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Quality Costs Downtime 20,000 15,000

1. The following activities are typical in production management: Reinspection 40,000 25,000
1. Warranty work Product inspection 5,000 10,000
2. Labor and overhead incurred for rework of defective products Product liability 35,000 27,500
found by an inspector
3. Quality training program 2. As a result of quality improvements, profits have increased by
4. The costs of a consumer complaint department A. P32,500 C. P7,500
5. In-process inspection costs B. P20,500 D. P5,00
6. Reinspection of reworked products
7. Downtime attributed to quality problems
8. Product recalls
9. Lower sales due to poor product performance
10.Quality audits
To what classification of quality costs do the foregoing described
costs belong?
Prevention Appraisal Internal Failure External
Failure
A 3,7,10 3,5 2 1,4,8,9
.
B 3,10 5 2,6,7 1,4,8,9
.
C 10 3 2,5,6 1,4,7,8,9
.
D 3,10 5 1,2,10 4,7,8,9
.

Questions 2 thru 4 are based on the following information.

At the beginning of the year, Joshua Corporation initiated a quality
improvement program. The program was successful in reducing scrap
and rework costs. To help assess the impact of the quality
improvement program, the following data was collected for the current
and preceding year.
Preceding Year Current Year
Sales P1,000,000 P 1,000,000
Recruiting 1,000 1,500
Packaging 2,500 4,000
inspections
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3. If quality costs had been reduced to 2.5 percent of sales in the 6. By how much did profits change as a result of changes in
current year, profits would have increased by productivity related to materials, and labor, respectively?
A. P177,000 C. P61,000 A. B. C. D.
B. P58,000 D. P25,000 Materials P(1,100) P1,100 P(625) P625
Labor P (825) P 825 P 625 P625
4. For the current year, the respective percentages based on sales of
the different quality costs, respectively, are: Activity-Based Costing
Prevention Appraisal Internal External 7. Designing and changing are activities that are classified as:
Failure failure A. Unit-level C. Product-level
A 0.15% 1.40% 2.50% 1.50% B. Batch-level D. Facility-level
.
B 0.15% 1.40% 4.00% 2.75% 8. How are the following activities classified using ABC system?
. 1. Security
C 0.65% 1.00% 1.50% 4.25% 2. Product inspections
. 3. Insurance on the plant
D 0.65% 1.00% 2.50% 1.50% 4. Materials handling
. 5. Modifications made by engineering to the product design of
several products
Productivity Measures 6. Machine-related overhead
Questions 5 & 6 are based on the following information. 7. Set-ups
Information about Rose Company is as follows: 8. Providing space and utilities
2001 2002 9. Moving of inventory
Output (units) 80,000 84,000 Unit Level Batch Level Product Level Facility Level
Selling price per unit P25 P25 A. 4,6,8 2,4,7 1,3 10
Input quantities: B. 2,6 4,5 1,7 3,10
Materials (pounds) 4,000 4,000 C. 6 2,4,7,10 5 1,3,8
Labor (hours) 3,200 3,250 D. 2 1,6,7 10 3,4,5,8
Input prices:
Materials (per pound) P5.00 P5.50 9. Protex Company makes two products, X and Z. X is being
Labor (per hour) P7.00 P7.50 introduced this period, whereas Z has been in production for 2
years. For the period about to begin, 1,000 units of each product
5. What are the materials productivity, and labor productivity ratio for are to be manufactured. The only relevant overhead item is the
2001? cost of engineering change orders. X and Z are expected to require
A. B. C. D. eight and two change orders, respectively. X and Z are expected to
Materials 20.00 100.00 25.00 20.00 require 2 and 3 machine hours, respectively. The cost of a change
Labor 25.00 95.45 24.00 24.00 orderis P600.

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If Protex applies engineering change order cost on the basis of Gross Profit P 80,000 P P150,000
machine hours, the overhead cost per unit to be assigned to X and 70,000
Z, respectively, are Period expenses:
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, Research & ( 70,000)
respectively development
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, Marketing ( 50,000)
respectively Life-cycle income P 30,000
A 10% return on sales is required for new products. Because the
10.Zeta Co. is preparing its profit plan. As part of its analysis of the proposed products did not have a 10% return on sales, the products
profitability of individual products, the controller estimates the were going to be dropped.
amount of overhead that should be allocated to the individual Relative to Product Y, Product X requires more research and
product lines from the information given as follows: development costs but fewer resources to market the product.
Wall mirrors Special Sixty percent of the research and development costs are traceable
windows to Product X and 30 percent of the marketing costs are traceable to
Units produced 25 25 Product X.
Material moves per product line 5 15 If research and development costs and marketing costs are traced
Direct labor hours per unit 200 200 to each product, life-cycle income for Product Y would be
Budgeted materials handling P50,000 A. P35,000 C. P12,000
costs B. P20,000 D. P7,000
Under each of the systems of costing, how much materials handling
costs should be allocated to one unit of wall mirrors? Cost Behavior
A. B. C. D. 12.The following cost functions were developed for manufacturing
Based on direct P1,000 P 500 P2,000 P5,000 overhead costs:
labor hours Manufacturing Overhead Costs Cost Function
Under activity- P 500 P1,000 P1,500 P2,500 Electricity P100 + P20 per direct
based costing labor hour
Maintenance P200 + P30 per direct
Life-Cycle Costing labor hour
11.Richards, Inc. developed the following budgeted life-cycle income Supervisors’ salaries P10,000 per month
statement for two proposed products. Each product’s life cycle is Indirect materials P16 per direct labor hour
expected to be two years. If July production is expected to be 1,000 units requiring 1,500 direct
Product Product Total labor hours, estimated manufacturing overhead costs would be
X Y A. P109,300 C. P76,300
B. P99,000 D. P10,366
Sales P200,000 P200,0 P400,000
00
Cost-Volume-Profit Analysis
Cost of goods sold ( 120,00 (130,0 ( 250,000)
0) 00)
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13.The Ship Company is planning to produce two products, Alt and Madden’s net assets are P36,000,000. The peso sales that must be
Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit and achieved for Madden to earn a 10 percent after tax return on assets
200,000 units of Tude at P3 a unit. Variable costs are 70% of sales would be
for Alt and 80% of sales for Tude. In order to realize a total profit of A. P8,800,000 C. P12,000,000
P160,000, what must the total fixed costs be? B. P16,000,000 D. P6,880,000
A. P80,000 C. P240,000
B. P90,000 D. P600,000 17.The following data relate to Homer Company which sells a single
product:
14.Glow Co. wants to sell a product at a gross margin of 20%. The cost Unit selling price P 20.00
of the product is P2.00. The selling price should be Purchase cost per unit 11.00
A. P1.60 C. P2.40 Sales commission, 10% of selling price 2.00
B. P2.10 D. P2.50 Monthly fixed costs P80,000
The firm’s salespersons would like to change their compensation
15.The following relates to Gloria Corporation, which produced and from a 10 percent commission to a 5 percent commission plus
sold 50,000 units during a recent accounting period: P20,000 per month in salary. They now receive only commission.
Sales P850,000 The change in compensation plan should change the monthly
Fixed manufacturing costs 210,000 breakeven point by
Variable manufacturing costs 140,000 A. 1,071 Increase C. 1,538 Increase
Fixed selling and administrative expense 300,000 B. 1,071 Decrease D. 1,538 Decrease
Variable selling and administrative expense 45,000
Income tax rate 40% 18.Brunei Corp. is developing a new product, surge protectors for high-
For the next accounting period, if production and sales are expected voltage electrical flows. The cost information for the product are:
to be 40,000 units, the company should anticipate a contribution Direct materials, P3.25 per unit; Direct labor, P4.00 per unit;
margin per unit of Distribution, P0.75 per unit. The company will also be absorbing
A. P1.00 C. P3.10 P120,000 of additional fixed costs associated with this new product.
B. P13.30 D. P7.30 A corporate fixed charge of P20,000 currently absorbed by other
products will be allocated to this new product.
16.Madden, Company has projected its income before taxes for next How many surge protectors (rounded to the nearest hundred) must
year as shown below. Madden is subject to a 40% income tax rate. Brunei sell at a selling price of P14 per unit to increase after-tax
Sales P8,000,000 income by P30,000? (effective income tax rate is 40%)
(160,000 A. 10,700 C. 20,000
units) B. 12,100 D. 28,300
Cost of sales
Variable costs P 2,000,000 19.A manufacturer produces a product that sells for P10 per unit.
Fixed costs 3,000,000 5,000,000 Variable costs per unit are P6 and total fixed costs are P12,000. At
Income before P 3,000,000 this selling price, the company earns a profit equal to 10% of total
taxes peso sales. By reducing its selling price to P9 per unit, the

