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Exam 25: Capital Budgeting and Managerial Decisions

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Question 31

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If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y; assuming fixed costs remain constant, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

A) True
B) False

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Question 32

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The time expected to pass before the net cash flows from an investment would return its initial cost is called the:

A) Amortization period.
B) Payback period.
C) Interest period.
D) Budgeting period.
E) Discounted cash flow period.

F) C) and D)
G) B) and C)

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Question 33

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Marcus processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Which product(s) should not be processed further?

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

An ________________________ requires a future outlay of cash and is relevant for current and future decision making.

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

An additional cost incurred only if a particular action is taken is a(n) :

Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment?

A cost that requires a current and/or future outlay of cash, and is usually an incremental cost, is a(n) :

Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 30,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company?

Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

Trescott Company had the following results of operations for the past year: A foreign company (whose sales will not affect Trescott's market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Trescott accepts the offer, its profits will:

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1) , $30,000 (year 2) , $18,000 (year 3) , $12,000 (year 4) and $6,000 (year 5) . The payback period is:

Another name for relevant cost is unavoidable cost.

An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

Relevant costs are also known as __________________.

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n) :

An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

Fields Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.