### Quiz 2 Ac505

0 Comment

AC505 Practice Quiz #2 Student: ____________________________________________________________ _______________ 1. Return on investment (ROI) can be decomposed into the asset turnover and the A. gross margin ratio. B. profit margin ratio. C. operating margin ratio. D. contribution margin ratio. 2. How will decreases in the following items affect return on investment (ROI)? A. a B. b C. c D. d 3. The CJP Company produces 10,000 units of item S10 annually at a total cost of \$190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for \$18 per unit.

If CJP accepts the offer, \$4 per unit of the fixed overhead would be saved. In addition, some of CJP’s facilities could be rented to a third party for \$15,000 per year. What are the relevant costs for the “make” alternative? A. \$160,000 B. \$165,000 C. \$175,000 D. \$185,000 4. The following information is available about the Winter Division of Washburn Company. Washburn requires a return of 9% from all divisions. Required: [Take all calculations to 4 decimal places] a. Compute the ROI for the Winter Division. b. Compute the residual income for the Winter Division. 5.

We Will Write a Custom Essay Specifically
For You For Only \$13.90/page!

order now

Bayside Wholesaling has the following data for its three divisions for the year: Required: a. Compute divisional operating income for each of the divisions. Assume taxes are 30%. b. Calculate the gross margin ratio for each division. c. Calculate the operating margin ratio for each division. d. Calculate the profit margin ratio for each division. 6. The XYZ Manufacturing Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows: Corporate headquarters is offering an investment opportunity to each of the divisions.

The opportunity will yield an operating income of \$35,000, based on an average operating investment of \$246,000. Required: a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations. b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations. 7. The Pierce Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for \$62 per unit. A distributor has offered to buy 1,000 units at a price of \$50 per unit. This special order would not disturb regular sales. Required: a. Calculate Pierce’s change in operating profits if the special order is accepted. b. How many units of regular sales could be lost before this contract is not profitable? 8. Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for \$3. 40.

If Bruce purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for \$20,000. a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income would be b. What is the maximum price Bruce would be willing to pay the outside supplier? 9. Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows: a. Assume that the fixed manufacturing overhead reflects the cost of Tofte’s manufacturing facility. This facility cannot be used for any other purpose.

An outside supplier has offered to sell the component to Tofte for \$34. If Tofte Industries purchases the component from the outside supplier, the effect on income would be a b. Assume Tofte Industries could avoid \$80,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for \$34. If Tofte purchases the component from the supplier instead of manufacturing it, the effect on income would be a AC505 Practice Quiz #2 Key 1. Return on investment (ROI) can be decomposed into the asset turnover and the A. ross margin ratio. B. profit margin ratio. C. operating margin ratio. D. contribution margin ratio. Asset turnover ? profit margin ratio = ROI AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Comprehension Difficulty: Easy Lanen – Chapter 14 #25 Learning Objective: 2 Topic Area: Return on Investment 2. How will decreases in the following items affect return on investment (ROI)? A. a B. b C. c D. d Decreasing sales decreases income (the numerator) which will decrease ROI. Decreasing equipment will decrease assets (the denominator) which will increase ROI. AACSB: Analytic AICPA: FN-Decision Making

Bloom’s: Application Difficulty: Medium Lanen – Chapter 14 #29 Learning Objective: 2 Topic Area: Return on Investment 3. The CJP Company produces 10,000 units of item S10 annually at a total cost of \$190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for \$18 per unit. If CJP accepts the offer, \$4 per unit of the fixed overhead would be saved. In addition, some of CJP’s facilities could be rented to a third party for \$15,000 per year. What are the relevant costs for the “make” alternative? A. \$160,000 B. \$165,000 C. \$175,000 D. \$185,000 \$20,000 + 55,000 + 45,000 + (4 ? 0,000) + 15,000 = \$175,000 AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Application Difficulty: Medium Lanen – Chapter 04 #36 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 4. The following information is available about the Winter Division of Washburn Company. Washburn requires a return of 9% from all divisions. Required: [Take all calculations to 4 decimal places] a. Compute the ROI for the Winter Division. b. Compute the residual income for the Winter Division. a. 10. 63% b. \$2,829,000 Feedback: a. ROI = \$18,462,000/\$173,700,000 = 10. 63% b. \$18,462,000 – (9% ? 73,700,000) = \$2,829,000 AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Medium Lanen – Chapter 14 #86 Learning Objective: 2 Learning Objective: 3 Topic Area: Return on Investment, Residual Income Measures 5. Bayside Wholesaling has the following data for its three divisions for the year: Required: a. Compute divisional operating income for each of the divisions. Assume taxes are 30%. b. Calculate the gross margin ratio for each division. c. Calculate the operating margin ratio for each division. d. Calculate the profit margin ratio for each division. a.