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manufacturer can increase its unit sales volume by 25%. Assume The following cost and revenue data relate to Store 21 and are
that there are no taxes and that total fixed costs and variable costs typical of the company’s many sales outlets:
per unit remain unchanged. If the selling price were reduced to P9 Selling price P 800
per unit, the profit would be Variable expenses:
A. P3,000 C. P5,000 Invoice costs P360
B. P4,000 D. P6,000 Sales commission 140
500
20. Last year, the marginal contribution rate of Lamesa Company Fixed expenses per year:
was 30%. This year, fixed costs are expected to be P120,000, the Rent P1,600,000
same as last year, and sales are forecasted at P550,000 a 10% Advertising 3,000,000
increase over last year. For the company to increase income by Salaries 1,400,000
P15,000 in the coming year, the marginal contribution margin rate Total P6,000,000
must be The company is considering paying the store manager a P60
A. 20% C. 40% commission on each pair of shoes sold in excess of break-even
B. 30% D. 70% point. If this change were made, what will be the store’s before tax
profit or loss assuming 23,500 pairs of shoes are sold in a year?
21.Wilson Co. prepared the following preliminary forecast concerning A. P(360,000) C. P840,000
product G for next year assuming no expenditure for advertising: B. P2,930,000 D. P1,330,000
Selling price per unit P 10
Units sales 100,000 23.BE&H Co. is considering dropping a product. Variable costs are
Variable costs P600,000 $6.00 per unit. Fixed overhead costs, exclusive of depreciation,
Fixed costs P300,000 have been allocated at a rate of $3.50 per unit and will continue
Based on a market study in December of this year, Wilson whether or not production ceases. Depreciation on the equipment
estimated that it could increase the unit selling price by 15% and is P20,000 a year. If production is stopped, the equipment can be
increase the unit sales volume by 10% if P100,000 were spent on sold for P18,000, if production continues, however, it will be useless
advertising. Assuming that Wilson incorporates these changes in its at the end of 1 year and will have no salvage value. The selling
forecast, what should be the operating income from product G? price is P10 a unit. Ignoring taxes, the minimum units to be sold in
A. P175,000 C. P205,000 the current year to break even on a cash flow basis is
B. P190,000 D. P365,000 A. 4,500 units C. 1,800 units
B. 5,000 units D. 36,000 units
22.Shoes, Unlimited operates a chain of shoe stores around the
country. The stores carry many styles of shoes that are all sold at Questions 24 through 28 are based on the Statement of Income of
the same price. To encourage sales personnel to be aggressive in Davao, Inc. which represents the operating results for the current
their sales efforts, the company pays a substantial sales fiscal year ending December 31. Davao had sales of 1,800 tons of
commission on each pair of shoes sold. Sales personnel also product during the current year. The manufacturing capacity of
receive a small basic salary. Davao’s facilities is 3,000 tons of product. Consider each question’s
situation separately.

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Sales P900,000 25.If the sales volume is estimated to be 2,100 tons in the next year,
Variable costs and if the prices and costs stay at the same levels and amounts
Manufacturing P315,000 next year, the after-tax net income that Davao can expect for the
Selling costs 180,000 next year is
Total variable costs 495,000 A. P135,000 C. P110,25
Contribution margin P405,000 B. P283,500 D. P184,500
Fixed costs
Manufacturing P 90,000 26.Davao has a potential foreign customer that has offered to buy
Selling 112,500 1,500 tons at P450 per ton. Assume that all of Davao’s costs would
Administration 45,000 be at the same levels and rates as last year. What net income after
Total fixed costs 247,500 taxes would Davao make if it took this order and rejected some
Net income before income taxes P157,500 business from regular customers so as not to exceed capacity?
Income taxes (40%) (63,000) A. P297,500 C. P252,000
Net income after income taxes P 94,500 B. P211,500 D. P256,500

24.The breakeven volume in tons of product for the year is 27.Without prejudice to your answers to previous questions, and
A. 420 C. 1,100 assume that Davao plans to market its product in an new territory.
B. 495 D. 550 Davao estimates that an advertising and promotion program
costing P61,500 annually would need to be undertaken for the next
two or three years. In addition , a P25 per ton sales commission
over and above the current commission to the sales force in the
new territory would be required. How many tons would have to be
sold in the new territory to maintain Davao’s current after-tax
income of P94,500?
A. 307.5 C. 1,095
B. 273.33 D. 1,545

28.Without prejudice to preceding questions, assume that Davao

estimates that the per ton selling price will decline 10% next year.
Variable costs will increase P40 per ton and the fixed costs will not
change. What sales volume in pesos will be required to earn an
after-tax net income of P94,500 next year?
A. P1,140,000 C. P825,000
B. P1,500,000 D. P1,350,000

Standard Costing & Variance Analysis

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29.Dahl Company, a clothing manufacturer, uses a standard costing 33.STA Company uses a standard cost system. The following
system. Each unit of finished product contains 2 yards of cloth. information pertains to direct labor costs for the month of June:
However, there is unavoidable waste of 20% calculated on input Standard direct labor rate per hour P10.00
quantities, when the cloth is cut for assembly. The cost of the cloth Actual direct labor rate per hour P 9.00
is P3 per yard. The standard direct material cost for cloth per unit Labor rate variance P12,000 favorable
of finished product is: Actual output 2,000 units
A. P4.80 C. P7.00 Standard hours allowed for actual production 10,000 hours
B. P6.00 D. P7.50 How many actual labor hours were worked during March for STA
Company?
30. The following information relates to Ore Company’s 2003 A. 10,000 C. 8,000
manufacturing activities: B. 12,000 D. 10,500
Standard direct labor hours per unit
Number of units produced 5,000 34.If annual overhead costs are expected to be P1,000,000 and
Standard variable overhead per standard direct labor hours 200,000 total labor hours are anticipated (80% direct, 20%
Actual variable overhead P28,000 indirect), the overhead rate based on direct labor hours is
Unfavorable overhead efficiency variance P 1,500 A. P6.25 C. P25.00
The number of actual direct labor hours are B. P5.00 D. P4.00
A. 10,500 C. 10,000
B. 11,000 D. 12,400 35.ABC had a P28,000 favorable volume variance, a P25,000
unfavorable variable overhead spending variance, and P12,000
Questions 31 & 32 are based on the following information. total overapplied overhead. The fixed overhead budget variance
Rainbow Company uses a standard cost system. Information about its was
direct labor costs for Product Lux for the month of January follows: A. P9,000 favorable C. P9,000 unfavorable
Standard hours allowed for actual production 1,500 B. P26,000 favorable D. P26,000 unfavorable
Actual hourly rate paid P61.00
Standard hourly rate P60.00 36.Given for the variable factory overhead of X Products Inc.: P39,500
Labor efficiency variance, Favorable P6,000 actual input at budgeted rate, P41,500 flexible budget based on
standard input allowed for actual output, P2,500 favorable flexible
31.How many direct labor hours were actually worked during the budget variance. Compute the spending variance:
month of January? A. P500 U C. P500 F
A. 1,400 C. 1,402 B. P2,000 F D. P2,000 U
B. 1,498 D. 1,600
37.Bacon had a P28,000 unfavorable volume variance, a P5,000
32.How much was the direct labor rate variance? unfavorable fixed overhead budget variance, and P22,000 total
A. P1,400 F C. P1,400 U underapplied overhead. The variable overhead spending variance
B. P1,600 F D. P1,600 U was
A. P11,000 favorable C. P11,000 unfavorable

