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Management Advisory Services 7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
1. The following characterize management advisory services except Selling price per pair of sunglasses P25.00
A. involve decision for the future Variable costs per pair of sunglasses:
B. broader in scope and varied in nature Raw materials P11.00
C. utilize more junior staff than senior members of the firm Direct labor 5.00
D. relate to specific problems where expert help is required Manufacturing overhead 2.50
Selling expenses 1.30
2. Which of the following is not classifiable as a management advisory service by CPA? Total variable costs per unit P19.80
A. Systems design. C. Make or buy analysis. Annual fixed costs:
B. Project feasibility study. D. Assistance in budget preparation. Manufacturing overhead P192,000
Selling and administrative 276,000
Managerial Accounting Total fixed costs P468,000
3. The following are inherent to either management accounting or financial accounting: Forecasted annual sales volume (120,000 pairs) P3,000,000
1. External report Income tax rate 40%
2. Historical information Glareless Company estimates that its direct labor costs will increase 8 percent next year. How many units will Glareless have to sell
3. Contribution approach income statement next year to reach breakeven?
4. Generally accepted accounting principles A. 97,500 units C. 83,572 units
5. Prospective financial statements B. 101,740 units D. 86,250 units
Which of the foregoing are related to management accounting and financial accounting, respectively? 8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for P900 per unit. In 2000, the following
Management Accounting Financial Accounting variable costs were incurred to produce each Walastik device.
A. 1, 2, 5 3, 4 Direct labor P180
B. 3, 5 1, 2, 4 Direct materials 240
C. 2, 3 1, 4, 5 Factory overhead 105
D. 3 1, 2, 4, 5 Selling costs 75
Total variable costs P600
COST BEHAVIOR Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except for an operating loss incurred in the year
4. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted output and P280,000 for 60,000 units of of incorporation, the firm has been profitable over the last five years.
budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed In 2001, a significant change in Madel’s production technology caused a 10% increase in annual fixed costs and a 20% unit cost
costs for P50,000 units. How much is Carera’s budgeted variable cost per unit of output? increase in the direct labor component as a result of higher skilled direct labor. However, this change permitted the replacement of a
A. P1.60 C. P3.00 costly imported component with a local component. The effect was to reduce unit material costs by 25%. There has been no change in
B. P1.67 D. P5.00 the Walastik selling price.
The annual sales units required for Madel to breakeven are:
COST-VOLUME-PROFIT ANALYSIS A. B. C. D.
Breakeven Point 2000 22,000 22,000 14,000 14,000
5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return on sales is 10%; at a P500,000 volume, 2001 20,840 22,407 22,407 20,840
return on sales is 22%. What is the break-even volume?
A. P120,000 C. P225,000* Profit Planning
B. P200,000 D. P450,000 9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, variable costs of P50,000, and fixed costs of
P30,000. Signal expects its cost structure and sales price per unit to remain the same in 2001, however total sales are expected to
6. Bush Electronics, Inc. had the following sales results for 2004: jump by 20%. If the 2001 projections are realized, net income in 2001 should exceed net income in 2000 by
TV sets CD player Radios A. 100% C. 20%
Peso sales component ratio 0.30 0.30 0.40 B. 80% D. 50%
Contribution margin ratio 0.40 0.40 0.60
Bush Electronics, Inc. had fixed costs of P2,400,000. 10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is considering opening on Sundays. The annual
The break-even sales in pesos for Bush Electronics, Inc. are: incremental fixed costs of Sunday openings are estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two
TV sets CD player Radios estimates that 60 percent of its Sunday sales to customers would be made on other days if the stores were not open on Sundays. The
A. P1,800,000 P1,800,000 P3,600,000 one-day volume of Sunday sales that would be necessary for Six-Two to attain the same weekly operating income as the current six-day
B P1,800,000 P1,800,000 P1,600,000 week is
C. P1,500,000 P1,500,000 P2,000,000 A. P6,000 C. P7,500
D. P1,531,915 P1,531,915 P2,042,553 B. P5,000 D. P4,500
11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable cost as a percentage of selling SP = selling price U = units
price are 60% for M and 85% for W. Total fixed costs are P225,000. If fixed costs will increase by 30 percent, what amount of peso sales Part Part Equations
would be necessary to generate an operating profit of P48,000? AL45 .6 ((P4.00 – P1.25) (U) – P33,400)
A. P1,350,000 C. P1,135,000 BT65 .6 ((P4.05 – P2.55) (U) – P15,000)
B. P486,425 D. P910,000 GM17 .6 ((P4.10 - P2.00) (U) - P22,365)
The production and unit sales volume level at which Valley will be indifferent as to whether Part BT62 or GM17 is produced is
12. Mount Park, Inc. had the following economic information for the year 2002: A. 7,365 C. 10,380
Sales(50,000 units @ P20) P1,000,000 B. 4,092 D. 12,275
Variable manufacturing costs 400,000
Fixed costs 250,000 16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The average car sells for P1,200,000 and a
Income tax rate 40 percent 6% commission is paid to the salesperson. BM Motors is considering a change to a commission arrangement that would pay each
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates increased competition; hence, an additional salesperson a salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
P75,000 advertising costs is budgeted in order to maintain its sales target for 2003. The amount of total car sales at which BM Motors would be indifferent as to which plan to select is
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in 2002? A. P22,500,000 C. P24,000,000
A. P1,125,000 C. P1,187,500 B. P30,000,000 D. P12,000,000
B. P1,325,000 D. P1,387,500
17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many styles of shoes that are all sold at the same
13. Larz Company produces a single product. It sold 25,000 units last year with the following results: price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each
Sales P625,000 pair of shoes sold. Sales personnel also receive a small basic salary.