SB \$140,000; TH: \$400,400; GM: \$63,000 b. SB:35. 88%; TH: 50%; GM: 50% c. SB:16. 67%; TH: 15. 05%; GM: 3. 21% d. SB:11. 67%; TH: 10. 54%; GM: 2. 25% Feedback: b. SB: \$430,500/1,200,000 = 35. 88%; TH: \$1,900,000/3,800,000 = 50%; GM: \$1,400,000/2,800,000 = 50% c. SB: \$200,000/1,200,000 = 16. 67%; TH: \$572,000/3,800,000 = 15. 05%; GM: \$90,000/2,800,000 = 3. 21% d. SB: \$140,000/1,200,000 = 11. 67%; TH: \$400,400/3,800,000 = 10. 54%; GM: \$63,000/2,800,000 = 2. 25% AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Medium Lanen – Chapter 14 #94 Learning Objective: 1

Topic Area: Accounting Income 6. The XYZ Manufacturing Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows: Corporate headquarters is offering an investment opportunity to each of the divisions. The opportunity will yield an operating income of \$35,000, based on an average operating investment of \$246,000. Required: a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity?

Support your answer with the appropriate calculations. b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations. a. X: reject; Y: reject; Z: accept b. A: accept; Y: accept; Z: reject Feedback: a. ROI for new investment = \$35,000/246,000 = 14. 23% Operating income X: \$1,640,000 ? .115 = \$188,600 Y: \$1,445,000 ? .080 = \$115,600 Z: \$1,040,000 ? .050 = \$52,000 Divisional ROI’s X: \$188,600/820,000 = 23. 0% (reject) Y: \$115,600/680,000 = 17. 0% (reject)

Z: \$66,000/400,000 = 16. 5% (reject) b. Divisional cost of capital X: \$188,600 – (cost of capital ? \$820,000) = \$98,400; Cost of capital = 11. 0% Y: \$115,600 – (cost of capital ? \$680,000) = \$27,200; Cost of capital = 13. 0% Z: \$66,000 – (cost of capital ? \$400,000) = \$2,000; Cost of capital = 16. 0% Divisional residual income for new investment X: \$35,000 – (. 11 ? \$246,000) = \$7,940 (accept) Y: \$35,000 – (. 13 ? \$246,000) = \$3,020 (accept) Z: \$35,000 – (. 16 ? \$246,000) = (\$4,360) (reject) AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Hard Lanen – Chapter 14 #97

Learning Objective: 2 Topic Area: Return on Investment 7. The Pierce Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for \$62 per unit. A distributor has offered to buy 1,000 units at a price of \$50 per unit. This special order would not disturb regular sales. Required: a. Calculate Pierce’s change in operating profits if the special order is accepted. b. How many units of regular sales could be lost before this contract is not profitable? a: [\$50 – (55 – 40% ? 0)] ? 1,000 = \$3,000 increase in profits b: \$3,000/(62 – 47) = 200 units AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Medium Lanen – Chapter 04 #87 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 8. Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for \$3. 40. If Bruce purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for \$20,000. a.

If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income would be b. What is the maximum price Bruce would be willing to pay the outside supplier? a. Make: \$640,000; Buy: 200,000 ? 3. 40 = 680,000 – 20,000 = \$660,000; income effect: 640,000 – 660,000 = 20,000 decrease in income if buy b. (\$640,000 + 20,000)/200,000 = \$3. 30 Feedback: Variable cost to make = \$200,000 + 320,000 + 120,000 = \$640,000 AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Medium Lanen – Chapter 04 #105 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions . Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows: a. Assume that the fixed manufacturing overhead reflects the cost of Tofte’s manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Tofte for \$34. If Tofte Industries purchases the component from the outside supplier, the effect on income would be a b. Assume Tofte Industries could avoid \$80,000 of fixed manufacturing overhead if it purchases the component from an outside supplier.

An outside supplier has offered to sell the component for \$34. If Tofte purchases the component from the supplier instead of manufacturing it, the effect on income would be a a. Make: \$960,000; Buy: \$34 ? 30,000 = \$1,020,000; income effect: \$960,000 – 1,020,000 = \$60,000 decrease in income if buy b. Make: \$960,000; Buy: \$1,020,000 – 80,000 = \$940,000: income effect: \$960,000 – 940,000 = \$20,000 increase in income if buy Feedback: Variable cost to make: \$300,000 + 480,000 + 180,000 = \$960,000 AACSB: Analytic AICPA: FN-Decision Making Bloom’s: Analysis Difficulty: Medium Lanen – Chapter 04 #106 Learning Objective: 4

Topic Area: Make-It or Buy-It Decisions AC505 Practice Quiz #2 Summary Category# of Questions AACSB: Analytic9 AICPA: FN-Decision Making9 Bloom’s: Analysis6 Bloom’s: Application2 Bloom’s: Comprehension1 Difficulty: Easy1 Difficulty: Hard1 Difficulty: Medium7 Lanen – Chapter 044 Lanen – Chapter 145 Learning Objective: 11 Learning Objective: 25 Learning Objective: 31 Learning Objective: 43 Topic Area: Accounting Income1 Topic Area: Make-It or Buy-It Decisions3 Topic Area: Return on Investment3 Topic Area: Return on Investment, Residual Income Measures1 Topic Area: Short-Run Pricing Decisions: Special Orders1

x

Hi!