PROBLEMS 1.

Jonlee Corporation reported sales of P 80,000 in 2006, P 96,000 in 2007 and P 112,000 in
2008. In an index analysis where 2007 is used as the base year, the respective sales percentages would
be B A. 80%; 96%; 112% B. 83%; 100%; 117% C. 80%; 100%; 120% D. 100%; 120%; 140% 2. Green
Company plans to purchase new equipment costing P 140,000 plus freight and installation costs
estimated at P 23,000. The purchase of the new equipment will prevent the company from having to
incur costs of P 30,000 to repair equipment now in service. Depreciation on the new equipment has
been estimated at P 20,000 each year. The income tax rate is 40%. The net investment in the new
equipment for capital investment planning is C A. P 173,000 B. P 153,000 C. P 145,000 D. P 131,000 3. If
the following data are estimated for next year, what unit sales would be needed to earn P 150,000 after
taxes? Forecast sales (P 30 per unit) P 600,000 Variable costs 240,000 Manufacturing fixed costs 90,000
Administrative fixed costs 120,000 Assumed tax rate 40% D A. 13,333 unitsB. 18,889 units C. 20,000
units D. 25,556 units 4. If the economy is facing demand-pull inflation, which of the following would be a
logical action by the government? A A. Increase income taxes B. Lower the discount rate C. Buy
government securities D. Increase government spending 5. A supplier extends a credit term of 2/10,
n/60 (EOM). The EOM (end-of-month) term has effectively extended credit period up to an average of
75 days from the last day of the discount period. Using a 365-day year, what is the nominal annual cost
of trade credit? C A. 11.45% B. 11.30% C. 9.93% D. 9.80% 6. Red Company established a standard cost
for raw materials at P 25.00 per unit. During the year, a total of 10,000 units were purchased of which
50% was at P 24.70 each, 20% was at P 24.90 each, and the balance, P 25.60 each. The raw materials
cost variance is A A. P 100 debit B. P 100 credit C. P 900 debit D. P 900 credit 7. On January 1, 2008,
Brown Company has a receivable balance of P 1 M. During 2008, it generated sales amounting to P 20
M, of which 60% is made on credit. 2008 receivable collections amounted to P 9,000,000. The accounts
receivable turnover is C A. 12.4 x B. 6.0 x C. 4.8 x D. 2.4 x 8. A careful study by a company’s cost analyst
has determined that if a truck is driven 120,000 miles during a year, the average operating cost is P 11.6
per mile. If a truck is driven only 80,000 miles, the average operating cost increases to P 13.6 per mile.
Using the high-low method, estimate the unit variable cost. A A. 7.6 B. 12.4 C. 12.6 D. 20,000 9. Pink
Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink can rent a
house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink can construct an on-
site office. Pink estimates that the construction of an on-site office would require materials costing P
1,500 (20 percent of which are salvageable upon dismantling) and labor costing P 1,000. Ignoring
interest and income tax effects, Pink will realize a net benefit by constructing its own on-site office of
Forbidden Kingdom project only if the length of the project is estimated to be at least: C A. 18 months B.
20 months C. 22 months D. 25 months 10. Assuming P 20,000 net annual cash inflows from a 4-year P
59,120-capital investment project, the break-even rate of return (IRR) for the project is closest to C A.
11.1% B. 12.2% C. 13.3% D. 14.4% 11. Assuming a current ratio of 3.5 and a quick ratio of 1.4, determine
the amount inventory of a company whose current liabilities are P 120,000 and long-term liabilities P
480,000. ANSWER: P 252,000 12. Blue, Inc. uses a learning curve of 80% for all new products it develops.
A trial run of 500 units of a new product shows total labor-related costs (direct, indirect labor, and fringe
benefits) of P 120,000. Management plans to produce 1,500 units of the new product during the next
year.Determine the unit cost of production for next year for labor-related costs. Round-off answer to
the nearest whole amount. ANSWER: P 125 13. Return on equity is 20%. Return on investment is 5%.