Variable costs P375,000 The following cost and revenue data relate to Store 9 and are typical of the company’s many sales outlets:
Fixed costs 150,000 525,000 Selling price P800
Net income before taxes P100,000 Variable expenses:
Income taxes 40,000 Invoice costs P360
Net income P 60,000 Sales commission 140
In an attempt to improve its product in the coming year, Larz is considering replacing a component part in its product that has a cost of P500
P2.50 with a new and better part costing P4.50 per unit. A new machine will also be needed to increase plant capacity. The machine Fixed expenses per year:
would cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-line depreciation on all plant assets. Rent P1,600,000
If Larz wishes to maintain the same contribution margin ratio after implementing the changes, what selling price per unit of product must Advertising 3,000,000
it charge next year to cover the increased material costs? Salaries 1,400,000
A. P27.00 C. P32.50 Total P6,000,000
B. P25.00 D. P28.33 The company is considering eliminating sales commissions entirely in its stores and increasing fixed salaries by P2,142,000 annually.
Point of Indifference If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be indifferent to commission basis?
14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of A. 25,300 C. 18,505
either the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 and B. 15,300 D. 21,000
13,000 pairs (units) of either product this year. Because the models are very similar, Ravine Ski will produce only one of the two
models. The information below was compiled by the accounting department. Sensitivity Analysis
Mountaineering Touring 18. If fixed costs increase while variable cost per unit remains constant, the contribution margin will be
Selling price per unit P880.00 P800.00 A. lower C. unchanged
Variable costs per unit P528.00 P528.00 B. higher D. unpredictable
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only P3,168,000 if the touring model is produced.
Ravine Ski is subject to a 40% income tax rate. 19. Firm D and Firm S are competitors within the same industry. Firm D produces its product using large amounts of direct labor. Firm S
The total sales revenue at which Ravine Ski Company would make the same profit or loss regardless of the ski model it decided to has replaced direct labor with investment in machinery. Projected sales for both firms are fifteen percent less than in the prior year.
produce is Which statement regarding projected profits is true?
A. P8,800,000 C. P9,240,000 A. Firm D will lose more profit than Firm S.
B. P4,224,000 D. P6,864,000 B. Firm S will lose more profit than Firm D.
C. Firm D and Firm S will lose the same amount of profit.
15. Valley of Fire Corporation has one department that produces three replacement parts for the company. However, only one part can be D. Neither Firm D nor Firm S will lose profit.
produced in any month because of the adjustments that must be made to the equipment. The department can produce up to 15,000 20. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. During the current month when the unit
units of any one of the three parts in each month. The company expresses the monthly after tax cost/volume/profit relationships for sales are expected to be only 45,000, there is a loss of P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant.
each part using an equation method. The format of the equations and the equation for each replacement part are given below: The fixed costs amounted to
(ATR) X ((SP – VC) x (U) – FC) A. P80,000 C. P247,500
ATR = after-tax rate VC = variable cost FC = fixed costs B. P360,000 D. P210,000
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their place of business to the downtown 26. A very high operating leverage indicates that a firm
area. Likewise it is anticipating that the selling price per unit and the variable expenses will not change. At present, the sales volume A. has high fixed costs
necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven would go B. has a high net income
up to P975,000. Based on these projections, what were the total fixed costs before the increase of P78,750? C. has high variable costs
A. P341,250 C. P183,750 D. is operating close to its breakeven point
B. P262,500 D. P300,000
27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a contribution margin of P1,000,000. Sales
22. Machan Co.’s year-end income statement is as follows: are expected to be P3,000,000 in 2002. Net income for 2002 can be expected to increase by what amount over 2001?
Sales (20,000 units) P360,000 A. P250,000 C. P500,000
Variable costs 220,000 B. 200 percent D. 40 percent
Contribution margin P140,000
Fixed costs 105,000 Situational
Net income P 35,000 Questions 28 thru 34 are based on the following information:
Management is unhappy with the results and plans to make some changes for next year. If management implements a new marketing Calamba Hospital operates a general hospital but rents space and beds to separate entities for specialized treatment such as pediatrics,
program, fixed costs are expected to increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to maternity, psychiatric, etc. Calamba charges each separate entity for common services to its patients like meals and laundry and for all
increase by 15 percent. What is the effect on income if the foregoing changes are implemented? administrative services such as billings, collections, etc. All uncollectible accounts are charged directly to the entity. Space and bed rentals
A. Decrease of P21,200 C. Increase of P13,800 are fixed for the year.
B. Increase of P1,800 D. Increase of P14,800 For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each patient an average of P65 per day, had a
capacity of 60 beds, operated 24 hours per day for 365 days, and had revenue of P1,138,800.
23. Candyman Company is a wholesale distributor of candy. The company services grocery, convenience, and drug stores in Metro Manila. Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Small but steady growth in sales has been achieved by the company over the past few years while candy prices have been increasing. Basis of Allocation
The company is formulating its plans for the coming fiscal year. Presented below are the data used to project the current year’s after-tax Patient Days Bed Capacity
net income of P110,400. Dietary P 42,952
Manufacturers of candy have announced that they will increase prices of their products an average of 15% in the coming year due to Janitorial P 12,800
increases in raw material (sugar, cocoa, peanuts, etc.) and labor costs. Candyman Company expects that all other costs will remain at Laundry 28,000
the same rates or levels as the current year. Candyman is subject to 40 percent tax rate. Lab, other than direct charges to patients 47,800
Average selling price P4.00 per box Pharmacy 33,800
Average variable costs Repairs and maintenance 5,200 7,140
Cost of candy P2.00 per box General administrative services 131,760
Selling expenses 0.40 per box Rent 275,320
Total P2.40 per box Billings and collections 40,000
Annual fixed costs Bad debt expense 47,000
Selling P169,000 Other 18,048 .
Administrative 280,000 P262,800 P453,000
Total P440,000
The only personnel directly employed by the Pediatrics Department are supervising nurses, nurses, and aides. The hospital has minimum
Expected annual sales volume (390,000 boxes) P1,560,000
personnel requirements based on total annual patient days. Hospital requirements beginning at the minimum, expected level of operation
If net income after taxes is to remain the same after the cost of candy increases but no increase in the sales price is made, how many
follow:
boxes of candy must Candyman sell?
