Prof.

Salem A Helles Advanced Managerial Accounting

Accounting Department Faculty of Commerce
Final Exam Master of Business Administration
Date:30 Jan. 2010 Master of Accounting and Finance

: :

ANSWER EIGHT QUESTIONS ONLY: (7.5 Mark for each Question)

Question One: Gaza Company is studying a project that would have an eight-
years life and require a $2,400,000 investment in equipment. At the end of eight
years, the project would terminate and the equipment would have no salvage
value. The project would provide net operating income each year as follows:
Sales ............................... ......... $3,000,000
Less variable expenses 1,800,000
Contribution margin 1,200,000
Less fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs ............. $700,000
Depreciation ............................... 300,000
Total fixed expenses .................... 1,000,000
Net operating income .................. $200,000
The company's discount rate is 12%
Required:
1- Compute the project's net present value. Is the project acceptable.
2- Find the project's internal rate of return to the nearest whole percent.
3- Compute the project's payback period.
4- Compute the project's accounting rate of return.

Question Two : Gaza Farms produces strawberries and raspberries. Annual fixed
costs are $ 15,600. The cost driver for variable costs is pints of fruit produced. The
variable cost is $0.75 per pint of strawberries and $ .95 per pint of raspberries.
Strawberries sell for $ 1.10 per pint, raspberries for $ 1.45 per pint. Two pints of
strawberries are produced for every pint of raspberries.
Required:
1- Compute the number of pints of strawberries and the number of pints of
raspberries produced and sold at the break-even point.
2- Suppose only strawberries are produced and sold. Compute the break-
even point in pints.

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 3- Suppose only raspberries are produced and sold. Compute the break-
even point in pints.

Question Three: LG Products markets two computer games: A and B. A contribution

:format income statement for a recent month for the two games appears below
A B Total
Sales $30,000 $70,000 $100,000
Less variable expenses 20,000 50,000 70,000
Contribution margin $10,000 $20,000 30,000
Less fixed expenses 24,000
Net operating income $6,000
:Required
.Compute the overall contribution margin (CM) ratio for the company .1
.Compute the overall break-even point for the company in sales dollars .2
.Compute the break- even point for each computer games in sales dollars .3

Question Four: FG Company makes two products, P1 and P2. Data regarding
:the two products follow
Direct Labor-
Annual
Hours per
Unit Production
P1 0.80 10,000 units
P2 0.40 40,000 units
:Additional information about the company follows
.a. P1 require $32 in direct materials per unit, and P2 require $18
.b. The direct labor wage rate is $15 per hour
.c. P1 are more complex to manufacture than P2 and they require special equipment
:d. The ABC system has the following activity cost pools
Estimated Activity
Overhead
Activity Cost Pool Activity Measure Total P1 P2
cost
Machine setups Number of setups $72,000 400 100 300
Special processing Machine-hours $200,000 5,000 5,000 -
General factory Direct labor-hours $816,000 24,000 8,000 16,000
Required:
.Compute the activity rate for each activity cost pool .1
Determine the unit cost of each product according to the ABC system, including .2
.direct materials and direct labor

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 Question Five: Wonderful! Not only did our salespeople do a good job in
meeting the sales budget this year, but our production people did a good job in
controlling costs as well," said, president of MB Company. "Our $18,300 overall
manufacturing cost variance is only 1.2% of the $1,536,000 standard cost of
products made during the year. That's well within the 3% parameter set by
management for acceptable variances. It looks like everyone will be in line for a
".bonus this year
The company produces and sells a single product. The standard cost card for the
:product follows

Standard Cost Card Per Unit

$16.90 Direct materials, 2 feet at $8.45 per foot
22.40 Direct labor, 1.4 direct labor-hours at $16 per direct labor-hour.
3.50 Variable overhead, 1.4 direct labor-hours at $2.50 per direct labor-hour.
8.40 Fixed overhead, 1.4 direct labor-hours at $6 per direct labor-hour.
$51.20 Standard cost per unit

:The following additional information is available for the year just completed
.a. The company manufactured 30,000 units of product during the year
b. A total of 64,000 feet of material was purchased during the year at a cost of
$8.55 per foot. All of this material was used to manufacture the 30,000 units.
.There were no beginning or ending inventories for the year
c. The company worked 43,500 direct labor-hours during the year at a direct
.labor cost of $15.80 per hour
d. Overhead cost is applied to products on the basis of standard direct labor-
:hours. Data relating to manufacturing overhead costs follow

35,000 Denominator activity level (direct labor-hours)

$210,000 Budgeted fixed overhead costs (from the flexible budget)
$108,000 Actual variable overhead costs
$211,800 Actual fixed overhead costs
Required:
.Compute the direct materials price and quantity variances for the year .1
.Compute the direct labor rate and efficiency variances for the year .2
:For manufacturing overhead, compute the following .3
.The variable overhead spending and efficiency variances for the year .a
.The fixed overhead budget and volume variances for the year .b

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Total the variances you have computed, and compare the net amount with the .4
$18,300 mentioned by the president. Do you agree that bonuses should be given
.to everyone for good cost control during the year? Explain

Question Six: "I know headquarters wants us to add that new product line," said,
manager of Billings Company's Office Products Division. "But I want to see the
numbers before I make any move. Our division's return on investment (ROI) has
".led the company for three years, and I don't want any letdown
Billings Company is a decentralized wholesaler with five autonomous divisions.
The divisions are evaluated on the basis of ROI, with year-end bonuses given to
the divisional managers who have the highest ROIs. Operating results for the
:company's Office Products Division for the most recent year are given below

