Managerial Accounting

Section 9- Level 4
Ch3: Profit Planning – Ch4: Capital Budgeting
Decisions
 Ch3: Profit Planning
Ch4: Capital Budgeting Decisions

Multiple Choice Questions

1) Sparks Company has a cash balance of $7,500 on April 1. The company must
maintain a minimum cash balance of $6,000. During April, cash receipts of $48,000
are planned. Cash disbursements during the month are expected to total $52,000.
Ignoring interest payments, during April the company will need to borrow:
A) $3,500
B) $2,500
C) $6,000
D) $4,000
2) For May, Young Company has budgeted its cash receipts at $125,000 and its
cash disbursements at $138,000. The company's cash balance on May 1 is $17,000.
If the desired May 31 cash balance is $20,000, then how much cash must the
company borrow during the month (before considering any interest payments)?
A) $4,000
B) $8,000
C) $12,000
D) $16,000
Use the following to answer questions 3-5:
Sipan Retail Company was recently created with a beginning cash balance of
$12,000. The owner expects the following for the first month of operations:
Cash sales to customers ............................................... $8,000
Sales on account to customers ..................................... $30,000
Cash collected from account customers ...................... $12,000
Cost of merchandise purchased ................................... $35,000
Cash paid for merchandise purchased ......................... $24,500
Cost of merchandise sold ............................................ $26,600
Cash paid for display cases ......................................... $9,600
Selling and administrative expenses ........................... $4,000

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The display cases above were purchased at the beginning of the month and are
being depreciated at a rate of $100 per month. This amount is included in the selling
and administrative expenses figure above. All other selling and administrative
expenses are paid as incurred. Sipan wants to maintain a cash balance of $10,000.
Any amount below this can be borrowed from a local bank as needed in increments
of $1,000. All borrowings are made at month end.
3) In Sipan's cash budget for this first month, how much money will Sipan need to
borrow at month end?
A) $7,000
B) $16,000
C) $17,000
D) $28,000
4) In Sipan's budgeted income statement for this first month, what will net income
(loss) be for this first month?
A) $(1,000)
B) $(2,000)
C) $7,400
D) $9,500
5) In Sipan's budgeted balance sheet at the end of this first month, at what
amount will accounts receivable be shown?
A) $0
B) $9,600
C) $18,000
D) $26,000
6) Three of the steps in management’s decision-making process are (1) review
results of decision, (2) determine and evaluate possible courses of action, and
(3) make the decision. The steps are prepared in the following order:
a. (1), (2), (3).
b. (2), (1), (3).
c. (3), (2), (1).
d. (2), (3), (1).

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7) Incremental analysis is the process of identifying the financial data that:
a. does not change under alternative courses of action.
b. change under alternative courses of action.
c. is mixed under alternative courses of action.
d. No correct answer is given.
8) In making business decisions, management ordinarily considers:
a. quantitative factors but not qualitative factors.
b. financial information only.
c. both financial and nonfinancial information.
d. relevant costs, opportunity cost, and sunk costs.
9) A company is considering the following alternatives:
Alternative A Alternative B
Revenues $50,000 $50,000
Variable costs 24,000 24,000
Fixed costs 12,000 15,000
Which of the following are relevant in choosing between these alternatives?
a. Revenues, variable costs, and fixed costs.
b. Variable costs and fixed costs.
c. Variable costs only.
d. Fixed costs only.
10) It costs a company $14 of variable costs and $6 of fixed costs to produce product
Z200 that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 each.
If the special offer is accepted and produced with unused capacity, net income will:
a. decrease $6,000.
b. increase $12,000.
c. increase $6,000.
d. increase $9,000.

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11) It costs a company $14 of variable costs and $6 of fixed costs to produce product
Z200. Product Z200 sells for $30. A buyer offers to purchase 3,000 units at $18 each.
The seller will incur special shipping costs of $5 per unit. If the special offer is
accepted and produced with unused capacity, net income will:
a. increase $3,000.
b. decrease $12,000.
c. increase $12,000.
d. decrease $3,000.
12) Jobart Company is currently operating at full capacity. It is considering buying a
part from an outside supplier rather than making it in-house. If Jobart purchases the
part, it can use the released productive capacity to generate additional income of
$30,000 from producing a different product. When conducting incremental analysis
in this make or-buy decision, the company should:
a. ignore the $30,000.
b. add $30,000 to other costs in the “Make” column.
c. add $30,000 to other costs in the “Buy” column.
d. subtract $30,000 from the other costs in the “Make” column.
13) In a make-or-buy decision, relevant costs are:
a. manufacturing costs that will be saved.
b. the purchase price of the units.
c. the opportunity cost.
d. All of the above.
14) Derek is performing incremental analysis in a make-or-buy decision for Item X.
If Derek buys Item X, he can use its released productive capacity to produce Item
Z. Derek will sell Item Z for $12,000 and incur production costs of $8,000. Derek’s
incremental analysis should include an opportunity cost of:
a. $12,000.
b. $4,000.
c. $8,000.
d. $0.