Determine the debt-equity ratio. ANSWER: 3x or 3:1 or 300% 14. Purchases = 80% of cost of sales; Fixed
overhead is, on the average, 20% of inventory cost. If cost of goods sold is P 250,000, then how much is
the difference in income reported under absorption costing and variable costing? ANSWER: P 10,000 15.
Yellow Corporation’s estimated its after-tax cost of capital is 7.8%. It has the following capital structure:
Common stock 50% Preferred stock 20% Long-term debt 30% Assuming the company’s cost of common
equity is 10%, the cost of preferred equity is 8%, and the firm’s tax rate is 40%, what is the pre-tax cost
of long-term debt? Round-off answer to two decimal places. (2 minutes) ANSWER: 6.67% 16. 10% is the
profit margin when sales level last year reached P 100,000. If the operating leverage last year was 4
times, then what would have been the variable costs last year to break-even? ANSWER: P 45,000 17. If
the annual percentage rate of interest is 10 percent compounded quarterly and payments are to be
made quarterly, then how many percent is the effective annual rate? (Round-off answer to two decimal
places) ANSWER: 10.38% 18. Plowback ratio is 40% while dividend yield is 20%. If earnings per share is P
20, then how much would be the initial public offering per share? ANSWER: P 60 19. Black
Merchandising has an optimal order quantity of 2,000 units. Black’s customers demand 50,000 units
each year. Transaction cost incurred is P 12 per order. If Black also maintains a safety stock of 100 units,
then how much is the total annual carrying costs? ANSWER: P 330.00 20. Net profit ratio ÷ contribution
margin ratio = __________ ANSWER: Margin of safety ratio (or safety margin percentage) PROBLE 21-24
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 yearDuring 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. 21. 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. ANS: A DM + DL + VFOH + FFOH = Standard Cost per Unit $3.00 + $2.50 + $1.80 +
$4.00 = $11.30 22. Refer to Langley Corporation. The volume variance under absorption costing is a.
$8,000 F. b. $4,000 F. c. $4,000 U. d. $8,000 U. ANS: B 1,000 favorable units production variance * $4.00
fixed factory overhead = $4,000 F 23. 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. ANS: B DM + DL
+ VOH = Standard Production Cost per Unit $3.00 + $2.50 + $1.80 = $7.30 24. 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. ANS: C Sales: $1,200,000 Variable Expenses 362,400 Contribution
Margin $ 837,600 Fixed Expenses Overhead $ 200,000 75,000 Net Income $ 562,600 =========
Problem 25-26 Smithson CompanySmithson Company produces two products (A and B). Direct material
and labor costs for Product A total $35 (which reflects 4 direct labor hours); direct material and labor
costs for Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functions are
needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour of Function 2 at
$7 per hour, and 6 hours of Function 3 at $18 per hour. Product B uses 1, 8, and 1 hours of Functions 1,
2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each period. 25.Refer to
Smithson Company If total overhead is assigned to A and B on the basis of overhead activity hours used,
the total product cost per unit assigned to Product A will be a. $86.32. b. $95.00. c. $115.50. d. None of
the responses are correct. ANS: C Total OH Proportion Allocated OH Units Produced OH per Unit DM and
DL/Unit Total $ 780,000 0.08256880 7 $ 64,403.67 800 $ 80.50 $ 35.00 $ 115.50 (7,200/87,2 00) 26.
Refer to Smithson Company If total overhead is assigned to A and B on the basis of overhead activity
hours used, the total product cost per unit assigned to Product B will be a. $115.50. b. $73.32. c. $34.60.
d. None of the responses are correct. ANS: D Total OH Proportion Allocated OH Units Produced OH per
Unit DM and DL/Unit Total $ 780,000 0.917431193 $ 715,596.33 8000 $ 89.44 $ 22.00 $ 111.44
(80,000/87,2 00) 27. A firm estimates that it will sell 100,000 units of its sole product in the coming
period. It projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000.
What is the firm budgeting for fixed costs in the coming period? a. $1,600,000 b. $2,400,000 c.