A. 480,000 C. 27,600 Annual Patient Days Aides Nurses Supervising Nurses
B. 400,000 D. 29,300 10,000 – 14,000 21 11 4
14,001 – 17,000 22 12 4
Margin of Safety 17,001 – 23,725 22 13 4
24. Claremont Company had is a manufacturer of its only one product line. It had sales of P400,000 for 2002 with a contribution margin 23,726 – 25,550 25 14 5
ratio of 20 percent. Its margin of safety ratio was 10 percent. What are the company’s fixed costs? 25,551 – 27,375 26 14 5
A. P72,000 C. P288,000 27,376 – 29,200 29 16 6
B. P80,000 D. P320,000 The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics Department always employs only the
minimum number of required full-time equivalent personnel.
25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio of 25 percent, and after-tax return on Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000; and aides, P5,000. Salary expense for the
sales of 6 percent. The company assumes its sales constant every month. If the tax rate is 40 percent, how much is the monthly fixed year ended June 30 for supervising nurses, nurses, and aides was P72,000, P169,000, and P110,000, respectively.
costs? The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is estimated that during 90 of these capacity days,
A. P36,000 C. P432,000 the demand average 17 patients more than capacity and even went as high as 20 patients more on some days. The hospital has an additional
B. P90,000 D. P360,000 20 beds available for rent for the coming fiscal year.
Degree of Operating Leverage
May 2005 Page 3 of 17
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer
28. The variable expense per patient day is Note: The average pizza sells for P2.50.
A. P15.08 C. P15.00
B. P12.50 D. P50.00 35. What is the tax shield on the noncash fixed costs?
A. P3,200 C. P3,400
29. The contribution margin per patient day is B. P14,950 D. P5,400
A. P49.92 C. P50.00
B. P52.50 D. P52.00 36. What is the breakeven point in number of pizzas that must be sold?
A. 25,929 C. 18,150
30. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory nurses? B. 23,569 D. 42,114
A. 9,500 C. 12,500
B. 11,500 D. 10,500 37. What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529 C. 12,990
31. The number of patient days needed to cover total costs is B. 21,284 D. 10,773
A. 14,200 C. 15,820
B. 15,200 D. 14,220 VARIABLE COSTING VS. ABSORPTION COSTING
Absorption Costing
32. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as in the past year, what would be the 38. When a firm prepares financial reports by using absorption costing, it may find that
increase in revenue? A. profits will always increase with increase in sales.
A. P99,450 C. P105,450 B. profits will always decrease with decreases in sales.
B. P87,750 D. P89,750 C. profit may decrease with increased sales even if there is no change in selling price and costs.
D. decreased output and constant sales result in increased profit.
33. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied per patient day is
A. P22,935 C. P22,965 39. The Bush Company has provided information concerning its projections for the coming year as follows:
B. P22,950 D. P23,935 Net sales P10,000,000
Fixed manufacturing costs P 1,000,000
34. What is the increased fixed cost applied for bed capacity, given the increased number of beds? Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in inventory, what will the projected cost of goods
A. P151,000 C. P147,000 sold be?
B. P173,950 D. P152,000 A. P5,000,000 C. P7,000,000
B. P6,000,000 D. P8,000,000
Questions 35 thru 37 are based on the following information.
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 per month. Two women were hired to work 40. Colger Company manufactures a single product using standard costing. Variable production costs are P12 and fixed production costs
full time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. This level of employment has been are P125,000. Colger uses a normal activity of 12,500 units to set its standard costs. Colger began the year with 1,000 units in
consistent. An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays P300 per month. The inventory, produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under absorption costing would be
necessary restaurant equipment and delivery cars were purchased with cash. Ms. Casserole has noticed that expenses for utilities and A. P115,000 C. P242,000
supplies have been rather constant. Ms. Casserole increased her business between 1998 and 2001. Profits have more than doubled since B. P132,000 D. P253,000
1998. Ms. Casserole does not understand why profits have increased faster than volume.
A projected income statement for the year ended December 31, 2002, prepared by the accountant, is shown below: 41. The Trinkets Company estimated the following data for the coming year:
Fixed manufacturing costs P565,000
Sales P95,000 Variable production costs per peso of sales
Cost of food sold P28,500 Materials P0.125
Wages & fringe benefits: Direct labor 0.150
Restaurant help 8,150 Variable overhead 0.075
Delivery help 17,300 Variable selling costs per peso of sales 0.150
Rent 4,800 Trinkets estimates its sales for the coming year to be P2,000,000.
Accounting services 3,600 The expected cost of goods sold for the coming year is
Depreciation: A. P1,265,000 C. P1,115,000
Delivery equipment 5,000 B. P1,565,000 D. P 700,000
Restaurant equipment 3,000
Utilities 2,325 42. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is from the financial records of the
Supplies 1,200 73,875 company for the year.
Net income before taxes P21,125 Total manufacturing costs were P2,500,000.
Income taxes (40%) 8,450 Costs of goods of manufactured was P2,425,000.
Net income P12,675 Applied factory overhead was 30 percent of total manufacturing costs.
May 2005 Page 4 of 17
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer
Factory overhead was applied to production at a rate of 80% of direct labor cost. A. B. C. D.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31. Under Absorption Costing P3,750 P3,750 P7,500 P7,500
What are the amounts/value of the following cost elements and inventory? Under Variable Costing P 0 P7,500 P0 P0
Direct labor Direct materials Work-in-process inventory
A. P750,000 P750,000 P225,000 Absorption Costing Income vs. Variable Costing Income
B. P937,500 P812,500 P225,000 46. Simple Corp. produces a single product. The following cost structure applied to their first year of operations, 2000:
C. P937,500 P812,500 P300,000 Variable Costs per Unit Annual Fixed Costs
D. P750,000 P750,000 P300,000 SG&A P2.00 P14,000
Production 4.00 P20,000
43. Black Forest, Inc. began operations on January 3. Standard costs were established in early January assuming a normal Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process
production volume of 160,000 units. However, Black Forest produced only 140,000 units of product and sold 100,000 units at a selling price of inventory. How much larger or smaller would Simple Corp.’s income be if it uses absorption rather than variable costing?