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B. P1,000 favorable D. P23,000 unfavorable Actual direct labor hours (DLH) 9,500
Units produced 4,500
38.Acme had a P22,000 favorable fixed overhead budget variance, a A. P500 U C. P1,000 U
P15,000 unfavorable variable overhead spending variance, and B. P800 U D. P1,300 U
P2,000 total overapplied overhead. The volume variance was
A. P13,000 overapplied C. P5,000 overapplied 42. STA Company’s standard fixed overhead cost is P3 per direct labor hour based
B. P13,000 underapplied D. P5,000 underapplied on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours
per unit. During 2001, STA produced 55,000 units of product, incurred
39.Aldorp had a P10,000 unfavorable fixed overhead budget variance, P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
a P6,000 unfavorable variable overhead spending variance, and a labor. What are the fixed overhead variances?
P2,000 favorable volume variance. The total overhead was
A. B. C. D.
A. P14,000 overapplied C. P18,000 overapplied
B. P14,000 underapplied D. P18,000 underapplied Fixed OH spending P15,00 P33,00 P15,00 P33,000
(budget) variance 0U 0U 0U U
40. Fidelity Company uses a flexible budget system and prepared Fixed OH Volume P30,00 P30,00 P18,00 P18,000
the following information for the year: Fidelity operated at 80 percent variance 0F 0F 0F F
of capacity during the year, but applied factory overhead based on the
90 percent capacity level. Assuming that actual factory overhead was Questions 43 and 44 are based on the following information.
equal to the budgeted amount of overhead, how much was the Raff Co.’s monthly normal volume is 50,000 units (100,000 direct labor
overhead volume variance for the year? hours.) Raff Co.’s standard cost system contains the following
Percent of Capacity 80 90 overhead costs:
Percent Percent Variable P6 per unit
Direct labor hours 24,000 27,000 Fixed 8 per unit
Variable factory overhead P54,000 P60,750 The following information pertains to the month of March
Fixed factory overhead P81,000 P81,000 Units actually produced 38,000
Total factory overhead rate pre P5.625 P5.25 Actual direct labor hours worked 80,000
DLH Actual overhead incurred:
Variable P250,000
A. P9,000 U C. P9,000 F
Fixed 384,000
B. P15,750 U D. P15,750 F
43.For March, the unfavorable variable overhead spending variance
was
41.Using the information presented below, calculate the total overhead
A. P6,000 C. P12,000
spending variance.
B. P10,000 D. P22,000
Budgeted fixed overhead P10,000
Standard variable overhead (2 DLH at P2 per DLH) P4 per unit
44.For March, the fixed overhead volume variance was
Actual fixed overhead P10,300
A. P96,000 U C. P80,000 U
Actual variable overhead P19,500
B. P96,000 F D. P80,000 F
Budgeted volume (5,000 units x 2 DLH) 10,000 DLH

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45.Smile Corporation uses a standard cost system. Information for the 315,000 variable. The total manufacturing overhead applied during
month of April is as follows: November was P572,000.
Actual manufacturing overhead costs (P13,000 is fixed) P40,000
Direct labor: 46.The variable manufacturing overhead variances for November are
Actual hours worked 12,000 hours A. B. C. D.
Standard hours allowed 10,000 hours Spending P9,000 U P6,000 F P4,000 U P 9,000 F
Average actual labor cost per hour Efficiency P3,000 U P9,000 U P1,000 F P12,000 U
The factory overhead rate is based on a normal volume of 12,000
direct labor hours 47.The fixed manufacturing overhead variances for November are
Standard cost data at 12,000 direct labor hours was: A. B. C. D.
Variable factory overhead P24,000 Spending P10,000 F P10,000 U P6,000 F P 4,000 U
Fixed factory overhead 12,000 Volume P10,000 f P10,000 F P3,000 U P22,000 F
Total factory overhead P36,000
What are the following overhead variances?
48.The total variance related to efficiency of the manufacturing
A. B. C. D.
operation for November is:
Variable OH P3,000 U P3,000 U P7,000 U P7,000 U A. P9,000 U C. P21,000 U
Spending B. P12,000 U D. P12,000 U
Variable OH P2,000 U P4,000 U P2,000 U P4,000 U
Efficiency Questions 49 thru 53 are based on the following information.
Fixed OH P4,000 U P1,000 U P1,000 U P4,000 U The following data are actual results for Roadtrek company for October:
Spending Actual output 9,000 cases
Actual variable overhead P405,000
Questions 46 thru 48 are based on the following information. Actual fixed overhead P122,000
Edney Company employs standard absorption system for product Actual machine time 40,500 machine hours
costing. The standard cost of its product is as follows:
Raw materials P14.50 Standard cost and budget information for Roadtrek Company follows:
Direct labor (2 DLH x P8) 16.00 Standard variable overhead rate P9.00 per MH
Manufacturing overhead (2 DLH x P11) 22.00 Standard quantity of machine hours 4 hours per case
The manufacturing overhead rate is based upon a normal activity level Budgeted fixed overhead P1,440,000 per year
of 600,000 direct labor hours. Edney planned to produce 25,000 units Budgeted output 10,000 cases per month
each month during the year. The budgeted annual manufacturing
overhead is 49. The variable overhead spending variance for the month of
Variable P3,600,000 October is
Fixed 3,000,000 A. P40,500 U C. P45,000 U
During November, Edney produced 26,000 units. Edney used 53,500 B. P81,000 U D. P81,000 F
direct labor hours in November at a cost of P433,350. Actual
manufacturing overhead for the month was P260,000 fixed and 50.The overhead efficiency variance is
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A. P4,500 U C. P4,500 F
B. P40,500 U D. P40,500 F 57.If revenues are P210,000 under alternative A and P216,000 under
alternative B, and costs are P190,000 for A and P204,000 for B,
51.The amount of fixed overhead controllable variance is then using the basic approach in incremental analysis, incremental
A. P2,000 U C. P42,500 U revenues, costs, and net income, in comparing B to A are
B. P2,000 F D. P42,500 F respectively
A. P6,000, P(14,000), P(8,000) C. P6,000, P14,000, P8,00
52.The amount of fixed overhead volume variance is B. P(6,000), P14,000, P8,000 D. P(6,000), P(14,000),
A. P12,000 F C. P21,000 F P(8,000)
B. P12,000 U D. P21,000 U
58.For the year ended April 30, 2003, Leba Company incurred direct
53.The amount variable overhead volume variance is costs of P800,000 based on a particular course of action. Had a
A. Zero C. P12,000 F different course of action been taken, direct costs would have been
B. P9,000 U D. P2,250 U P650,000. In addition, Leba’s fixed costs during the fiscal year were
P110,000.
Absorption Costing & Variable Costing The incremental (decremental) costs was:
54.Which of the following statements is true for a firm that uses A. P40,000 C. P(40,000)
variable (direct) costing? B. P150,000 D. P(150,000)
A. The cost of a unit of product changes because of changes in the
number of units manufactured. 59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
B. Profits fluctuate with sales Product B each week by incurring a common variable costs of P400,000.
C. An idle facility variation is calculated These two products can be sold as is or processed further. Further processing
D. Product costs include “direct” (variable) administrative costs. of either product does not delay the production of subsequent batches of the
joint product. Data gathering there two products are as follows:
55.At its present level of operations, a small manufacturing firm has
Product Product
total variable costs equal to 75% of sales and total fixed costs equal
A B
to 15% of sales. Based on variable costing, if sales change by
Selling price per pound without P P 9.00
P1.00, income will change by
further Processing 12.00
A. P0.25 C. P0.75
Selling price per pound with further P P 11.00
B. P0.12 D. P0.10
Processing 15.00
Total separate weekly variable costs P50,00 P45,000
Relevant Costing
of Further processing 0
56.An important concept in decision making is described as the
contribution to income that is forgone by not using a limited To maximize Wallace Company’s manufacturing contribution
resources in its best alternative use. This concept is called margin, the total separate variable costs of further processing that
A. Marginal cost C. Potential cost should be incurred each week are
B. Opportunity costs D. Relevant cost A. P45,000 C. P95,000
B. P50,000 D. P0
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costs
60.Blue & Company sells a product for P20 with variable cost of P8 per Contribution P 60 P42
unit. Blue could accept a special order for 1,000 units at P14. If margin
Blue accepted the order, how many units could it lose at the regular Total demand for X is 16,000 units and for Y is 8,000 units. Machine
price before the decision become unwise? hours is a scarce resource. 42,000 machine hours are available
A. 1,000 units C. P500 units during the year. Product X requires 6 machine hours per unit while
B. P200 units D. 0 units product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
61.Geary Manufacturing has assembled the following data pertaining A. B. C. D.
to two popular products. Product X 16,000 8,000 7,000 3,000
Blender Electric Product Y -0- 4,000 -0- 8,000
mixer
Direct materials P 6 P 11 63.Wagner sells product A at a price of P21 per unit. Wagner’s cost per
Direct labor 4 9 unit based on the full capacity of 200,000 units is as follows:
Factory overhead @ P16 16 32 Direct materials P 4
per hour Direct labor 5
Cost if purchased from an 20 38 Overhead (2/3 of which is fixed) 6
outside supplier P15
Annual demand (units) 20,000 28,000 A special order offering to buy 20,000 units was received from a
Past experience has shown that the fixed manufacturing overhead foreign distributor. The only selling costs that would be incurred on
component included in the cost per machine hour averages P10. this order would be P3 per unit for shipping. Wagner has sufficient
Geary has a policy of filling all sales orders, even if it means existing capacity to manufacture the additional units
purchasing units from outside suppliers. To achieve an increase in operating income of P40,000. Wagner
If 50,000 machine hours are available, and Geary Manufacturing should charge a selling price of
desires to follow an optimal strategy, it should A. P14 C. P16
A. produce 25,000 electric mixers, and purchase all other units as B. P15 D. P18
needed
B. produce 20,000 blenders and 15,000 electric mixers, and 64.Yardley Co. has considerable excess manufacturing capacity. A
purchase all other units as needed special job order’s cost sheet includes the following applied
C. produce 20,000 blenders and purchase all other units as needed manufacturing overhead costs:
D. purchase all units as needed Variable costs P56,250
Fixed costs 45,000
62.The Hingis Corporation manufactures two products: X and Y. The fixed costs include a normal P6,800 allocation for in-house
Contribution margin per unit is determined as follows: design costs, although no in-house design will be done. Instead,
Product X Product Y the special job will require the use of external designers costing
Revenue P 130 P80 P13,750. What is the minimum acceptable price of the job?
Variable 70 38 A. P63,050 C. P101,250
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B. P70,000 D. P108,200 B. decrease by P90,000 D. decrease by P40,000