$1,100,000 d. $1,900,000 ANS: D Profit + Fixed Cost = (100,000 units * $60/unit CM) Fixed Cost =
(100,000 units * $24/unit CM) - Profit = $2,400,000 - $500,000 = $1,900,00028. Sombrero Company
manufactures a western-style hat that sells for $10 per unit. This is its sole product and it has projected
the break-even point at 50,000 units in the coming period. If fixed costs are projected at $100,000, what
is the projected contribution margin ratio? a. 80 percent b. 20 percent c. 40 percent d. 60 percent ANS:
B Fixed Costs=Contribution Margin at Breakeven Point = $100,000 Breakeven Sales: $500,000 CM Ratio:
$(100,000/500,000) = 20% 29. The following information pertains to Saturn Company’s cost-volume-
profit relationships: Break-even point in units sold 1,000 Variable costs per unit $500 Total fixed costs
$150,000 How much will be contributed to profit before taxes by the 1,001st unit sold? a. $650 b. $500
c. $150 d. $0 ANS: C Fixed Cost = Contribution Margin = $150,000 Contribution Margin/Unit =
Contribution Margin/Units $150,000/1,000 units = $150/unit 30. Ledbetter Company reported the
following results from sales of 5,000 units of Product A for June: Sales $200,000 Variable costs (120,000)
Fixed costs (60,000) Operating income $ 20,000 Assume that Ledbetter increases the selling price of
Product A by 10 percent in July. How many units of Product A would have to be sold in July to generate
an operating income of $20,000? a. 4,000 b. 4,300 c. 4,545 d. 5,000 ANS: A If sales price per unit is
increased by 10 percent, less units will have to be sold to generate gross revenues of $200,000. Sales
price per unit = $200,000/5,000 units = $40/unit $40/unit * 1.10 = $44/unit $(200,000 / 44/unit) = 4,545
units31.Knox Company uses 10,000 units of a part in its production process. The costs to make a part
are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30.
Knox has received a quote of $55 from a potential supplier for this part. If Knox buys the part, 70
percent of the applied fixed overhead would continue. Knox Company would be better off by a. $50,000
to manufacture the part. b. $150,000 to buy the part. c. $40,000 to buy the part. d. $160,000 to
manufacture the part. ANS: C Cost to make: $55/unit * 10,000 units = $550,000 Cost to manufacture:
$(12+25+13+9)= $59/unit Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000
32.Unique Company manufactures a single product. In the prior year, the company had sales of $90,000,
variable costs of $50,000, and fixed costs of $30,000. Unique expects its cost structure and sales price
per unit to remain the same in the current year, however total sales are expected to increase by 20
percent. If the current year projections are realized, net income should exceed the prior year’s net
income by: a. 100 percent. b. 80 percent. c. 20 percent. d. 50 percent. ANS: B Contribution margin:
$40,000 Net profit: $(40,000 - 30,000) = $10,000 20% CM increase: $40,000 * 1.20 = $48,000 Net profit:
$(48,000 - 30,000) = $18,000 Increase in profit $8,000 $8,000/$10,000 = 80% 33.Paulson Company has
only 25,000 hours of machine time each month to manufacture its two products. Product X has a
contribution margin of $50, and Product Y has a contribution margin of $64. Product X requires 5 hours
of machine time, and Product Y requires 8 hours of machine time. If Paulson Company wants to dedicate
80 percent of its machine time to the product that will provide the most income, the company will have
a total contribution margin of a. $250,000. b. $240,000. c. $210,000. d. $200,000. ANS: B Assume 80% of
capacity applied to Product X X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,00 0 Y: 5,000
hrs/8 hrs per unit 625 units * $64 CM/unit 40,000 Total $240,00 0===== = 34.Doyle Company has 3
divisions: R, S, and T. Division R's income statement shows the following for the year ended December
31: Sales $1,000,000 Cost of goods sold (800,000) Gross profit $ 200,000 Selling expenses $100,000
Administrative expenses 250,000 (350,000) Net loss $ (150,000) Cost of goods sold is 75 percent variable
and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the
selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the
administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated,
Doyle’s income would a. increase by $150,000. b. decrease by $ 75,000. c. decrease by $155,000. d.
decrease by $215,000. ANS: C Sales foregone $(1,000,000) COGS avoided Variable $600,000 Fixed
120,000 720,000 Selling Expense Avoided 100,000 Administrative Expense Avoided 25,000 Decrease in
income $( 155,000) ========= 35. Thomas Company is currently operating at a loss of $15,000. The
sales manager has received a special order for 5,000 units of product, which normally sells for $35 per
unit. Costs associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3;
applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a
slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses
would be decreased by $1. If Thomas wants this special order to increase the total net income for the
firm to $10,000, what sales price must be quoted for each of the 5,000 units? a. $23.50 b. $24.50 c.