P180 per unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and 40% were selling. Fixed costs A. The absorption costing income would be P6,000 larger
totaled P11,200,000, of which 50% were manufacturing and 50% were selling. Black Forest had no raw materials or work-in-process B. The absorption costing income would be P6,000 smaller
inventories at December 31. Actual input prices and quantities per unit of product were equal to standard. C. The absorption costing income would be P4,800 larger*
Using absorption costing, Black Forest’s income statement would show: D. The absorption costing income would be P4,000 smaller
Cost of Goods Sold at Standard Cost Overhead Volume Variance
A. P8,200,000 P800,000 Unf STANDARD COSTING & VARIANCE ANALYSIS
B. P7,200,000 P800,000 Fav Basic Concepts
C. P6,500,000 P700,000 Unf 47. Which of the following is a difference between a static budget and a flexible budget?
D. P7,000,000 P700,000 Fav A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
Absorption Costing & Variable Costing C. A flexible budget gives different allowances for different levels of activity, a static budget does not.
44. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products are as follows: D. There is no difference between the two.
Direct Materials P4.00
Direct labor 6.00 Setting Standards
Factory overhead 48. Which of the following statements about the selection of standards is true?
Variable 3.00 A. Ideal standards tend to extract higher performance levels since they give employees something to live up to.
Fixed (based on a normal capacity of 10,000 units) 2.00 B. Currently attainable standards may encourage operating inefficiencies.
Total 15.00 C. Currently attainable standards discourage employees from achieving their full performance potential.
D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus causing a decline in performance.
Beginning inventory 2,000 units
49. The per-unit standard cost for variable overhead is normally based on the
Production 8,000 units
A. standard quantity of an input factor used in a unit of product.
Units sold (selling price P50) 7,000 units
B. actual variable overhead cost incurred at the achieved level of production.
C. budgeted total cost for variable overhead divided by the number of units expected to be produced.
Actual costs:
D. ratio of fringe benefits to the basic cost of labor.
Direct materials P 35,000
Direct labor 50,000
50. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of 30,000 direct labor hours.
Variable overhead 23,000
Direct materials P800,000
Fixed 18,000
Direct labor 600,000
Variable selling and adm. 60,000
Variable manufacturing overhead 360,000
Fixed selling and adm. 35,000
Fixed manufacturing overhead 288,000
What is the total manufacturing overhead application rate if the Relevant Company has to operate at 80 percent of the stated capacity?
Variances are closed to cost of sales monthly
A. P24.00 C. P24.60
How much are the net income under absorption costing and variable costing methods?
B. P27.00 D. P21.60
A. B. C. D.
Absorption P144,000 P143,000 144,000 142,000 Raw Materials Variances
Variable 143,000 144,000 142,000 144,000 51. Derby Co. uses a standard costing system in connection with the manufacture of a line of T-shirts. Each unit of finished product
contains 2 yards of direct material. However, a 20 percent direct material spoilage calculated on input quantities occurs during the
45. Lord Industries manufactures a single product. Variable production costs are P10 and fixed production costs are P75,000. Lord uses a manufacturing process. The cost of the direct materials is P120 per yard.
normal activity of 10,000 units to set its standard costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 The standard direct material cost per unit of finished product is
units. The volume variance under each product costing are: A. P192 C. P288
79. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 4% C. increase by 30% PRODUCT PRICING
B. increase by 6% D. decrease by 50% 84. In a cost-based pricing system the markup should cover
I. Selling and administrative expenses
Residual Income II. Desired profit
80. Jar Division of Handy, Inc. expects the following result for 2004: III. Manufacturing cost
Unit sales 70,000 A. I, II, and III C. I and III only
Unit selling price P 10 B. I and II only D. II and III only
Unit variable cost P 4
Total fixed costs P300,000 RELEVANT COSTING
Total investment P500,000 Basic Concepts
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Jar’s 85. The potential benefit that may be obtained from following an alternative course of action is called
manager with an offer to buy 10,000 units at P7 each. If Jar accepts the order, it would not lose any of the 70,000 units at the regular A. opportunity benefit C. relevant cost
price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000. B. opportunity cost D. sunk cost
What is the minimum price that Jar could accept for the order and still maintain its expected residual income?
A. P5.00 C. P4.75 86.Opportunity costs:
B. P5.60 D. P9.00 A. Are treated as period costs under variable costing.
B. Have already been incurred as a result of past action.
Return on Investment & Residual Income C. Are benefits that could have been obtained by following another course of action.
81. Scotch Co. has the following results for the year: D. Do not vary among alternative courses of action.
Sales P740,000
Variable expenses 260,000 87. The Auto Division of Fly Insurance employs three claims processors capable of processing 5,000 claims each. The division currently
Fixed expenses 300,000 processes 12,000 claims. The manager has recently been approached by two sister divisions. Division A would like the auto division to
Total divisional assets average P1,000,000. The company’s minimum required rate of return is 14 percent. The residual income and process approximately 2,000 claims. Division B would like the auto division to process approximately 5,000 claims. The Auto Division
return on investment for Scotch are: would be compensated Division A or Division B for processing these claims. Assume that these are mutually exclusive alternatives.