65.MC Industries manufactures a product with the following costs per 69.Consider the following portion of a segmented income statement for
unit at the expected production of 30,000 units: the year just ended. Assume that the fixed expenses of Division X
Direct materials P 4 include P30,000 of direct expenses and that the discontinuance of
Direct labor the department will not affect the sales of the other departments
Variable manufacturing overhead nor reduce the common expenses:
Fixed manufacturing overhead Net sales P100,000
The company has the capacity to produce 40,000 units. The Variable manufacturing costs 60,000
product regularly sells for P40. A wholesaler has offered to pay P32 Gross profit P 40,000
a unit for 2,000 units. Fixed expenses (direct and allocated) 50,000
If the firm is at capacity and the special order is accepted, the effect Loss from operations P (10,000)
on operating income would be What would be the effect on the firm’s operating income if Division
A. a P20,000 increase C. a P4,000 increase X were discontinued?
B. a P16,000 decrease D. P0 A. increase of P10,000 C. decrease of P100,000
B. decrease of P40,000 D. decrease of P10,000
66.Gata Co. plans to discontinue a department with a P48,000
contribution to overhead, and allocated overhead of P96,000, of 70.Condensed monthly operating income data for Cosmo Inc. for
which P42,000 cannot be eliminated. What would be the effect of November 2000 is presented below. Additional information
this discontinuance on Gata’s pretax profit? regarding Cosmo’s operation follows the statement.
A. increase of P48,000 C. increase of P6,000 Total Hall Town
B. decrease of P48,000 D. increase of P6,000 Store Store
Sales P200,000 P80,000 P120,000
67.Pili Company plans to discontinue a segment with a P32,000 Less Variable costs 116,00 32,000 84,00
segment margin. Common expenses allocated to the segment 0 0
amounted to P45,000, of which P20,000 cannot be eliminated if the Contribution margin P 84,000 P48,000 P
segment were closed. The effect of closing down the segment on 36,000
Pili Company’s before tax profit would be Less direct fixed 60,00 20,000 40,00
A. P12,000 decrease C. P12,000 increase expense 0 0
B. P 7,000 decrease D. P 7,000 increase Store segment P 24,000 P28,000 P
margin ( 4,000)
68.Division B earns a contribution margin of P200,000 and has a Less common fixed 10,00 4,000 6,00
divisional margin of P70,000. If Division B is closed, all of the direct expenses 0 0
divisional expenses and P110,000 of common expenses can be Operating income P 14,000 P24,000 P
eliminated. These facts indicate that closing the division will cause (10,000)
the firm’s operating income to One-fourth of each store’s direct fixed expenses would continue
A. increase by P90,000 C. increase by P40,000 through December 31, 2001, if either store were closed.
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Management estimates that closing the Town Store would result in a Supply, one of Leland’s reliable vendors, has offered to supply Part No.
ten percent decrease in Hall Store. Hall Store would not affect Town KJ137 at a unit price of P15,000.
Store sales. The operating results for November 2000 are
representative of all months. 72.If Leland purchases the KJ37 units from Scott, the capacity Leland
A decision of Cosmo, Inc. to close the Town Store would result in a used to manufacture these parts would be idle. Should Leland
monthly increase (decrease) in Cosmo’s operating income during decide to purchase the parts from Scott, the unit cost of KJ37 would
2001 of A. increase by P4,800 C. decrease by P3,200
A. P4,000 C. (P800) B. decrease by P6,200 D. increase by P1,800
B. (P10,800) D. (P6,000) 73. Assume Leland Manufacturing is able to rent all idle capacity for
P25,000 per month. If Leland decided to purchase the 10 units from
71.Peluso Company, a manufacturer of snowmobiles, is operating at 70 Scott Supply, Leland’s monthly cost for KJ37 would
percent of plant capacity. Peluso’s plant manager is considering A. increase P48,000 C. decrease P7,000
making the headlights now being purchased for P1,100 each, a B. increase P23,000 D. decrease P57,000
price that is not expected to change in the near future. The Peluso
plant has the equipment and labor force required to manufacture 74.Assume that Leland does not wish to commit to a rental agreement
the headlights. The design engineer estimates that each headlight but could use idle capacity to manufacture another product that
requires P400 of direct materials and P300 of direct labor. Peluso’s would contribute P52,000 per month. If Leland elects to
plant overhead rate is 200 percent of direct labor costs, and 40 manufacture KJ37 in order to maintain quality control, Leland’s
percent of the overhead is fixed cost. A decision by Peluso opportunity cost is
Company to manufacture the headlights will result in a gain (loss) A. P18,000 C. P4,000
for each headlight of B. (P20,000) D. (P48,000)
A. P(200) C. P40
B. P160 D. P280 Responsibility Accounting & Transfer Pricing
75.A management decision may be beneficial for a given profit center,
Questions 72 thru 74 are based on the following information: but not for the entire company. From the overall company
Leland Manufacturing uses 10 units of Part Number KJ37 each month in viewpoint, this decision would lead to
the production of radar equipment. The unit cost to manufacture one A. goal congruence C. suboptimization
unit of KJ37 is presented below. B. centralization D. maximization
Direct materials P1,000
Materials handling (20% of direct material cost) 200 76.Company L had its operating asset turnover increased by 50% and
Direct labor 8,000 the operating income margin increased by 50%. Company U had its
Manufacturing overhead (150% of direct labor) 12,000 operating asset turnover increased by 30% and the operating
Material handling represents the direct variable costs of the Receiving income margin decreased by 30%. What changes are expected for
department that are applied to direct materials and purchased ROI of Company L and Company U, respectively?
components on the basis of their cost. This is a separate charge in A. B. C. D.
addition to manufacturing overhead. Leland’s annual manufacturing Company 50% 125% 225% 125%
overhead budget is one-third variable and two-thirds fixed. Scott L increase increase increase increase