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15) The decision rule in a sell-or-process-further decision is: process further as
long as the incremental revenue from processing exceeds:
a. incremental processing costs.
b. variable processing costs.
c. fixed processing costs.
d. No correct answer is given.
16) Walton, Inc. makes an unassembled product that it currently sells for $55.
Production costs are $20. Walton is considering assembling the product and selling
it for $68. The cost to assemble the product is estimated at $12. What decision
should Walton make?
a. Sell before assembly; net income per unit will be $12 greater.
b. Sell before assembly; net income per unit will be $1 greater.
c. Process further; net income per unit will be $13 greater.
d. Process further; net income per unit will be $1 greater.
17) In a decision to retain or replace equipment, the book value of the old
equipment is a (an):
a. opportunity cost.
b. incremental cost.
c. sunk cost.
d. marginal cost.
18) If an unprofitable segment is eliminated:
a. net income will always increase.
b. variable costs of the eliminated segment will have to be absorbed by other
segments.
c. fixed costs allocated to the eliminated segment will have to be absorbed by other
segments.
d. net income will always decrease.

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19) A segment of Hazard Inc. has the following data.
Sales $200,000
Variable expenses 140,000
Fixed expenses 100,000
If this segment is eliminated, what will be the effect on the remaining company?
Assume that 50% of the fixed expenses will be eliminated and the rest will be
allocated to the segments of the remaining company.
a. $120,000 increase.
b. $50,000 increase.
c. $10,000 decrease.
d. $10,000 increase.
20) Future costs that do not differ between the alternatives in a decision are
avoidable costs:
a) True
b) False
21) Joint processing after the split-off point is profitable if the incremental revenue
from such processing exceeds the incremental processing costs:
a) True
b) False
22) Lumber produced in a lumber mill results in several different products being
produced from each log; such products are called joint products:
a) True
b) False
23) In a sell or process further decision, an avoidable fixed production cost
incurred after the split-off point is relevant to the decision
a) True
b) False

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24) Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is
thinking of quitting his job to attend college full time next semester. Which of the
following would be considered an opportunity cost in this decision?
A) the cost of the textbooks
B) the cost of the cola that Hal will consume during class
C) Hal's lost wages at Burger Breath
D) both A and B above
25) In a make-or-buy decision, relevant costs include:
A) unavoidable fixed costs
B) avoidable fixed costs
C) fixed factory overhead costs applied to products
D) fixed selling and administrative expenses
26) Two or more products produced from a common input are called:
A) common costs.
B) joint products.
C) joint costs.
D) sunk costs.
27) Wenig Inc. has some material that originally cost $73,500. The material has a
scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for
$58,100. What would be the incremental effect on the company's overall profit of
reworking and selling the material rather than selling it as is as scrap?
A) -$22,000
B) -$67,600
C) $51,500
D) $5,900

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28) The Milham Company has two divisions - East and West. The divisions have the
following revenues and expenses:

Management at Milham is pondering the elimination of the West Division since it

has shown an operating loss for the past several years. If the West Division were
eliminated, its traceable fixed costs could be avoided. Total common corporate
costs would be unaffected by this decision. Given these data, the elimination of the
West Division would result in an overall company net operating income of:
A) $100,000
B) $80,000
C) $120,000
D) $50,000
29) The following information relates to next year's projected operating results of
the Aluminum Division of Wroclaw Corporation:
Contribution margin ...................... $1,500,000
Fixed expenses .............................. 1,700,000
Net operating loss .......................... $ (200,000)
If Aluminum Division is dropped, $1,000,000 of the above fixed costs would be
eliminated. What will be the effect on Wroclaw's profit next year if Aluminum
Division is dropped instead of being kept?
A) $500,000 decrease
B) $800,000 increase
C) $1,000,000 increase
D) $1,200,000 increase

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 Answers
Item Ans Item Ans Item Ans Item Ans Item Ans
1- B 7- B 13- D 19- C 25- B
2- D 8- C 14- B 20- B 26- B
3- B 9- D 15- A 21- A 27- D
4- C 10- B 16- D 22- A 28- D
5- C 11- D 17- C 23- A 29- A
6- D 12- B 18- C 24- C

Key solutions

1) 7,500 + 48,000 =55,500 – 52,000 = 3,500 – 6,000 = Borrow 2,500

2) 17,000 + 125,000 = 142,000 – 138,000 = 4000 – 20,000 = Borrow 16,000
3) Cash Collections (12,000 + 8,000+ 12,000) – Cash Disbursements (24,500 + 9,600
+ 4,000 – 100) = (6,000) ---- Borrow = 10,000+6,000= 16,000
4) Sales (8,000 + 30,000) – Cost of goods sold (26,600) – S & A Expense (4,000)
=7,400 Net income.
5) 30,000 – 12,000 = 18,000

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