A. B. C. D. Claims processor salary cost is relevant for
Residual Income P36,000 P40,000 P36,000 P40,000 A. division A alternative only
Return on Investment 36% 18% 18% 36% B. division B alternative only
82. The following information relates to two projects of Rica Corporation. C. both Division A and Division B alternatives
D. neither Division A nor Division B alternatives
Project A Project B
Operating income P2,500,000 P600,000 Sell as is or Process-Further
Residual income P 500,000 P200,000 88. Ottawa Corporation produces two products from a joint process. Information about the two joint products follows:
ROI 10% 12%
Product X Product Y
Return on residual investment 2% 4%
Anticipated production 2,000 lbs 4,000 lbs
A bonus of P50,000 will be paid to the manager whose project contributed most to the overall performance of the firm. The P50,000 Selling price per lb. at split-off P30 P16
bonus should go to the manager of Additional processing costs/lb after split-off (all variable) P15 P30
A. project A because the residual income is higher Selling price/lb after further processing P40 P50
B. project B because the return on investment is higher
C. project A because it was a larger, more complex project The cost of the joint process is P85,000.
D. project B because the return on residual investment is higher* Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which maximizes profit, Ottawa’s profit will increase
by
Transfer Pricing A. P16,000 C. P50,000
83. An appropriate transfer price between two divisions of the Star Corporation can be determined from the following data: B. P4,000 D. P10,000
Fabrication Division Obsolete Inventories
Market price of subassembly P50 89. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is P50. The company has
Variable cost of subassembly P20 unused production capacity and has determined that units could be finished and sold for P65 with an increase in variable costs of 40%.
Excess capacity (in units) 1,000 What is the additional net income per unit to be gained by finishing the unit?
Assembling Division A. P3 C. P15
Number of units needed 900 B. P10 D. P12
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. 50 is the only acceptable price
Profit Maximization 93. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased advertising is
90. Fe Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin A. B. C. D.
of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to XY-7 P160,000 P640,000 P 80,000 P 80,000
dedicate 80% of its machine time to the product that will provide the most income, Fe will have a total monthly contribution margin of BD-4 P320,000 P960,000 P960,000 P320,000
A. P250,000 C. P210,000 94. Suppose Brynles has only 100,000 machine hours that can be made available to produce additional units of XY-7 and BD-4. If
B. P240,000 D. P200,000 the potential increase in sales units for either product resulting from advertising is far in excess of this production capacity, which product
should be advertised and what is the estimated increase in contribution margin earned?
91. Geary Manufacturing has assembled the following data pertaining to two popular products. A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
Blender Electric mixer B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
Direct materials P 6 P11 C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
Direct labor 4 9 D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
Factory overhead @ P16 per hour 16 32
Cost if purchased from an outside supplier 20 38 Special Order
Annual demand (units) 20,000 28,000 95. An opportunity cost commonly associated with a special order is
Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. A. the contribution margin on lost sales
Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. B. the variable costs of the order
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal strategy, it should produce C. additional fixed related to the increased output
A. 25,000 electric mixers, and purchase all other units as needed D. any of the above
B. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed
C. 20,000 blenders and purchase all other units as needed 96. Jap Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are:
D. 28,000 electric mixers and purchase all other units as needed Manufacturing costs
Direct materials P39
92. ABC Electronics has the following standard costs and other data: Direct labor 6
Part Beta Part Zeta Variable overhead 8
Direct materials P 4.00 P80.00 Fixed overhead 9
Direct labor 10.00 47.00 Selling expenses
Factory overhead 40.00 20.00 Variable 30
Unit standard cost P54.00 P147.00 Fixed 11
Units needed per year 6,000 8,000 The company desires to seek an order for 5,000 units from a foreign customer. The variable selling expenses will be reduced by 40%,
Machine hours per unit 4 2 but the fixed costs for obtaining the order will be P20,000. Domestic sales will not be affected by the order.
Unit cost if purchased P50 P150.00 The minimum break-even price per unit to be considered on this special sale is
In past years, ABC has manufactured all of its required components; however, this year only 30,000 hours of otherwise idle machine A. P71 C. P69
time can be devoted to the production of components. Accordingly, some of the parts must be purchased from outside suppliers. In B. P75 D. P84
producing parts, factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will not be affected by any
make-or-buy decision represent 60% of the applied overhead. Make or Buy
The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum potential cost savings. The relevant unit 97. For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling
production costs that should be considered in the decision to schedule machine time are: equipment. As material costs have steadily increased, the controller of the Blue Company is reviewing the decision to continue to make
A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta the small motors and has identified the following facts:
B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta 1. The equipment used to manufacture the electric motors has a book value of P150,000.
2. The space now occupied by the electric motor manufacturing department could be used to eliminate the need for storage space
Questions 93 & 94 are based on the following information. now being rented.
Brynles Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied 3. Comparable units can be purchased from an outside supplier for P59.75.
at a rate of P1.00 per machine hour. 4. Four of the persons who work in the electric motor manufacturing department would be terminated and given eight weeks’
severance pay.
Per Unit XY-7 BD-4 5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing process.
Selling price P4.00 P3.00 Which of the items above are relevant to the decision that the controller has to make?
Variable manufacturing cost P2.00 P1.50 A. 1, 3, and 4 C. 2, 3, 4, and 5
Fixed manufacturing cost P0.75 P0.20 B. 2, 3, and 4 D. 1, 2, 4, and 5
Variable selling cost P1.00 P1.00
The sales manager has had a P160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable 98. Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of its product a year. The following
product. The products are not substitutes for one another in the eyes of the company’s customers. information pertains to the production costs at capacity:
The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4. Variable costs P 80,000
B. Discount Rate IRR additional sales revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales revenue and expenses from
C. IRR IRR the advertising program are projected to increase by 10 percent each year. Panama Insurance Company’s tax rate is 40 percent.