$10,000,000............Sales ..
6,000,000....................Variable expenses
4,000,000................. Contribution margin
3,200,000...................Fixed expenses
$800,000.................. Net operating income
$4,000,000 Divisional operating assets

The company had an overall return on investment (ROI) of 15% last year
(considering all divisions). The Office Products Division has an opportunity to
add a new product line that would require an additional investment in operating
assets of $1,000,000. The cost and revenue characteristics of the new product
:line per year would be

$2,000,000..............Sales ..
60% of sales.................Variable expenses
$640,000.......................Fixed expenses
Required:
Compute the Office Products Division's ROI for the most recent year; also .1
.compute the ROI as it would appear if the new product line is added
If you were in Manager's position, would you accept or reject the new product .2
.line? Explain
Suppose that the company's minimum required rate of return on operating assets .3
.is 12% and that performance is evaluated using residual income
a. Compute the Office Products Division's residual income for the most recent year;
also compute the residual income as it would appear if the new product line is
.added
b. Under these circumstances, if you were in Manager's position, would you accept
.or reject the new product line? Explain

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Question Seven: Bed & Bath, a retailing company, has two departments, Hardware
and Linens. A recent monthly contribution format income statement for the company
:follows
Department
Total
Hardware Linens
Sales $4,000,000 $3,000,000 $1,000,000
Variable expenses 1,300,000 900,000 400,000
Contribution margin 2,700,000 2,100,000 600,000
Fixed expenses 2,200,000 1,400,000 800,000
Net operating income (loss) $ 500,000 $ 700,000 ($200,000)

A study indicates that $340,000 of the fixed expenses being charged to Linens are
sunk costs or allocated costs that will continue even if the Linens Department is
dropped. In addition, the elimination of the Linens Department will result in a 10%
.decrease in the sales of the Hardware Department
Required:
If the Linens Department is dropped, what will be the effect on the net operating
?income of the Company as a whole

Question Eight: Gaza Company has limited funds available for investment and must
ration the funds among five competing projects. Selected information on the five
:projects follows
Life of the Internet Rate
Investment Net Present
Project project of Return
Required Value
(years) (percent)
A ... $160,000 $44,323 7 18%
B ... $135,000 $42,000 12 16%
C ... $100,000 $35,035 7 20%
D ... $175,000 $38,136 3 22%
E . $150,000 $(8,696) 6 8%

The net present values above have been computed using a 10% discount rate. The
company wants your assistance in determining which project to accept first. second,
.and so forth. The company's investment funds are limited
Required:
.Compute the project profitability index for each project .1
:In order of preference, rank the five projects in terms of .2
.a. Net present value
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 .b. Project profitability index
.c. Internal rate of return
?Which ranking do you prefer? Why .3

Question Nine: The administrator of Alwafa Hospital would like a cost formula
linking the administrative costs involved in admitting patients to the number of
patients admitted during a month. The admitting department's costs and the number
of patients admitted during the immediately preceding eight months are given in the
:following table

Number of Admitting
Month patients Department
Admitted Cost
May 1,800 $14,700
June 1,900 $15,200
July 1,700 $13,700
August 1,600 $14,000
September 1,500 $14,300
October 1,300 $13,100
November 1,100 $12,800
December 1,500 $14,600

Required:
Use the high-low method to establish the fixed and variable components of .1
.admitting costs
.Compute admitting department cost if number of patient is 1400 .2

Question Ten: Computer Sales, Inc., Sells Computer supplies. Management is

planning its cash needs for the second quarter. The company usually has to borrow
money during this quarter to support peak sales, which occur during May. The
following information has been assembled to assist in preparing a cash budget for the
quarter:
A. Budgeted monthly income statements for April- July are:
April May June July
Sales.. $ 600,000 $ 900,000 $ 500,000 $ 400,000
Cost of goods sold. 420,000 630,000 350,000 280,000
Gross Margin.. 180,000 270,000 150,000 120,000
Less operating expenses:
- Selling expense. 79,000 120,000 62,000 51,000
- Administrative expense* 45,000 52,000 41,000 38,000
Total expenses 124,000 172,000 103,000 89,000
Net income. $ 56,000 $ 98,000 $ 47,000 $ 31,000

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 * Includes $ 20,000 depreciation each month.

B. Sales are 20% for cash and 80% on account,

C. Sales on account are collected over a three- month period in the following ratio:
10% collected in the month of sale, 70% collected in the first month following
the month of sale, the remaining 20% collected in the second month following
the month of sale. Februarys sales totaled $200,000, and Marchs sales totaled
$300,000
D. Inventory purchases are paid for within 15 days. Therefore, 50% of a months
inventory purchases are paid for in the month of purchase. The remaining 50%
is paid in the following month. Accounts payable at March 31 for inventory
purchases during March total $126,000
E. At the end of each month, inventory must be on hand equal to 20% of the cost
of the merchandise to be sold in the following month. The merchandise
inventory at March 31 is $ 84,000
F. Dividends of $ 49,000 will be declared and paid in April.
G. Equipment costing $16,000 will be purchased for cash in May.
H. The cash balance at March 31 is $52,000, the company must maintain a cash
balance of at least $40,000 at all times.
I. The company can borrow from its bank as needed to bolster the cash account.
Borrowings and repayments must be in multiples of $1,000. All borrowings
take place at the beginning of a month, and all repayments are made at the end
of a month. The annual interest rate is 12%. Compute interest on whole months
(1/12, 2/12, and so forth).
Required:-
Prepare a cash budget for the second quarter, by month as well as in total for the
quarter. Show borrowing from the companys bank and repayments to the bank as
needed to maintain the minimum cash balance.

GOOD LUCK

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