton Corporation. Based on absorption costing, the Cost

of Goods Manufactured for Clinton Corporation's first year would be
a. $200,000.
b. $270,000.
c. $300,000.
d. $210,000.

9. Refer to Clinton Corporation. Based on absorption costing, what amount

of period costs will Clinton Corporation deduct?
a. $70,000
b. $79,000
c. $30,000
d. $58,000

10. For its most recent fiscal year, a firm reported that its contribution
margin was equal to 40 percent of sales and that its net income
amounted to 10 percent of sales. If its fixed costs for the year were
$60,000, how much were sales?
a. $150,000
b. $200,000
c. $600,000
d. can't be determined from the information given

11. At its present level of operations, a small manufacturing firm has

total variable costs equal to 75 percent of sales and total fixed
costs equal to 15 percent of sales. Based on variable costing, if
sales change by $1.00, income will change by
a. $0.25.
b. $0.10.
c. $0.75.
d. can't be determined from the information given.

Entertainment Solutions Corporation

Entertainment Solutions Corporation manufactures and sells FM radios.

Information on the prior year's operations (sales and production Model A1)
is presented below:

Sales price per unit $30

Costs per unit:
Direct material 7
Direct labor 4

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 Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,00
0
Sales in units 9,500

12. Refer to Entertainment Solutions Corporation. The Model B2 radio is

currently in production and it renders the Model A1 radio obsolete.
If the remaining 500 units of the Model A1 radio are to be sold
through regular channels, what is the minimum price the company would
accept for the radios?
a. $30
b. $27
c. $18
d. $4

13. Refer to Entertainment Solutions Corporation. Assume that the

remaining Model A1 radios can be sold through normal channels or to
a foreign buyer for $6 per unit. If sold through regular channels,
the minimum acceptable price will be
a. $30.
b. $33.
c. $10.
d. $4.

Chip Division of Computer Solutions, Inc.

The Chip Division of Computer Solutions, Inc. produces a high-quality

computer chip. Unit production costs (based on capacity production of 100,000
units per year) follow:

Direct material $50

Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

14. Refer to Chip Division of Computer Solutions, Inc. Assume, for this
question only, that the Chip Division is producing and selling at
capacity. What is the minimum selling price that the division would
consider on a "special order" of 1,000 chips on which no variable
period costs would be incurred?
a. $100
b. $72
c. $81
d. $94

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 15. Refer to Chip Division of Computer Solutions, Inc. Assume, for this
question only, that the Chip Division is operating at a level of
70,000 chips per year. What is the minimum price that the division
would consider on a "special order" of 1,000 chips to be distributed
through normal channels?
a. $ 78
b. $ 95
c. $100
d. $ 81

16. Refer to Chip Division of Computer Solutions, Inc. Assume, for this
question only, that the Chip Division is presently operating at a
level of 80,000 chips per year. Accepting a "special order" on 2,000
chips at $88 will
a. increase total corporate profits by $4,000.
b. increase total corporate profits by $20,000.
c. decrease total corporate profits by $14,000.
d. decrease total corporate profits by $24,000.

Use the following to answer questions 17 to 23:

Financial statements for Larabee Company appear below:

Larabee Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities ........ $ 180 $ 160
Accounts receivable, net ........... 190 160
Inventory ............................ 150 160
Prepaid expenses ..................... 20 20
Total current assets .................. 540 500
Noncurrent assets:
Plant & equipment, net ............... 1,680 1,640
Total assets ........................... $2,220 2,140

Current liabilities:
Accounts payable ....................... $ 110 $ 140
Accrued liabilities .................... 50 80
Notes payable, short term .............. 60 100
Total current liabilities .............. 220 320
Noncurrent liabilities:
Bonds payable .......................... 350 400
Total liabilities ...................... 570 720

Stockholders’ equity: ..................

Preferred stock, $20 par, 10% .......... 120 120
Common stock, $10 par .................. 180 180
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 Additional paid-in capital--common stock 280 280
Retained earnings ..................... 1,070 840
Total stockholders’ equity ............ 1,650 1,420
Total liabilities & stockholders’ equity $2,220 $2,140

Larabee Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ....................... $ 2,610

Cost of goods sold ........................... 1,820
Gross margin ................................. 790
Operating expenses ........................... 310
Net operating income ......................... 480
Interest expense ............................. 40
Net income before taxes ...................... 440
Income taxes (30%) ........................... 132
Net income ................................... $ 308

Dividends during Year 2 totaled $78 thousand, of which $12 thousand were
preferred dividends. The market price of a share of common stock on December
31, Year 2 was $150.