D. IRR Discount Rate The present value of 1 at 10 percent, end of each period:
Periods Present value Factory
Accounting Rate of Return 1 0.90909
108. Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the expectation that P40,000 per year could be 2 0.82645
saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no salvage value, 3 0.75131
and would be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12 percent. Present value of an 4 0.68301
annuity of 1 at 12 percent for 10 periods is 5.65. Present value of 1 due in 10 periods at 12 percent is 0.322. 5 0.62092
The average accrual accounting rate of return during the first year of asset’s use is The net present value of the advertising program would be
A. 20.0 percent C. 10.0 percent A. P37,064 C. P(37,064)
B. 10.5 percent D. 40.0 percent B. P29,136 D. P(29,136)
109. The Fields Company is planning to purchase a new machine which it will depreciate, for book purposes, on a straight-line basis over a 114. For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of five years with no salvage value. The
ten-year period with no salvage value and a full year’s depreciation taken in the year of acquisition. The new machine is expected to machine is expected to produce cash flow from operations, net of 40 percent income taxes, as follows:
produce cash flow from operations, net of income taxes, of P66,000 a year in each of the next ten years. The accounting (book value) First year P160,000
rate of return on the initial investment is expected to be 12%. How much will the new machine cost? Second year 140,000
A. P300,000 C. P660,000 Third year 180,000
B. P550,000 D. P792,000 Fourth year 120,000
Fifth year 100,000
110. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a five-year project at the beginning of the year. Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:
GMF estimates that the annual cash savings from this project will amount to P65,000. Tax and book depreciation on the project will be First year P150,000
P40,000 per year for five years. On investments of this type, GMF’s desired rate of return is 12%. Information on present value factors Second year 120,000
is as follows: Third year 90,000
At 12% At 14% At 16% Fourth year 60,000
Present value of P1 for 5 periods 0.57 0.52 0.48 Fifth year 30,000
Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3 The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 percent at end of each period are:
For the project’s first year, GMF’s accounting rate of return, based on the project’s average book value would be End of: Period 1 – 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552, Period 5 - 0.56743
A. 14.4% C. 12.5% Had Roxas used straight-line method of depreciation, what is the difference in net present value provided by the machine at a discount
B. 13.9% D. 12.0% rate of 12 percent?
A. Increase of P9,750 C. Decrease of P24,376
Payback Period B. Decrease of P9,750 D. Increase of P24,376
111. The payback method assumes that all cash inflows are reinvested to yield a return equal to
A. zero C. the Time-Adjusted-Rate-of-Return Profitability Index
B. the Discount Rate D. the Cost-of-Capital 115. A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are P20,505 on an investment of P50,000. the
profitability index for this project is
Bailout Period A. 1.367 C. 2.438
112. A project costing P1,800,000 is expected to produce the following annual cash flows (after tax) and salvage value: B. 3.333 D. 1.300
Year Net cash inflow Salvage value
Internal Rate of Return
1 500,000 800,000 116. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate of return is 10%. The present value of P1
2 500,000 600,000 at 10% for one year is .909, for years is .826, and for three years is .751. The cash flow, net of income taxes, will be P30,000 for the
3 600,000 500,000 first year (present value of P27,270) and P36,000 for the second year (present value of P29,736). Assuming the rate of return is exactly
4 800,000 400,000 10%, what will the cash flow, net of income taxes, be for the third year?
5 700,000 300,000 A. P17,268 C. P22,994
B. P22,000 D. P30, 618
What is the bailout period for the project?
A. 3.25 yrs. C. 2.73 yrs 117. Care Products Company is considering a new product that will sell for P100 and have a variable cost of P60. Expected volume is
B. 2.5 yrs D. 2.4 yrs. 20,000 units. New equipment costing P1,500 and having a five-year 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
Net Present Value 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
113. Panama Insurance Company’s management is considering an advertising program that would require an initial expenditure of P165,500 3.60478.
and bring in additional sales over the next five years. The cost of advertising is immediately recognized as expense. The projected
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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer
Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling price (rounded to nearest peso) needed to Project 1 Project 2 Project 3 Project 4
earn a 12 percent internal rate of return? Initial cash outlay P200,000 P298,000 P248,000 P272,000
A. P81.00 C. P70.00 Annual net cash inflows
B. P85.00 D. P90.00 Year 1 P 65,000 P100,000 P 80,000 P 95,000
Year 2 70,000 135,000 95,000 125,000
118. Payback Company is considering the purchase of a copier machine for P42,825. The copier machine will be expected to be Year 3 80,000 90,000 90,000 90,000
economically productive for 4 years. The salvage value at the end of 4 years is negligible. The machine is expected to provide 15 percent Year 4 40,000 65,000 80,000 60,000
internal rate of return. The company is subject to 40 percent income tax rate. Net present value ( 3,798) 4,276 14,064 14,662
The present value of an ordinary annuity of 1 for 4 periods is 2.85498. Profitability index 98% 101% 106% 105%
In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to be provided by the machine? Internal rate of return 11% 13% 14% 15%
A. P17,860 C. P25,000 Which project(s) should Investors, Inc. select during the upcoming year under each budgeted amount of funds?
B. P15,000 D. P35,700
No Budget Restriction P600,000Available Funds P300,000Available Funds
Equipment Replacement A. Projects 2,3, & 4 Projects 3 & 4 Project 3
119. A company is considering replacing a machine with one that will save P40,000 per year in cash operating costs and have P10,000 more B. Projects 1, 2, & 3 Projects 2, 3 & 4 Projects 3 & 4
depreciation expenses per year than the existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash C. Projects 1, 3, & 4 Projects 2 & 3 Project 2
flows of the company by D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
A. P28,000 C. P18,0000
B. P24,000 D. P6,000 Comprehensive
125. Which of the following combinations is possible?
120. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines. The new machine would cost Profitability Index NPV IRR
P90,000, have a five-year life, and no estimated salvage value. Variable operating costs would be P100,000 per year. The present A. greater than 1 positive equals cost of capital
machine has a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000, but it would be zero after five B. greater than 1 negative less than cost of capital
years. Variable operating costs would be P125,000 per year. Ignore present value calculations and income taxes. C. less than 1 negative less than cost of capital*
Considering the five years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed D. less than 1 positive less than cost of capital
to retaining the present one?
A. P10,000 decrease C. P35,000 increase MASTER BUDGET
B. P15,000 decrease D. P40,000 increase Basic Concepts
126. Zero-base budgeting requires managers to
Investment Decision A justify expenditures that are increases over the prior period’s budgeted amount.
121. The NPV and IRR methods give B. justify all expenditures, not just increases over last year’s amount.
A. the same decision (accept or reject) for any single investment C. maintain a full-year budget intact at all times.
B. the same choice from among mutually exclusive investments D. maintain a budget with zero increases over the prior period.