$27.50 d. $34.00 ANS: A In order to increase income to $10,000, there must be an increase of $25,000 or
$5 per unit. Direct materials $ 4.50 Direct Labor 10.00 Variable Overhead 3.00 Variable Selling Exp 1.00
Production Costs $18.50 Additional profit per unit 5.00Sales price/unit $23.50 ===== 36.Glamorous
Grooming Corporation makes and sells brushes and combs. It can sell all of either product it can make.
The following data are pertinent to each respective product: Brushes Combs Units of output per
machine hour 8 20 Selling price per unit $12.00 $4.00 Product cost per unit Direct material $1.00 $1.20
Direct labor 2.00 0.10 Variable overhead 0.50 0.05 Total fixed overhead is $380,000. The company has
40,000 machine hours available for production. What sales mix will maximize profits? a. 320,000
brushes and 0 combs b. 0 brushes and 800,000 combs c. 160,000 brushes and 600,000 combs d. 252,630
brushes and 252,630 combs ANS: A Brushes have a contribution margin of $8.50 per unit; combs have a
contribution margin of $2.65 per unit. The combination of 320,000 brushes and 0 combs provides a net
profit of $340,000. 37. Houston Footwear Corporation has been asked to submit a bid on supplying
1,000 pairs of military combat boots to the Armed Forces. The company's costs per pair of boots are as
follows: Direct material $8 Direct labor 6 Variable overhead 3 Variable selling cost (commission) 3 Fixed
overhead (allocated) 2 Fixed selling and administrative cost 1 Assuming that there would be no
commission on this potential sale, the lowest price the firm can bid is some price greater than a. $23. b.
$20. c. $17. d. $14. ANS: C The lowest price would have to be greater than the sum of all variable
manufacturing costs. Variable manufacturing costs total $17; therefore the price would have to be
greater than $17 per pair. Richmond Steel CorporationThe capital budgeting committee of the Richmond
Steel Corporation is evaluating the possibility of replacing its old pipe-bending machine with a more
advanced model. Information on the existing machine and the new model follows: Existing machine
New machine Original cost $200,000 $400,000 Market value now 80,000 Market value in year 5 0
20,000 Annual cash operating costs 40,000 10,000 Remaining life 5 yrs. 5 yrs. 38. Refer to Richmond
Steel Corporation. The major opportunity cost associated with the continued use of the existing machine
is a. $30,000 of annual savings in operating costs. b. $20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing machine. d. $400,000 cost of the new machine. ANS: A
39. Datasoft Industries is considering the purchase of a $100,000 machine that is expected to result in a
decrease of $15,000 per year in cash expenses. This machine, which has no residual value, has an
estimated useful life of 10 years and will be depreciated on a straight-line basis. For this machine, the
accounting rate of return would be a. 10 percent. b. 15 percent. c. 30 percent. d. 35 percent. ANS: C
$15,000/($100,000/2) = 30% 40. An investment project is expected to yield $10,000 in annual revenues,
has $2,000 in fixed costs per year, and requires an initial investment of $5,000. Given a cost of goods
sold of 60 percent of sales, what is the payback period in years? a. 2.50 b. 5.00 c. 2.00 d. 1.25 ANS: A Net
cash flow = $10,000 - $6,000 - $2,000 Net cash flow = $2,000 $5,000/$2,000 = 2.50 years Webber
Corporation is considering an investment in a labor-saving machine. Information on this machine
follows: Cost $30,000 Salvage value in five years $0 Estimated life 5 years Annual depreciation $6,000
Annual reduction in existing costs $8,000 41. Refer to Webber Corporation. What is the internal rate of
return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are
required. a. 37.5% b. 25.0% c. 10.5%d. 13.5% ANS: C IRR = $30,000 / $8,000 = 3.75 Using PV of Annuity
Table 5 years. The constant of 3.75 corresponds to a rate of 10.5% Rhodes Corporation Rhodes
Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The
system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage
value, and is expected to generate annual cost savings of $250,000. Based on Rhodes Corporation's
analysis, the project has a net present value of $57,625. 42. Refer to Rhodes Corporation. What discount
rate did the company use to compute the net present value? Present value tables or a financial
calculator are required. a. 10% b. 11% c. 12% d. 13% ANS: B NPV = $ 57,625 Initial Cost = $1,000,000 PV
of Cash Inflows = $1,057,625 Annual Cost Savings =$ 250,000 $1,057,625/$250,000 = 4.2305 PV of
Annuity Constant At 6 years, the constant corresponds to a discount rate of 11%. DIF: Moderate OBJ: 14-
3 43. Refer to Rhodes Corporation. What is the project's profitability index? a. 1.058 b. .058 c. .945 d.
