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Test No. 2. Accounting 2122, Summer 2006. Name: ____________________________
Class Time: 9:45 or 11:30 (Circle one) Row in Class _____
Multiple Choice- 26 questions count 4 points each for a total of 104 Points.
Blacken the area in the circle containing the appropriate letter for each entry.
Use a soft-lead pencil. Enter last name first in the area for “NAME.”
Enter student ID number in the area for “IDENTIFICATION NUMBER.”
Answer each question by marking the letter representing the best answer.
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Chapter 5. Relevant Information for Decision Making: Marketing Decisions
Special sales order.
Deletion or addition of products, services or departments.
Optimal use of limited resources.
1. A retail ice cream company normally sells 12,000 gallons of ice cream each month. Selling price is $9.00
per gallon. Wholesale cost is $3.00 per gallon. Company is considering reducing its retail price to $6.00 per
gallon, in order to increase its sales. How many gallons will need to be sold at $6.00 per gallon in order to
increase its gross profit from its current level?
a. More than 12,000 gallons, but not more than 16,000 gallons
b. More than 16,000 gallons, but not more than 20,000 gallons
c. More than 20,000 gallons, but not more than 24,000 gallons
d. More than 24,000 gallons
2. Adams Company, a glove manufacturer, has enough idle capacity available to accept a special order or
20,000 pairs of gloves at $14.00 a pair. The normal selling price is $20.00 a pair. Variable manufacturing
costs are $9.00 a pair, and fixed manufacturing costs are $3.00 a pair. Adams will not incur any selling
expenses as a result of the special order, except for a shipping charge of $2 per pair. What would be the effect
on operating income if the special order could be accepted without affecting normal sales?
a. $20,000 increase b. $40,000 increase c. $60,000 increase d. $240,000 increase
3. Local Co. plans to discontinue a department with a $32,000 contribution to overhead, and allocated
overhead of $100,000, of which $60,000 cannot be eliminated. What would be the effect of this
discontinuance on Local's pretax profit?
a. Increase of $8,000. b. Decrease of $50,000.
c. Decrease of $60,000 d. Decrease of $10,000
e. Increase of $10,000
4. Waxhaw Company's regular selling price for its product is $10 per unit. Variable costs are $6 per unit.
Fixed costs total $1 per unit based on 100,000 units, and remain unchanged within the relevant range of 50,000
units to total capacity of 200,000 units. After sales of 80,000 units were projected for 2006, a special order
was received for an additional 10,000 units. To increase its operating income by $50,000, what price per unit
should Waxhaw charge for this special order?
a. $7 b. $8 c. $10 d. $11
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Chapter 6. Relevant Information for Decision Making: Production.
Opportunity, outlay and differential costs.
Make or buy decisions.
Joint products – sell at split-off or process further.
Irrelevance of past costs. (Book value of old equipment)
Irrelevance of cost or revenues that will not change.
Beware of unit costs
Conflicts between decision making and performance evaluation.
Absorption vs contribution approach.
5. A part for a radio being produced by Car Audio Systems is being purchased at present for $85 per 100 parts.
Management is studying the possibility of manufacturing these parts. Cost and production data would be as
follows: Annual production (usage) is 50,000 units. Fixed costs would remain unchanged whether
the part is purchased or manufactured.
Fixed Costs $18,000 $.36 per unit
Variable costs: Materials $.45 per unit
Labor $.42 per unit
Overhead $.21 per unit
Should the company purchase or make the part?
a. Purchase the part b. Make the part
6. In a process that produces two products, which of the following costs is relevant in determining whether a
product should be sold at the point of split-off of processed further?
a. Joint Costs b. Costs to be incurred after split-off c. Both
7. The manufacturing capacity of Concord Company's facilities is 30,000 units a year. Operating results for
2006 is budgeted as follows (before considering a special order):
Sales (18,000 units @ $100) $1,800,000
Variable mfg. and selling costs 990,000
Contribution margin 810,000
Fixed costs 495,000
Operating income $ 315,000
A foreign distributor has offered to buy 15,000 units at $75 per unit during 2006. If Concord accepted this
offer and rejected some business from regular customers so as not to exceed capacity, what would be the total
operating income for 2006?
a. $405,000 b. $705,000 c. $480,000 d. $255,000 e. None of these
8. Gastonia manufactures products X, Y, and Z from a joint process, with joint costs of $60,000.
Sales Value and Additional
Sales Value Costs If Processed Further
Product Units Produced at split-off Sales values Added Costs
X 6,000 $40,000 $55,000 $20,000
Y 4,000 35,000 50,000 7,000
Z 2,000 25,000 39,000 5,000
Which products should be sold at split-off?
a. X b. Y c. Z d. none of the products
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9. Greensboro Co. manufactures products X, Y, and Z from a joint process, with joint costs of $60,000.
Units Produced at split-off
X 6,000 $40,000
Y 4,000 50,000
Z 6,000 10,000
Assuming that joint production costs are allocated using the relative sales value approach,
what were the total costs allocated to Product Z?
a. $6,000 b. $18,000 c. $25,000 d. $39,000 e. None of these
10. Repeat the preceding question. Joint production costs are allocated using the physical measures (units
produced) approach. What were the total costs allocated to Product Z?
a. $15,000 b. $20,000 c. $22,500 d. $30,000 e. None of these
11. In deciding whether to replace or keep existing equipment, which of these items is (are) relevant?
a Book value of old equipment c Cost of new equipment
b Original cost of old equipment d All of these
12. Charlotte Corporation has an “old” delivery truck that does not get good gas mileage, so it is considered to
be very inefficient. Charlotte paid $20,000 for the truck several years ago and has depreciated it down to a
book value of $4,000. It can currently be sold for $2,500. The old truck uses gasoline at a cost of $5,000 per
year. A “used” truck (made by another manufacturer) with similar features would use gasoline at a cost $3,000
per year. The new “used” truck can be purchased for $8,000. Both trucks could be used for four more years.