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Company 9% 9% no change no change customer will not accept fewer than 10,000 units. Accepting the
U decrease decrease order would increase fixed costs by P10,000 and investment by
P40,000.
77.The manager of the Queen Division of Pusoy Company expects the At the price of P7 offered by foreign customer, what is the
following results in 2004 (pesos in millions): maximum number of units in regular sales that Houston could
Sales P49.60 sacrifice and still maintain its expected residual income?
Variable costs (60%) 29.76 A. 2,333 C. 2,667
Contribution margin P19.84 B. 3,333 D. 3,667
Fixed costs 12.00
Profit P 7.84 79. Family Company has two division, Ma and Pa. Information for each division
Investment: is as follows:
Plant equipment P19.51 Ma Pa
Working capital 14.88 Net earnings for division P20,000 P65,000
P34.39 Asset base for division P50,000 P300,000
ROI P7.84/P34.39 22.80% Target rate of return 15% 18%
The division has a target ROI of 30 percent, and the manager has Operating income 10% 20%
asked you to determine how much sales volume the division would margin
need to reach that. He states that the sales mix is relatively Weighted average cost 12% 12%
constant so variable costs should be close to 60 percent of sales, of capital
fixed cost and plant and equipment should remain constant, and What is the Economic Value Added for Ma and Pa, respectively?
working capital (cash, receivables, and inventories) should vary A. P20,000, P36,000 C. P12,500, P11,000
closely with sales in the percentage reflected above. The peso B. P14,000, P29,000 D. P20,000, P29,000
sales that the division needs in order to reach the 30 percent ROI
target is 80. An appropriate transfer price between two divisions of the Star
A. P19,829,032 C. P57,590,322 Corporation can be determined from the following data:
B. P44,373,871 D. P59,510,000 Fabrication Division
Market price of subassembly P50
78.Ace Division of Card, Inc. expects the following result for 2004: Variable cost of subassembly P20
Unit sales 70,000 Excess capacity (in units) 1,000
Unit selling price P 10 Assembling Division
Unit variable cost P 4 Number of units needed 900
Total fixed costs P 300,000 What is the natural bargaining range for the two divisions?
Total investment P 500,000 A. Between P20 and P50 C. Any amount less
The minimum required ROI is 15 percent, and divisions are than P50
evaluated on residual income. A foreign customer has approached B. Between P50 and P70 D. P50 is the only
Houston’s manager with an offer to buy 10,000 units at P7 each. acceptable price
Houston Division has capacity of 75,000 units and the foreign

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81.Pacific Company has three plants: one located in Malaysia, one in

India and another plant located in the Philippines. Both plants
manufactures a component used in a finished product
manufactured in the Philippine plant. Currently, both plants are Product Pricing Decision
operating at 70 percent capacity. In Malaysia the income tax rate is 84.Garden Corp. had the following information:
42% while in India the tax rate 35%; in the Philippines, the Revenues P500,000
corporate income tax rate is 40%. Cost of goods sold:
The market price of the component, in peso equivalent, is P100 and Direct materials P100,000
the foreign plant’s costs to manufacture the component are as Direct labor 75,000
follows: Overhead 125,000 300,000
Direct materials P10 Gross profit P200,000
Direct labor Selling and admin expenses 75,000
Variable overhead Operating income P125,000
Fixed overhead What are the mark up based on:
Which transfer price would be in the best interest of the overall A. B. C. D.
corporation? Cost of 66.7% 166.7% 66.7% 166.7%
A. B. C. D. goods sold
Malaysia P35 P 35 P100 P100 Prime 185.7% 42.9% 42.9% 185.7%
India P35 P100 P100 P 35 costs
Direct 400.0% 500.0% 400.0% 500.0%
82.The Engine Division provides motors for the Auto Division of a materials
company. The standard unit costs for Engine Division are as
follows: Master Budget
Direct materials 10,000 85.The method of budgeting which adds one month’s budget to the
Direct labor 20,000 end of the plan when the current month’s budget is dropped from
Variable Overhead 5,000 the plan refers to
Fixed Overhead 2,500 A. Long-term budget C. Incremental budget
Market price P45,500 B. Operations budget D. Continuous budget
What is the best transfer price to avoid transfer price problems?
A. P45,500 C. P35,000 86.Jakarta Corporation plans to sell 200,000 units of Batik products in
B. P30,000 D. P37,500 October and anticipates a growth in sales of 5 percent per month.
83. To avoid waste and maximize efficiency when transferring The target ending inventory in units of the product is 80% of the
products among divisions in a competitive economy, a large diversified next month’s estimated sales. There are 150,000 units in inventory
corporation should base transfer prices on: as of the end of September. The production requirement in units of
A. Full cost C. variable costs Batik for the quarter ending December 31 would be
B. replacement cost D. market price A. 670,560 C. 665,720
B. 691,525 D. 675,925

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Questions 87 & 88 concern Paradise Company, which budgets on

annual basis for its fiscal year. The following beginning and ending
inventory levels (in units) are planned for the fiscal year of July 1, 2000
through June 30, 2001.
July 1, 2000 June 30, 2001
Raw material* 40,000 50,000
Work-in-process 10,000 10,000
Finished goods 80,000 50,000
*Two (2) units of raw material are needed to produce each unit of
finished product.

87.If Paradise Company plans to sell 480,000 units during the 200-
2001 fiscal year, the number of units it would have to manufacture
during the year would be
A. 440,000 C. 510,000
B. 480,000 D. 450,000

88.If 500,000 finished units were to be manufactured during the 2000-

2001 fiscal year by Paradise Company, the units of raw material
needed to be purchased would be
A. 1,000,000 units C. 1,020,000 units
B. 1,010,000 units D. 990,000 units

89.The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000

in July, and P6,100,000 in August. On average, 30% of its sales are
cash, 50% of credit sales are collected in one month, and 45% are
collected in the second month. The remainder are written off to
bad debt in the third month after sale. What are the expected cash
inflow for August and expected receivable balance on August 31?
A. B. C. D.
Cash Inflow P5,050,00 P4,084,00 P1,830,00 P5,071,00
0 0 0 0
Aug 31 AR P7,140,00 P6,093,50 P7,232,00 P6,279,00
Balance 0 0 0 0

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B. A decrease in the initial investment