1.000 ANS: A PI = $1,057,625/1,000,000 = 1.058 DIF: Moderate OBJ: 14-3 44. Refer to Rhodes
Corporation. What is the project's internal rate of return? Present value tables or a financial calculator
are required. a. between 12.5 and 13.0 percent b. between 11.0 and 11.5 percent c. between 11.5 and
12.0 percent d. between 13.0 and 13.5 percent ANS: A $1,000,000/$250,000 = 4.000 Using the Present
Value of Annuity Table for 6 years, the rate falls between 12.5% and 13% 45.Budgeted sales for the first
six months for Porter Corp. are listed below: JANUARY FEBRUARY MARCH APRIL MAY JUNEUNITS: 6,000
7,000 8,000 7,000 5,000 4,000 Porter Corp. has a policy of maintaining an inventory of finished goods
equal to 40 percent of the next month's budgeted sales. If Porter Corp. plans to produce 6,000 units in
June, what are budgeted sales for July? a. 3,600 units b. 1,000 units c. 9,000 units d. 8,000 units ANS: C
Beginning Inventory for June 1,600 units (4,000 * 40%) Produced in June 6,000 units Deduct: June sales
(4,000) units Ending inventory for June 3,600 units 3,600/0.40 = 9,000 units 46.Budgeted sales for Knox
Inc. for the first quarter the year are shown below: JANUARY FEBRUARY MARCH UNITS: 35,000 25,000
32,000 The company has a policy that requires the ending inventory in each period to be 10 percent of
the following period's sales. Assuming that the company follows this policy, what quantity of production
should be scheduled for February? a. 24,300 units b. 24,700 units c. 25,000 units d. 25,700 units ANS: D
Ending Inventory, February 3,200 units February Sales 25,000 units Requirements for Month 28,200
units Less Beginning Inventory, February (2,500) units Production scheduled for February 25,700 units
47.Production of Product X has been budgeted at 200,000 units for May. One unit of X requires 2 lbs. of
raw material. The projected beginning and ending materials inventory for May are: Beginning inventory:
2,000 lbs. Ending inventory: 10,000 lbs. How many lbs. of material should be purchased during May? a.
192,000 b. 208,000 c. 408,000 d. 416,000 ANS: C Ending inventory--May 10,000 lbs. Production needs:
200,000 units * 2 lbs/unit 400,000 lbs. Inventory needed 410,000 lbs. Beginning inventory--May (2,000)
lbs. Total purchase requirements 408,000 lbs.48.Edwards Company has the following expected pattern
of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after
the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent
is never collected. At the end of May, Edwards Company has the following accounts receivable balances:
From April sales $21,000 From May sales 48,000 Edwards expected sales for June are $150,000. How
much cash will Edwards Company expect to collect in June? a. $127,400 b. $129,000 c. $148,600 d.
$152,520 ANS: C June sales ($150,000 * 70%) $105,000 May sales (160,000 * 15%) 24,000 April sales
(140,000 * 14%) 19,600 Total cash collections-- June $148,60