Either one would be junked at no salvage value after 4 years. Ignore income taxes. Considering the cash flows
for the next four years for each alternative course of action based on the information presented above,
a. keep the old delivery truck b. buy the new “used” delivery truck. c. cannot determine
13. Winston began operations on January 1, 2006, and produces a single product that sells for $12.00 per unit.
Winston uses an actual (historical) cost system. 100,000 units were produced and 80,000 units were sold in
2006. There was no work-in-process inventory at December 31, 2006. Manufacturing costs and selling and
administrative expenses for 2006 were as follows
Fixed costs Variable costs
Raw materials (all variable) $4.00 per unit produced
Direct labor (all variable) $3.00 per unit produced
Variable factory overhead $2.00 per unit produced
Fixed factory overhead $100,000
Variable Selling and administrative $1.00 per unit sold
Fixed Selling and administrative $60,000
What is the operating income for 2006 using the direct costing method?
a. $200,000 b. $210,000 c. $20,000 d. $30,000 e. $0
14. Repeat the preceding question. What is the operating income using the absorption costing method?
a. $200,000 b. $210,000 c. $20,000 d. $30,000
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Chapter 7. The Master Budget.
Advantages of budgets. Types of budgets.
Components of the master budget. Steps for preparing the master budget.
Sales budget. Cash collections from customers.
Production budget. Materials purchases budget. Payment to suppliers. Operating expenses.
15. Which of the following steps in the preparation of a master budget would logically be performed first?
a Prepare a cash budget. c Prepare a production schedule.
b Prepare a sales forecast. d Prepare a budget of manufacturing costs.
16. UNCC budgeted sales of 100,000 units of product R for September.
Production of one unit of R requires two pounds of material A and three pounds of material B.
Actual inventory units at Sept. 1 and desired units at Sept. 30 are:
Actual inventory Budgeted inventory
Product R 20,000 Units 15,000 Units
Material A 25,000 Pounds 18,000 Pounds
Material B 22,000 Pounds 24,000 Pounds
How many units of R should be produced during September?
a. 105,000 b. 95,000 c. 110,000 d. 330,000
17. Repeat the preceding question. How many pounds of Material B should be purchased during September?
a. 287,000 b. 298,000 c. 332,000 d. 317,000
18. Assume that the expected cash receipts for the Atlanta Company during the month of April amount to
$45,000. On April 1 the company has a cash balance of $12,000 and must have a minimum cash balance of
$10,000 on the first of every month for operating funds. Anticipated cash disbursements during April will be
$51,000. During April the company will need to borrow:
a. $2,000 b. $4,000 c. $6,000 d. $8,000 e. none of these
19. Red Company prepared its cash budget for July based on the following projections:
Markup based on cost 60%
Decrease in inventories $ 70,000
Increase in accounts payable for inventories $ 120,000
For July, what were the estimated cash disbursements for inventories?
a. $810,000 b. $1,010,000 c. $1,055,000 d. $1,175,000 e. none of these
20. ABC Co. forecasts sales (all on credit) of $40,000, $50,000, and $60,000 for May, June, and July,
respectively. Seventy percent of sales are collected in the month of the sale, 20% in month following the sale,
and 8% in second month following the sale, (2% are uncollectible). What are budgeted cash receipts for July?
a. $18,800 b. $54,500 c. $55,000 d. $55,200 e. none of these
21. A company has budgeted its activity for October based on the following information:
Sales are budgeted at $300,000.
All sales are credit sales and a provision for bad debts is made monthly at the rate of 2% of sales.
Merchandise inventory was $70,000 at September 30, and an increase of $10,000 is planned for the month.
All merchandise is marked up to sell at invoice cost plus 20%.
Cash disbursements for selling and administrative expenses in the month are $33,000.
Depreciation for the month is projected at 5,000.
Budgeted operating income for October in the amount of
a. $6,000 b. $9,000 c. $56,000 d. $66,000 e. None of these
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Use the following information for the next 4 questions.
The January 31, balance sheet of UNCC Corporation follows: (Not a Manufacturing Company)
Cash $ 8,000
Accounts receivable (net of allowance for uncollectible accounts of $2,000) 38,000
Property and equipment (net of allowance for accum. Deprec. of $60,000) 40,000
Accounts payable $ 82,500
Common stock 50,000
Retained earnings 36,000
1 Collections are expected to be 60% in the month of sale, 38% the next month, and 2% uncollectible.
2 Accounts payable for purchases are paid in full the following month.
3 Sales are budgeted as follows: February - $110,000 March - $120,000 April - $140,000
4 Gross margin is 25% of sales.
5 Purchases each month are sufficient to cover the next month's projected sales.
6 Other expenses each month, paid in cash, are expected to be $16,500.
7. Depreciation each month is $5,000.
22. What is the projected balance cash at the end of February?
a $5,000 b $10,000 c $13,000 d $22,000 e $30,000
23. What is the pro forma income (loss) before income taxes for April?
a. ($3,700) b. ($1,500) c. $3,800 d. $10,700 e. None of these
24. What is the projected accounts payable balance on March 31?
a. $82,500 b. $86,250 c. $90,000 d. $105,000
25. The cash disbursements in April for purchases are expected to be:
a. $82,500 b. $86,250 c. $90,000 d. $105,000
26.. A company had the following: (in $thousands)
Accounts receivable on January 1 $ 160
Accounts receivable on December 31 200
Net sales in year (all on credit) $2,600
Cash received from customers was:
a. $2,600 b. $2,640 c. $3,040 d. $2,560