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Sample 2008 Entrance Examination

101. CLC is a not-for-profit organization that helps children improve their literacy and uses
fund accounting to report its activities. Mr. Donovan donated $250,000 to CLC to be
used to finance a specific event to promote childrens literacy. In which of the following
funds would CLC record the donation?

a) General fund.
b) Special (reserve) fund.
c) Capital fund.
d) Fiduciary fund.
e) Endowment fund.


The following information pertains to questions 102 and 103.

HGML Co. produces one product using a single machine that has a capacity of 100,000 units
per year. Last year, the company produced and sold 80,000 units. It is considering replacing the
machine with a new, automated machine that would eliminate all direct labour costs, but would
require a higher grade of direct materials and a licensing fee of $1 per unit. The production
costs using the new versus the old machine at two production activity levels are as follows:

80,000 units 100,000 units

Old Machine New Machine Old Machine New Machine
Direct materials $120,000 $152,000 $150,000 $190,000
Direct labour 80,000 - 100,000 -
Amortization 50,000 70,000 50,000 70,000
Licensing fee - 80,000 - 100,000
Other overhead 350,000 280,000 380,000 310,000
Total $600,000 $582,000 $680,000 $670,000

The selling price of the product is $10 per unit. All selling and administration costs are fixed at
$300,000 per year, which would not change if the new machine is acquired. The company has a
40% tax rate and an after-tax cost of capital of 10%. The new machine would have a life of three
years, which is the same as the remaining useful life of the old machine. Neither machine would
have a material disposal value at the end of three years. Other data pertaining to the two
machines are as follows:

Old Machine New Machine

Original capital cost $250,000 $210,000
Current market value $120,000 $210,000
Current book value $180,000
Undepreciated capital cost $195,500
Capital cost allowance rate 30% 30%

40 CMA Canada
Sample 2008 Entrance Examination

102. Assuming the company continues to use the old machine, what is the contribution
margin per unit of the product?

a) $7.50
b) $4.00
c) $6.925
d) $3.70
e) $6.00

103. (+) What is the incremental CCA tax shield if the new machine is purchased as opposed
to keeping the old machine?

a) $25,773
b) $27,000
c) $8,591
d) $4,152
e) $20,618

CMA Canada 41