17. Larabee Company's earnings per share of common stock for Year 2 was
closest to:
a. $17.11
b. $16.44
c. $24.44
d. $ 9.87

18. Larabee Company's price-earnings ratio on December 31, Year 2 was

closest to:
a. 8.77
b. 6.14
c. 9.12
d. 15.20

19. Larabee Company's dividend payout ratio for Year 2 was closest to:
a. 13.8%
b. 25.3%
c. 8.4%
d. 22.3%

20. Larabee Company's dividend yield ratio on December 31, Year 2 was
closest to:
a. 2.0%
b. 2.4%
c. 1.7%
d. 2.9%

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 21. Larabee Company's return on total assets for Year 2 was closest to:
a. 12.8%
b. 15.4%
c. 14.7%
d. 14.1%

22. Larabee Company's return on common stockholders' equity for Year 2

was closest to:
a. 19.3%
b. 21.8%
c. 20.9%
d. 20.1%

23. Larabee Company's book value per share at the end of Year 2 was
closest to:
a. $91.67
b. $85.00
c. $25.56
d. $10.00

Use the following to answer questions 24-28:

Selected data (in thousands of dollars) from Ostrander Corporation's

financial statements are presented below:

Balance Sheet Data: Year 2 Year 1

Cash ................................. $ 32 $ 28
Marketable securities ................ $ 169 $ 172
Accounts receivable (net) ............ $ 210 $ 204
Merchandise inventory ................ $ 440 $ 420
Equipment (net) ...................... $ 480 $ 440
Total assets ......................... $1,397 $1,320
Current liabilities .................. $ 370 $ 368
Total liabilities .................... $ 790 $ 750
Common stock outstanding ........... $ 226 $ 210
Retained earnings .................... $ 381 $ 360

Income Statement Data:

Year 2
Sales (all on account) ................ $4,175
Cost of goods sold .................... $2,880
Interest expense ...................... $ 50
Income tax ............................ $ 120
Net income ............................ $ 175

24. Ostrander Corporation's acid-test (quick) ratio for Year 2 is

closest to:
a. 1.73
b. 1.87
c. 1.11
d. 0.54
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 25. Ostrander Corporation's inventory turnover for Year 2 is closest to:
a. 6.54
b. 6.69
c. 6.85
d. 9.70

26. Ostrander Corporation's average collection period (age of

receivables) for Year 2 is closest to:
a. 18.10 days
b. 26.61 days
c. 17.83 days
d. 18.36 days

27. Ostrander Corporation's times interest earned for Year 2 is closest

to:
a. 4.50
b. 7.70
c. 3.50
d. 6.90

28. Ostrander Corporation's debt-to-equity ratio at the end of Year 2 is

closest to:
a. 3.49
b. 1.85
c. 2.07
d. 1.30

Use the following to answer questions 29-35:

Financial statements for Maraby Company appear below:

Maraby Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities ............ $ 220 $ 190
Accounts receivable, net .................. 190 160
Inventory ................................. 140 150
Prepaid expenses .......................... 70 80
Total current assets ...................... 620 580
Noncurrent assets:
Plant & equipment, net .................... 1,180 1,150
Total assets .............................. $1,800 $1,730

Current liabilities:
Accounts payable .......................... $ 100 $ 120
Accrued liabilities ....................... 100 70
Notes payable, short term ................. 160 160
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Total current liabilities ................. 360 350
Noncurrent liabilities:
Bonds payable ............................. 450 500
Total liabilities ......................... 810 850
Stockholders’ equity:
Preferred stock, $10 par, 8% .............. 100 100
Common stock, $5 par ...................... 160 160
Additional paid-in capital--common stock .. 100 100
Retained earnings ......................... 630 520
Total stockholders’ equity ................ 990 880
Total liabilities & stockholders’ equity .. $ 1,800 $1,730

Maraby Company
Income Statement For the Year Ended
December 31, Year 2
(dollars in thousands)

Sales (all on account) .................. $1,960

Cost of goods sold ...................... 1,370
Gross margin ............................ 590
Operating expenses ...................... 230
Net operating income .................... 360
Interest expense ........................ 50
Net income before taxes ................. 310
Income taxes (30%) ...................... 93
Net income .............................. $ 217

29. Maraby Company's working capital (in thousands of dollars) at the end
of Year 2 was closest to:
a. $260
b. $620
c. $360
d. $990

30. Maraby Company's current ratio at the end of Year 2 was closest to:
a. 1.34
b. 1.72
c. 0.60
d. 0.44

31. Maraby Company's acid-test (quick) ratio at the end of Year 2 was
closest to:
a. 0.51
b. 0.47
c. 1.14
d. 1.95

32. Maraby Company's accounts receivable turnover for Year 2 was closest
to:
a. 13.5
b. 7.8
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 c. 11.2
d. 9.4

33. Maraby Company's average collection period (age of receivables) for

Year 2 was closest to:
a. 38.6 days
b. 46.6 days
c. 32.6 days
d. 27.0 days

34. Maraby Company's inventory turnover for Year 2 was closest to:
a. 11.2
b. 7.8
c. 9.4
d. 13.5

35. Maraby Company's average sale period (turnover in days) for Year 2
was closest to:
a. 38.6 days
b. 32.6 days
c. 46.6 days
d. 27.0 days

END OF EXAMINATIONS

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