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Exam 25: Capital Budgeting and Managerial Decisions

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Question 71

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Chang Industries has 2,000 defective units of product that have already cost $14 each to produce.A salvage company will purchase the defective units as they are for $5 each.Chang's production manager reports that the defects can be corrected for $6 per unit,enabling them to be sold at their regular market price of $21.The incremental income or loss on reworking the units is:

A) $20,000 loss.
B) $20,000 income.
C) $12,000 loss.
D) $32,000 income.
E) $30,000 incomE.

F) A) and E)
G) C) and E)

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Question 72

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Lattimer Company had the following results of operations for the past year: A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit.In addition to existing costs,selling these units would add a $0.25 selling cost for export fees.If Lattimer accepts this additional business,the special order will yield a:

A) $2,000 loss.
B) $8,250 loss.
C) $3,750 profit.
D) $3,250 loss.
E) $5,000 profit.

F) A) and B)
G) A) and C)

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Question 73

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How does the calculation of break-even time (BET)differ from the calculation of payback period (PBP)?

A company inadvertently produced 3,000 defective products.The product cost $15 each to be manufactured and normally sells for $35 each.A salvage company will purchase the defective units as they are for $13 each.The production manager reports that the defects can be corrected for $5 per unit,enabling the company to sell them at a discounted price of $22.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

Maxim manufactures a hamster food product called Green Health.Maxim currently has 10,000 bags of Green Health on hand.The variable production costs per bag are $1.80 and total fixed costs are $10,000.The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost.The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe,which can be sold for $8 and $6 per bag,respectively.The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

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

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

If the straight-line depreciation method is used,the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Vextra Corporation is considering the purchase of new equipment costing $35,000.The projected annual cash inflow is $11,000,to be received at the end of each year.The machine has a useful life of 4 years and no salvage value.Vextra requires a 12% return on its investments.The present value of an annuity of $1 for different periods follows: What is the net present value of the machine (rounded to the nearest whole dollar) ?

The following data concerns a proposed equipment purchase: Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:

The expected amount of time to recover the initial amount of an investment is called the:

Nestor Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.Compute the break-even time (BET) period for this investment.(Round to two decimal places. )

Porter Co.is analyzing two projects for the future.Assume that only one project can be selected. The payback period in years for Project X is:

Relevant costs are also known as ___________________.

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

Wheeler Company can produce a product that incurs the following costs per unit: direct materials,$10;direct labor,$24,and overhead,$16.An outside supplier has offered to sell the product to Axle for $45.If Wheeler buys from the supplier,it will still incur 45% of its overhead cost.Compute the net incremental cost or savings of buying.

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n) :

Poe Company is considering the purchase of new equipment costing $80,000.The projected net cash flows are $35,000 for the first two years and $30,000 for years three and four.The revenue is to be received at the end of each year.The machine has a useful life of 4 years and no salvage value.Poe requires a 10% return on its investments.The present value of an annuity of 1 and present value of an annuity for different periods is presented below.Compute the net present value of the machine.

Benjamin Company had the following results of operations for the past year: A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Benjamin accepts the offer,its profits will:

A company is considering the purchase of new equipment for $42,000.The projected annual cash inflow is $18,000.The machine has a useful life of 3 years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of $1 for various periods follows: What is the net present value of this machine assuming all cash flows occur at year-end?