Question 1

Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division’s

Options :

A : Contribution margin.

B : Net revenue minus controllable division costs.

C : Gross profit

D : Net income minus the division’s fixed costs.

Answer: B

Question 2

The ABC Company manufactures components for use in producing one of its finished products. When

12,000 units are produced, the full cost per unit is $35, separated as follows:

Direct materials $ 5

Direct labor 15

Variable overhead 10

Fixed overhead 5

The XYZ Company has offered to sell 12,000 components to ABC for $37 each. If ABC accepts the

offer, some of the facilities currently being used to manufacture the components can be rented as

warehouse space for $40,000. However, $3 of the fixed overhead currently applied to each

component would have to be covered by ABC’s other products. What is the differential cost to the

ABC Company of purchasing the components from the XYZ Company?

Options :

A : $8000

B : $20,000

C : $24,000

D : $44,000

Answer: B

Question 3

Contracts to hedge risk by exchange cash flows include Interest-Rate Currency Swaps Swaps

Options :

A : Yes Yes

B : Yes No

C : No Yes

D : No No

Answer: A

Question 4

Which of the following is not a category of relevant cash flows’?

Options :

A : Annual net cash flows

B : Project termination cash flows.

C : Incremental cash flows.

D : Net initial investment.

Answer: C

Question 5

The following data pertain to a 4-year project being considered by Metro Industries:

• A depreciable asset that costs $1,200,000 will be acquired on January 1 . The asset, which is

expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property under

the Modified Accelerated Cost Recovery System (MACPS).

• The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the

same January 1 for $180,000.

• The project is expected to provide added annual sales of 30,000 units at $20. Additional cash

operating costs are: variable, $12 per unit fixed, $90,000 per year.

• A $50,000 working capital investment that is fully recoverable at the end of the fourth year is

required. Metro is subject to a 40% income tax rate and rounds all computations to the nearest

dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred.

The company uses the net present value method to analyze investments and will employ the

following factors and rates.

The expected incremental sales will provide a discounted, net-of-tax contribution margin over 4

years of

Options :

A : $57,600

B : $92,160

C : $273,600

D : $437,760

Answer: D