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UNIT 4 QUIZ 1. Question : The shadow price in a linear programming model is: Student Answer: Interesting from a mathematical standpoint, but not useful from an accounting standpoint. Equal to the current market price for an additional unit of the related resource. The price one would be willing to pay for an additional unit of the scarce resource. Greater than the market price for the related resource. Zero for a binding constraint.
Question 2. Question : Determination of the optimum short-term product mix needs to include an analysis of: Student Answer: Fully absorbed costs. Production constraints. Sales-mix costs.
Revenue forecasts. Joint manufacturing costs.
Question 3. Question : All the following are characteristic of relevant costs except: Student Answer: They are generally variable. They are not committed. They are different in amount for different options. They are costs that will be incurred in the future. They are inventory-related costs.
UNIT 4 QUIZ Question 4. Question : Which of the following statements regarding "opportunity costs" is TRUE? Student Answer: These costs are recorded routinely by cost accounting systems. These costs relate to the benefit lost or foregone when a chosen option (course of action) precludes the benefits from an alternative option. These costs are generally deductible for federal income tax purposes. In terms of most short-run decisions, they are irrelevant.
Question 5. Question : A useful device for solving production problems involving multiple products and limited resources is: Student Answer: Gross profit per unit of product. Contribution per unit of scarce resource. Value-stream costing. Relevant cost pricing. The contribution income statement. Question 6. Question : Relevant costs for a make-or-buy decision for a component part include all of the following EXCEPT: Student Answer: Fixed salaries that will not be incurred if the part is outsourced. Payroll tax (unemployment insurance cost), because of outsourcing. Material-handling costs that can be eliminated if the part is outsourced. Special machinery for the part that has no resale value. Current direct material costs for the part.
UNIT 4 QUIZ Question 7. Question : Which one of the following is an advantage of the book
(accounting) rate of return method for analyzing capital investment proposals? Student Answer: It is not affected by different accounting methods. It is precise and objective. Data for calculating the return are typically readily available. The method explicitly adjusts for the time value of money. The accounting rate of return is generally approximately equal to a project's internal rate of return (IRR).
Question 8. Question : Which one of the following statements concerning capital budgeting is not true? Student Answer: A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return. Capital budgeting is the process of identifying, evaluating, selecting, and controlling long-term investment projects. Capital budgeting is based on precise estimates of future events. Capital budgeting involves estimating the revenues and costs of each proposed project, evaluating their merits, and choosing those worthy of investment.
UNIT 4 QUIZ
Question 9. Question : The after-tax cost of debt for purposes of estimating a company's weighted-average cost of capital: Student Answer: Requires an estimate of the yield-to-maturity for long-term bonds. Is equal to the pretax cost of debt times t, where t = income tax rate. Is equal to the pretax cost of debt รท (1 - t), where t = income tax rate. Is approximated by the firm's short-term borrowing rate. Is estimated using the Capital Asset Pricing Model (CAPM).
Question 10. Question : Which one of the following is an advantage of the payback method? Student Answer: It provides a (rough) measure of risk. It is linearly related to the net present value (NPV) of a proposed project. It considers all possible future cash flows. It applies conventional discounting procedures to anticipated future cash flows. It allows managers to choose between competing projects with different useful lives.
UNIT 4 QUIZ Question 11. Question : When evaluating capital budgeting decision models, the payback period emphasizes: Student Answer: Liquidity. Profitability. Cost of capital. Average net income divided by average investment. Average after-tax cash inflow divided by average investment.
Question 12. Question : In a discounted cash flow (DCF) analysis, a required incremental investment in net working capital: Student Answer: Should be amortized over the useful life of the equipment. Can be disregarded because the same amount of cash will be recovered at the end of the project's life. Should be treated as a recurring cash outflow over the life of the project. Should be treated as a reduction in the required cash outflow in period 0. Should be treated as an immediate cash outflow that is later recovered when it is no longer needed.
UNIT 4 QUIZ Question 13. Question : Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. What is the present value payback period, rounded to one-tenth of a year? (Note: PV factors for 10% are as follows: year 1 = 0.909; year 2 = 0.826; year 3 = 0.751; year 4 = 0.683; year 5 = 0.621; the PV annuity factor for 10%, 5 years = 3.791.) Student Answer: 2.5 years. 3.0 years. 3.3 years. 3.6 years. 4.0 years.
Question 14. Question : A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $5,000 cash and be replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The net relevant cost of the replacing option is: Student Answer: $5,000. $20,000. $22,000. $25,000. UNIT 4 QUIZ
Question 15. Question : Carmino Company is considering an investment in equipment that will generate an after-tax income of $6,000 for each year of its four-year life. The asset has no salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at the beginning of each year will be as follows: Year 1 = $30,000 Year 2 = 15,000 Year 3 = 7,500 Year 4 = 3,750 The amount of after-tax cash inflow from the asset in Year 3 is:
Student Answer: $6,600. $7,500. $8,100. $9,000. $9,750.