C. An increase in the useful life of the project
90.Dolyar, Inc. prepared the following sales budget: D. An increase in the discount rate
Month Cash Sales Credit Sales
February P 80,000 P340,000 93.A weakness of the internal rate of return method for screening
March 100,000 400,000 investment projects is that it:
April 90,000 370,000 A. does not consider the time value of money
May 120,000 460,000 B. implicitly assumes that the company is able to reinvest cash
June 110,000 380,000 flows from the project at the company’s discount rate
Collection pattern is: 40% percent in the month of sale, 45% in the C. implicitly assumes that the company is able to reinvest cash
month following the sale, and 10% two months following the sale. The flows from the project at the internal rate of return
remaining 5% is expected to be uncollectible. The company’s total D. fails to consider the timing of cash flows
budgeted collection from April to June amounts to
A. P1,090,000 C. P1,468,500 94. Sensitivity analysis, if used with capital projects,
B. P1,325,500 D. P1,397,500 A. Is used extensively when cash flows are known with certainty
B. Measures the change in the discounted cash flows when using
91.Beta Co. has the following sales forecasts for the selected three- the discounted payback method rather than the net present
month period in 2004 value method.
April P120,000 C. Is a “what-if” technique that asks how a given outcome will
May 70,000 change if the original estimates of the capital budgeting model
June 80,000 are changed.
Seventy percent of sales are collected in the month of the sale, and D. Is a technique used to rank capital expenditure requests.
the remainder are collected in the following month.
Accounts receivable balance (April 1, 2004) P100,000 95.If Sol Company expects to get a one-year loan to help cover the
Cash balance (April 1, 2004) 50,000 initial financing of capital project, the analysis of the project should
Minimum cash balance is P50,000. Cash can be borrowed in A. offset the loan against any investment in inventory or receivable
P10,000 increments from the local bank (assume no interest required by the project
charges). B. show the loan as an increase in the investment
What is the cash balance at the end of April, assuming that cash is C. show the loan as a cash outflow in the second year of the
received only from customers and that P200,000 out during April? project’s life
A. P34,000 C. P54,000 D. ignore the loan
B. P50,000 D. P55,000
96.Royal Industries is replacing a grinder purchased 5 years ago for
Capital Budgeting P15,000 with a new one costing P25,000 cash. The original grinder
92.Which of the following would decrease the net present value of a is being depreciated on a straight-line basis over 15 years to a zero
project? salvage value. Royal will sell this old equipment for P6,000 cash.
A. A decrease in the income tax rate The new equipment will be depreciated on a straight-line basis over

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10 years to a zero salvage value. Assuming a 40% marginal tax 100. Brand is considering, an investment in a new cheese-cutting
rate, Royal’s net cash investment at the time of purchase is the old machine to replace its existing cheese cutter. Information on the
grinder is sold and the new one purchased is existing machine and the replacement machine follow:
A. P19,000 C. P17,400 Cost of the new machine P40,000
B. P15,000 D. P25,000 Net annual savings in operating costs 9,000
Salvage value now of the old machine 6,000
97.Flow Industries is analyzing a capital investment proposal for new Salvage value of the old machine in 8 years 0
machinery to produce a new product over the next 10 years. At the Salvage value of the new machine in 8 years 5,000
end of the 10 years, the machinery must be disposed of with a net Estimated life of the new machine 8 years
zero book value but with a scrap salvage value of P20,000. It will What is the expected payback period for the new machine?
require some P30,0000 to remove the machinery. The applicable A. 4.44 years C. 8.50 years
tax rate is 35%. The appropriate “end of life” cash flow based on B. 2.67 years D. 3.78 years
the foregoing information is
A. inflow of P30,000 C. outflow of P10,000 101. Cause Company is planning to invest in a machine with a useful
B. outflow of P6,500 D. outflow of P17,000 life of five years and no salvage value. The machine is expected to
produce cash flow from operations, net of income taxes, of P20,000
98.Sarah Company is planning to purchase a new machine for in each of the five years. Cause’s expected rate of return is 10%.
P600,000. Depreciation for tax purposes will be P100,000 annually Information on present value and future amount factors is as
for six years. The new machine is expected to produce cash flow follows:
from operations, net of income taxes, of P150,000 a year in each of 1 2 3 4 5
the next six years. The accounting (book value) rate of return on Present value of .909 .826 .751 .683 .621
the initial investment is expected to be P1 at 10%
A. 8.3% C. 16.7% Present value of
B. 12.0% D. 25.0% an annuity .909 1.736 2.487 3.170 3.791
99. Barf is considering a 10-year capital investment project with of P1 at 10%
forecasted revenues of P40,000 per year and forecasted cash Future amount 1.100 1.210 1.33 1.464 1.611
operating expenses of P29,000 per year. The initial cost of the of P1 at 10%
equipment of the project is P23,000 and Barfield expects to sell the Future amount
equipment for P9,000 at the end of the tenth year. The equipment will of an 1.000 2.100 3.310 4.641 6.105
be depreciated over 7 years. The project requires a working capital annuity of
investment of P7,000 at its inception and another P5,000 at the end of P1 at 10%
year 5. Using a 40% marginal tax rate, the expected net cash flow How much will the machine cost?
from the project in the tenth year is A. P32,220 C. P75,820
A. P32,000 C. P20,000 B. P62,100 D. P122,100
B. P24,000 D. P11,000
102. Janet Company has a payback goal of 3 years on new equipment
acquisitions. A new sorter is being evaluated that costs P450,000

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and has a 5-year life. Straight-line depreciation will be used; no five equal principal payments of P1,000 each and 6% interest on the
salvage value is anticipated. Janet is subject to a 40% income tax unpaid balance. Principal and interest are due at the end of each year
rate. To meet the company’s payback goal, the sorter must for five years. Alternatively, the firm can lease the asset for five years
generate reductions in annual cash operating costs of at an annual rental cost of P1,400 with payments due at the beginning
A. P60,000 C. P150,000 of each year. The corporate tax rate is 35% and the appropriate after
B. P100,000 D. P190,000 tax cost of capital is 12%.

103. Moorman Products Company is considering a new product that

will sell for P100 and have a variable cost of P60. Expected volume
is 20,000 units. New equipment costing P1,500 and having a five-
year useful life and no salvage value is needed, and will be
depreciated using the straight-line method. The machine has cash
operating costs of P20,000 per year. The firm is in the 40 percent
tax bracket and has cost of capital of 12 percent. The present value
of 1, end of five periods is 0.56743; present value of annuity of 1 for
5 periods is 3.60478.
How many units per year the firm must sell for the investment to
earn 12 percent internal rate of return?
A. 12,838 C. 8,225
B. 10,403 D. 7,625

104. Highpoint, Inc., is considering investing in automated equipment

with a ten-year useful life. Managers at Highpoint have estimated
the cash flows associated with the tangible costs and benefits of
automation, but have been unable to estimate the cash flows
associated with the intangible benefits. Using the company’s 10%
discount rate, the net present value of the cash flows associated
with just the tangible costs and benefits is a negative P184,350.
How large would the annual net cash inflows from the intangible
benefits have to be to make this a financially acceptable
investment?
A. P18,435 C. P35,000
B. P30,000 D. P37,236

Questions 105 thru 107 are based on the following information.

A firm must choose between leasing a new asset of purchasing it with
funds from a term loan. Under the purchase option, the firm will pay

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105. Which of the following is closest to the PV of the after-tax B. 3.0 years D. 5.0 years
interest payment?
A. P360 C. P640 110.Logo’s expected IRR on its investment in this machine is
B. P453 D. P726 A. 3.3% C. 12.0%
B. 10.0% D. 15.3%
106. Which of the following is closes to the present value of cost if
leasing the asset?
A. P3,694 C. P3,849
B. P3,779 D. P3,992

107. Which of the following is closest to the PV of cost of purchasing

the new asset with a term loan?
A. P3,777 C. P4,058
B. P3,952 D. P4,153

Questions 108 through 110 are based on the following information:

Logo Co. is planning to buy a coin-operated machine costing P40,000.
For book and tax purposes, this machine will be depreciated P8,000
each year for five years. Logo estimates that this machine will yield an
annual cash inflow, net of depreciation and income taxes, of P12,000.
Logo’s desired rate of return on its investments is 12%. At the
following discount rates, the NPVs of the investment in this machine
are:
Discount rate NPV
12% +P3,258
14% + 1,197
16% - 708
18% - 2,474

108. Logo’s accounting rate of return on its initial investment in this

machine is expected to be
A. 30% C. 12%
B. 15% D. 10%

109.Logo’s expected payback period for its investment in this machine

is
A. 2.0 years C. 3.3 years

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111.Lawton Co. is expanding its manufacturing plant, which requires value 98)
an investment of P4,000,000 in new equipment and plant Profitability 98% 101% 106% 105%
modifications. Lawton’s sales are expected to increase by index
P3,000,000 per year as a result of the expansion. Cash investment Internal rate 11% 13% 14% 15%
in current assets averages 30% of sales; accounts payable and of return
other current liabilities are 10% sales. What is the estimated total Which project(s) should Investors, Inc. select during the upcoming
investment for this expansion? year under each budgeted amount of funds?
A. P3,400,000 C. P4,600,000 No Budget P600,000 Available P300,000Available
B. P4,300,000 D. P4,000,000 Restriction Funds Funds
Projects 2, 3 & 4 Projects 3 & 4 Project 3
112.Par Co. is reviewing the following data relating to an energy saving Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4
investment proposal: Projects 1, 3 & 4 Projects 2 & 3 Project 2
Investment P50,000 Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
What would be the annual savings needed to make the investment
realize a 12% yield?
A. P8,189 C. P12,306
B. P11,111 D. P13,889