C. different rankings of projects with unequal lives
D. the same rankings of projects with different required investments Production Budget
127. Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a growth in sales of 5 percent per month.
122. In choosing from among mutually exclusive investments the manager should normally select the one with the highest The target ending inventory in units of the product is 80 percent of the next month’s estimated sales. There are 150,000 units in
A. NPV C. payback reciprocal inventory as of the end of September. The production requirement in units of Batik for the quarter ending December 31 would be
B. IRR D. book rate of return A. 670,560 C. 665,720
B. 691,525 D. 675,925
123. Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?
A. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash flows will be reinvested at Cash Budget
the internal rate of return. 128. The Mango Company is preparing its cash budget for the month of May. The following information is available concerning its accounts
B. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes a reinvestment rate payable:
equal to the internal rate of return.* Estimated credit sales for May P200,000
C. The IRR method does not assume reinvestment of the cash flows while the NPV assumes the reinvestment rate is equal to the Actual credit sales for April 150,000
discount rate. Estimated collections in May for credit sales in May 20%
D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method assumes a reinvestment Estimated collections in May for credit sales in April 70%
rate equal to the discount rate. Estimated collections in May for credit sales prior to April P12,000
Estimated write-offs in May for uncollectible credit sales 8.000
124. Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming Estimated provision for bad debts in May for credit sales in May 7,000
year: What are the estimated cash receipts from accounts receivable collections in May?
135. The following were reflected from the records of War Freak Company: Sensitivity Analysis
Earnings before interest and taxes P1,250,000 140. Annette Company uses the direct write-off method to account for uncollectible accounts receivable. If the company subsequently
Interest expense 250,000 collects an account receivable that was written off in a prior accounting period, the effect of the collection of the account receivable on
Preferred dividends 200,000 Annette’s current ratio and total working capital would be
Payout ratio 40 percent A. B. C. D.
Shares outstanding throughout 2003 Current Ratio None Increase Decrease None
Preferred 20,000 Working Capital None Increase Decrease Increase
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times 141. The days’ sales-in-receivable ratio will be understated if the company
The dividend yield ratio is A. uses a natural business year for its accounting period*
A. 0.50 C. 0.12 B. uses a calendar year for its accounting period
B. 0.40 D. 0.08 C. uses average receivable in the ratio calculation
D. has high sales at the end of the year
WORKING CAPITAL MANAGEMENT 149. Lipa company currently has annual sales of P2,000,000. Its average collection period is 40 days, and bad debts are 5 percent of sales.
Working Capital Policy The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent
142. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n) of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P250,000
A. increase in the ratio of current liabilities to noncurrent liabilities. annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12 percent. Assume a tax rate of 40 percent and
B. decrease in the operating cycle. 360 days per year.
C. decrease in the operating cycle. What would be the incremental investment in receivables if the change were made?
D. increase in the ratio of current assets to noncurrent liabilities.* A. P(16,667) C. P(48,611)
B. P(27,167) D. P(45,833)
143. Wen Company follows and aggressive financing policy in its working capital management while Manong Corporation follows a
conservative financing policy. Which one of the following statements is correct? Inventory Management
A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of short-term debt to total debt. 150. Which of the following items is irrelevant for a company that is attempting to minimize the cost of the stockout?
B. Wen has a low current ratio while Manong has a high current ratio A. Cost of placing an order C. Storage cost of inventory
C. Wen has less liquidity risk while Manong has more liquidity risk. B. Contribution margin on lost sales D. Size of the safety stock
D. Wen finances short-term assets with long-term debt while Manong finances short-term assets with short-term debt.
151. When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item
Cash Management A. decreased by the amount of the safety stock.
144. Gear Inc., has a total annual cash requirement of P14,700,000 which are to be paid uniformly. Gear has the opportunity to invest the B. is one-half the level of the safety stock.
money at 24% per annum. The company spends, on the average, P40 for every cash conversion to marketable securities. C. increases by one-half the amount of the safety stock.
What is the optimal cash conversion size? D. increases by the amount of the safety stock.
A. P60,000 C. P80,000
B. P62,500 D. P70,000 152. Gleim Company, which manufactures a line of appliances, has an annual demand for its HD washing machine estimated at 7,500 units.
The annual cost of carrying one unit of inventory is P200, and the cost to initiate a production run is P5,000.There are no HD washing
145. The Alabang Company has a daily average collection of checks of P250,000. It takes the company 4 days to convert the checks to machine on hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the coming year. Gleim has 250
cash. Assume a lockbox system could be employed which would reduce the cash conversion period to 3 days. The lockbox system business days per year. Assume that sales occur uniformly throughout the year and that production is instantaneous.
would have a net cost of P25,000 per year, but any additional funds made available could be invested to net 8 percent per year. Should If Gleim does not maintain a safety stock, the estimated total carrying costs and total set-up costs for the coming year are:
Alabang adopt the lockbox system? A. B. C. D.
A. Yes; the system would free P250,000 in funds Carrying costs P150,000 P300,000 P150,000 P300,000
B. Yes; the benefits of the lock-box system exceed the costs. Set-up costs P 25,000 P 25,000 P 5,000 P 5,000
C. No; the benefit is only P10,000.
D. No; the firm would lose P5,000 per year if the system were used. 153. The sales office of Hermit Company has developed the following probability distribution for daily sales of a perishable product.