113.Investor’s Inc. uses a 12% hurdle rate for all capital expenditures
and has done the following analysis for four projects for the
upcoming year.
Project Project 2 Project 3 Project
1 4
Initial cash P200,0 P298,00 P248,000 P272,0
outlay 00 0 00
Annual net
cash inflows
Year 1 P P100,00 P 80,000 P
65,000 0 95,000
Year 2 70,000 135,000 95,000 125,00
0
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net present ( 3,7 4,276 14,064 14,662

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Questions 114 thru 117 are based on the following information. B. P16,762 D. P22,800
In order to increase production capacity, Gunning Industries is
considering replacing an existing production machine with a new 116.The acquisition of the new production machine by Gunning will
technologically improved machine effective January 1, 2002. The contribute a discounted net-of-tax contribution margin of
following information is being considered by Gunning Industries: A. P242,624 C. P363,936
 The new machine would be purchased for P160,000 in cash. B. P303,280 D. P454,920
Shipping installation, and testing would cost an additional P30,000.
 The new machine is expected to increase annual sales by 20,000
units at a sales price of P40 per unit. Incremental operating costs
include P30 per unit in variable costs and total fixed costs of
P40,000 per year.
 The investment in the new machine will require an immediate
increase in working capital of P35,000. This cash outflow will be
recovered at the end or year 5.
 Gunning uses straight-line depreciation for financial reporting and
tax reporting purposes.
 The new machine has an estimated useful life of 5 years and zero
salvage value
 Gunning is subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments
and will employ the following factors and rates:
Per PV of 1 at 10% PV of an ordinary annuity of 1 at
iod 10%
1 .909 .909
2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791

114.Gunning Industries’ net cash outflow in a capital budgeting

decision is
A. P190,000 C. P204,525
B. P195,000 D. P225,000

115.Gunning Industries’ discounted annual depreciation tax shield for

the year 2002 is
A. P13,817 C. P20,725
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117.The overall discounted cash flow impact of Gunning’s working Inventory turnover (based on cost of sales) 8 times
capital investment for the new production machine would be Gross profit margin 40%
A. P(7,959) C. P(13,265) Sheridan’s net sales for the year were
B. P(10,080) D. P(35,000) A. P800,000 C. P1,200,000
B. P480,000 D. P672,000
Financial Statement Analysis
118. Sales (in millions) for a three year period are: Year 1 P4, Year 2
P4.6, and Year 3 P5.0. Using Year 1 as the base year the
percentage increase in sales in Years 2 and 3 are, respectively
A. 115% and 125% C. 115% and 130%
B. 115% and 109% D. 87% and 80%

119. A company has total sales of P300,000 with a gross profit ratio
of 35%. Inventory at the beginning of the period was P50,000 and
at the end of the period was P70,000. Net income is P40,000.
Inventory turnover is
A. 5 times C. 1.75 times
B. 3.25 times D. 0.67 times

120. The times interest earned ratio of McHoggan Company is

4.5times. The interest expense for the year was P20,000 and the
company’s tax rate is 40%. The company’s net income is:
A. P22,000 C. P42,000
B. P54,000 D. P66,000

121. If the North Division of Alliance Products Company had an

operating asset turnover of 4.2 and an operating income margin of
0.10, the return on investment would be
A. 23.8% C. 42.0%
B. 420.0% D. 4.2%

122. Selected data from Sheridan Corporation’s year-end financial

statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio
Quick ratio
Current liabilities P120,000

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123. Jade Corporation has a practical production capacity of a million B. P150,000 U; P120,000 F D. P180,000 U; P150,000 F
units. The current year’s master budget was based on the
production and sales of 700,000 units during the current year. Working Capital Management
Actual production for the current year was 720,000 units, while 126.Gear Inc., has a total annual cash requirement of P9,075,000
actual sales amounted to only 600,000 units. The units are sold for which are to be paid uniformly. Gear has the opportunity to invest
P20 each and the contribution margin ratio is 30%. The peso the money of 24% per annum. The company spends, on the
amount that best qualifies the Marketing Department’s failure to average, P40 for every cash conversion to marketable securities.
achieve budgeted performance for the current year is: What is the optimal cash conversion size?
A. P720,000 unfavorable C. P2,400,000 unfavorable A. P60,000 C. P55,000
B. P600,000 unfavorable D. P2,000,000 unfavorable B. P45,000 D. P72,500

124. The gross profit of Rea Company for each of the years ended as 127. Lyman Company has the opportunity to increase annual sales
indicated follow: P100,000 by selling to a new riskier group of customers. The
2001 2000 uncollectible expense is expected to be 15% and collection costs
Sales P792,000 P800,000 will be 5%. The company’s manufacturing and selling expenses are
Cost of 463,000 480,000 70% of sales, and its effective tax rate is 40%. If Lyman should
goods sold accept this opportunity, the company’s after tax profits would
Gross profit P328,000 P320,000 increase by
Assuming that 2001 selling price was 10% lower, what would be the A. P6,000 C. P10,200
decrease in gross profit due to change in the selling price? B. P10,000 D. P14,400
A. P8,000 C. P79,200
B. P72,000 D. P88,000 128.The following information regarding a change in credit policy was
assembled by the Willis Company. The company has a required rate
125. Garfield Company, which sells a single product, provided the of return of 10% and a variable cost ratio of 60%.
following data from its income statements for the years 2001 and Old Credit Policy New Credit Policy
2000: Sales P3,600,000 P3,960,000
2001 2000 Average 30 days 36 days
Sales (150,000 units in 2001; P750,000 P720,0 Collection
180,000 units in 2000) 00 period
Cost of goods sold 525,00 575,0 The pretax cost of carrying the additional investment in receivable,
0 00 using 360-day year would be
Gross profit P225,000 P145,0 A. P5,760 C. P8,160
00 B. P9,600 D. P960
In an analysis of variation in gross profit between the two years,
what would be the effects of changes in sales price and sales 129. The sales director of Lloyd Company suggested that certain
volume, respectively? credit terms be modified. He estimates the following effects:
A. P150,000 F; P120,000 U C. P180,000 F; P150,000 U  Sales will increase by at least 20%

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 Accounts receivable turnover will be reduced to 8 times from the 131.Expected annual usage of a particular raw material is 2,000,000
present turnover of 10 times units and the standard order size is 10,000 units. The invoice cost
 Bad debts, now at 1% of sales will increase to 1.5% of each unit is P500, and the cost to place one purchase order is
Sales before the proposed changes is at P900,000. Variable cost P80. The estimated annual order costs is
ratio is 55% and the desired rate of return is 20%. Fixed expenses A. P16,000 C. P32,000
amount to P150,000. B. P100,000 D. P50,000
Should the company allow revision of its credit terms?
A. Yes, because income will increase by P64,800 132.The Handy Company has the following information available
B. Yes, because losses will be reduced by P73,800 concerning one of its inventory items:
C. No, because income will be reduced by P13,000 Cost of placing an order P 32.00
D. No, because losses will be increased by P28,000 Unit of carrying cost per year P 4.00
Annual unit demand 5,625
130.A spindle manufacturer uses about 200 cases of raw wood per Safety stock 100
month. It pays a broker P50.00 to locate a supplier and handle the Average daily demand 25
ordering and delivery arrangements. Storage and handling costs Normal lead time in days 10
are P0.02 per case per month. If each case costs P0.78 the most The reorder point for the inventory item is
economical order quantity (rounded to the next whole number) is A. 250 C. 350
A. 884 cases C. 1,133 cases B. 600 D. 300
B. 625 cases D. 1,000 cases
133.The G Corporation purchases 60,000 headbands per year. The
average purchase lead time is 20 working days. Maximum lead
time is 27 working days. The corporation works 240 days per year.
The appropriate safety stock level and the reorder point for the
company are:
A. B. C. D.
Safety 1,750 1,750 1,167 1,167
Stock
Reorder 6,750 5,250 6,750 5,250
Point