Receivables Management X (Units Sold) P (Sales = X)
146. It is held that the level of accounts receivable that a firm has or holds reflects both the volume of a firm’s sales on account and a firm’s 200 0.2
credit policies. Which one of the following items is not considered as part of a firm’s “credit policy”? 250 0.5
A. The maximum risk group to which credit should be extended. 300 0.2
B. The extent (in terms of money) to which a firm will go to collect an account. 350 0.1
C. The length of time for which credit is extended. The product is restocked at the start of each day. If the company desires a 90% service level in satisfying sales demand, the initial stock
D. The size of the discount that will be offered. balance for each day should be
A. 245 C. 315
147. Relax Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. B. 300 D. 220
Relax estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection
period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to standards will result in an expected 154. Each stockout of a product sold by AFM Co. costs P1,750 per occurrence. The company’s carrying cost per unit of inventory is P5 per
increase in the average accounts receivable balance of year, and the company orders 1,500 units of product 20 times a year at a cost of P100 per order. The probability of a stockout at
A. P540,000 C. P900,000 various levels of safety stock are:
B. P2,700,000 D. P1,620,000 Units of Safety Stock Probability of Stockout
0 0.50
148. Matang-Lawin’s budgeted sales for the coming year are P48,000,000, of which 80% are expected to be credit sales at a terms of n/30. 100 0.30
Matang-Lawin estimates that a proposed relaxation of credit standards would increase credit sales by 30 percent and increase the 200 0.14
average collection period from 30 days to 45 days. Based on a 360-day year, the proposed relaxation of credit standards would result in 300 0.05
an expected increase in the accounts receivable balance of 400 0.01
A. P3,440,000 C. P3,040,000 The optimal safety stock level for the company based on the units of safety stock level above is
B. P1,440,000 D. P960,000
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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer
A. 0 units C. 300 units 162. Galvez Company expects next year’s after-tax income to be P7,500,000. The firm’s debt ratio is currently 40 percent. Galvez has
B. 100 units D. 400 units P6,000,000 of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend
policy, what is the expected dividend payout ratio next year?
Trade Credit A. 52.0 percent C. 48.0 percent
155. If a retailer’s term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of not taking the discount? Assume a 360- B. 75.0 percent D. 25.0 percent
day year.
A. 24.00% C. 24.74% 163. Glenda Company expects to generate P10 million internally which could be available for financing part of its P12 million capital budget
B. 37.11% D. 31.81% for this coming year. Glenda’s management believes that a debt-equity ratio of 40 percent is best for the firm. How much should be
paid in dividends if the target debt-equity ratio is to be maintained?
Short-term Loans A. P2,800,000 C. P8,571,429
156. Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per annum. The bank requires 10 percent of B. P1,428,571 D. P4,000,000
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 QUANTITATIVE METHODS
A. 28.21% C. 14.29% Probabilities
B. 27.27% D. 15.38% 164. Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that silver worth P15 million can be sold.
There is a 20% probability that the silver will only be worth P500,000. What is the maximum Express would be willing to spend to
157. The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate of 8%. In addition, Dean is required to develop the mine?
maintain a 20% compensating balance in its checking account. Assuming Dean would normally maintain a zero balance in its checking A. P10,000,000 C. P3,100,000
account, the effective interest rate on the loan is B. P 5,000,000 D. P0
A. 8.0% C. 11.11%
B. 10.0% D. 6.4% 165. CTV Company has three sales departments. Department FA processes about 50 percent of CTV’s sales, Department TA about 30
percent, and Department PA about 20 percent. In the past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent,
COST OF CAPITAL and 2.5 percent, respectively. A random audit of the sales records yields a recording error of sufficient magnitude to distort the
Cost of Debt company’s results. The probability that Department FA is responsible for this error is
158. The Maru Company’s bonds have 5 years remaining to maturity. Interest is paid annually; the bonds have a P1,000 face value; and the A. .50 C. .02
coupon interest rate is 9 percent. B. .33 D. .25
What is the estimated yield to maturity of the bonds at their current market price of P850?
A. 10.64 percent C. 11.76 percent 166. 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
B. 11.00 percent (?) D. 10.00 percent 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%.
Capital Asset Pricing Model The expected payoff for either selling coffee or soft drinks and the expected payoff if the vendor has perfect information are
159. Spec, Inc.’s stock is expected to generate a dividend and terminal value one year from now of P57.00. The stock has a beta of 1.3, the Coffee Soft drinks Perfect information
risk-free interest rate is 6 percent, and the expected return market return is 11 percent. What should the equilibrium price of Spec’s A. P1,360 P1,600 P3,000
stock in the market now? B. P1,960 P1,600 P2,200
A. P50.67 C. P53.77 C. P2,200 P1,900 P1,360
B. P51.35 D. P43.84 D. P3,900 P1,900 P1,960
Dividend Growth Model Linear Programming
160. Tiger Company’s stock is currently selling for P60 a share. The firm is expected to earn P5.40 per share and to pay a year-end dividend 167. Anderson Co. manufactures two different products, A and B. The company has 100 pounds of raw materials and 300 direct labor hours
of P3.60. available for production. The time requirement and contribution margins per unit are as follows:
If investors require a 9 percent return, what rate of growth must be expected for Tiger?
A. Zero growth C. 40.0 percent A B
B. 3.0 percent D. 50.0 percent Raw materials per unit (lbs) 1 2
Direct labor hours per unit 4 2
Dividend Policy Contribution margin per unit P4 P5
161. Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current capital structure is 40% debt and 60% The objective function for maximizing profits and the equation for the constrain on raw materials are:
common equity. The director of capital budgeting has determined that the optimal capital spending for next year is P1,200,000. If Resi Objective Function Constraint on raw materials
follows a strict residual dividend policy, what is the expected dividend payout ratio for next year? A. Max P1A + P2B 4A + 2B < 100
A. 80.0% C. 40.0% B. Max P4A + P5B 1A + 2B < 100
B. 66.7% D. 10.0% C. Max P4A + P2B 4A + 5B < 100
D. Min P4A + P5B 4A + 5B < 300
Answer Key
1. C 11. C 21. B 31. C 41. A
2. D 12. A 22. A 32. A 42. C
3. B 13. D 23. A 33. B 43. C
4. C 14. A 24. A 34. A 44. C
5. C 15. D 25. C 35. A 45. D
6. C 16. C 26. D 36. A 46. C
7. A 17. B 27. C 37. A 47. C
8. B 18. C 28. C 38. C 48. D
9. B 19. B 29. C 39. C 49. A
10. C 20. B 30. D 40. D 50. A