134.Bye Company borrows from a bank a certain loan at a stated

discount rate of 12 percent per annum. The bank requires 10
percent of loan as compensating balance in its new checking
account. The loan is payable at the end of 6 months. The effective
interest rate of this loan is
A. 28.21 percent C. 27.27 percent
B. 14.29 percent D. 15.38 percent

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Risk-free rate 9.0 percent

135.The Manunuba Company was recently quoted terms on a The required market return is
commercial bank loan of 7% interest with 20% compensating A. 13.0 percent C. 18.0 percent
balance. The term of the loan is one year. The effective cost of B. 25.0 percent D. 16.0 percent
borrowing (rounded to the nearest hundredth) for each interest
arrangements are: 140. The Taurus Company’s last dividend was P3.00; its growth rate is
A. B. C. D. 6 percent and the stock now sells for P36. New stock can be sold to
Discounted 9.59% 8.75% 7.53% 7.53% net the firm P32.40 per share.
interest What is the Taurus Company’s cost of retained earnings?
Payable upon 8.75% 9.59% 8.75% 9.59% A. 14.83 percent C. 15.81 percent
maturity B. 15.26 percent D. 9.69 percent

Cost of Capital & Risk 141. The Leonard Company’s last dividend was P3.00; its growth rate
136. For 2003, Bee Company increased earnings before interest and is 6 percent and the stock now sells for P36. New stock can be sold
taxes by 17%. During the same period, net income after tax to net the firm P32.40 per share.
increased by 42%. The degree of financial leverage that existed A. 14.83 percent C. 15.81 percent
during 2003 is B. 15.26 percent D. 9.69 percent
A. 1.70 C. 2.47
B. 4.20 D. 5.90 142.Williams Co. is interested in measuring its overall cost of capital
and has gathered the following data. Under the terms described
137.Mars Company plans to issue some P100 preferred stock with an below, the company can sell unlimited amounts of all instruments.
11 percent dividend. The stock is selling on the market for P97, and  Williams can raise cash by selling P1,000, 8%, 20-year bonds
Mars must pay flotation costs of 5 percent of the market price. The with annual interest payments. In selling the issue, an average
company is under the 40 percent corporate tax rate. premium of P30 per bond would be received, and the firm must
The cost of preferred stock for Mars Company is pay flotation costs of P30 per bond. The after-tax cost of funds
A. 7.16 percent C. 11.34 percent is estimated to be 4.8%.
B. 6.80 percent D. 11.94 percent  Williams can sell 8% preferred stock at P105 per share. The cost
of issuing and selling the preferred stock is expected to be P5
138.ABC Corp. stock’s beta is .50. If the market return is 16%, and the per share.
risk-free rate is 6%, what is the required rate of return on ABC  Williams’ common stock is currently selling for P100 per share.
stock? The firm expects to pay cash dividends of P7 per share next
A. 11% C. 13% year, and the dividends are expected to remain constant. The
B. 12% D. 14% stock will have to be underpriced by P3 per share, and flotation
costs are expected to amount to P5 per share.
139.The following data are related to WXY stock:  Williams expects to have available P100,000 of retained
Required return on WXY common 15 percent earnings in the coming year; once these retained earnings are
Beta coefficient

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exhausted, the firm will use new common stock as the form of 144.Using the dividend growth model, what is the expected cost of
common stock equity financing. retained earnings for Larry Technics, Inc.?
 Williams’ preferred capital structure is A. 10.44 percent C. 16.30 percent
Long-term debt B. 9.30 percent D. 17.44 percent
Preferred stock
Common stock Quantitative Methods
What are the corresponding weighted-average cost of capital under 145.Reina, Inc. has a target total labor cost of P3,600 for the first four
each financing needs? batches of a product. Labor is paid P10 an hour. If Soft expects an
A. B. C. D. 80% learning curve, how many hours should the first batch take?
P200,000 6.5% 6.8% 4.5% 7.3% A. 360 hours C. 140.63 hours
P1,000,00 6.8% 4.8% 6.5% 9.1% B. 57.6 hours D. 230.4 hours
0
146. A company is designing a new regional distribution warehouse.
Questions 143 & 144 are based on the following information. To minimize delays in loading and unloading trucks, an adequate
The earnings, dividends, and stock price of Larry Technics, Inc. are number of loading docks must be built. The most relevant
expected to grow at 7 percent per year after this year. Larry’s common technique to assist in determining the proper number docks is
stock sells for P23 per share, its last dividend was P2.00 and the A. Cost-volume-profit analysis C. PERT/CPM analysis
company pay P2.14 at the end of the current year. Larry should pay B. Linear programming D. Queuing theory
P2.50 flotation cost.
147. Following is a table for two separate product lines, X and Y:
143. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the Prob X Profit Y Profit
average return on the market is 12 percent, what will be the firm’s abili
cost of equity using the CAPM approach? ty
A. 16.05 percent C. 15.00 percent 2 P5,000 P 500
B. 14.27 percent D. 14.00 percent 0%
7 3,000 4,000
0%
1 6,000 8,000
0%
The product line to obtain maximum utility for a risk-averse decision
maker is
A. X because it has the highest expected profit.
B. Y because it has the highest dispersion
C. Y because it has the highest expected profit
D. X because it has the lowest dispersion

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148.Dough Distributors has decided to increase its daily muffin What is the expected value of Dough’s decision to buy 100
purchases by 100 boxes. A box of muffins costs P2 and sells for P3 additional boxes of muffins?
through regular stores. Any boxes not sold through regular stores A. P28 C. P52
are sold through Dough’s thrift store for P1. Dough assigns the B. P40 D. P68
following probabilities to selling additional boxes:
Additional sales Probability 149.A beverage stand can sell either soft drinks or coffee on any given
60 day. If the stand sells soft drinks and the weather is hot, it will
100 make P2,500; if the weather is cold, the profit will be P1,000. If the
stand sells coffee and the weather is hot, it will make P1,900; if the
weather is cold, the profit will be P2,000. The probability of cold
weather on a given day at this time is 60%.
The expected payoff for either selling coffee or soft drinks and the
expected payoff if the vendor has perfect information are
A. B. C. D.
Coffee P1,360 P1,960 P2,200 P3,900
Soft drinks P1,600 P1,600 P1,900 P1,900
Perfect P3,000 P2,200 P1,360 P1,960
Information.

150.A construction contractor has been invited to submit a bid on a

large and complicated construction project. The preparation of the
bid proposal will cost about P20,000. Management feels that if the
company bids low enough to result in a net profit of P50,000, there
would be a 60% chance of getting the job. If the company bids high
enough to result in a P100,000 net profit, the chance of getting the
contract would be only 20%. What should the company do?
A. Bid only high enough to allow for P50,000 profit because the
expected value of the payoff is P22,000.
B. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P4,000
C. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P20,000.
D. Make no bid.

151.Critical Path Method (CPM) is a technique for analyzing, planning,

and scheduling large, complex projects by determining the critical

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path from a single time estimate for each event in a project. The 152.Clara Building Corporation uses the critical path method to monitor
critical path: construction jobs. The company is currently 2 weeks behind
A. Is the shortest path from the first event to the last event for a schedule on Job 181, which is subject to a P10,500-per-week
project. completion penalty. Path A-B-C-F-G-H-I has normal completion time
B. Is an activity within the path that requires the most number of of 20 weeks, and critical path A-D-E-F-G-H-I has a normal
time. completion time of 22 weeks. The following activities can be
C. Is the earliest time to complete the project. crashed:
D. Is the maximum amount of time an activity may be delayed Activit Cost to Crash 1 Week Cost to Crash 2 Weeks
without delaying the total project beyond its target time. ies
BC P 8,000 P15,000
DE 10,000 19,600
EF 8,800 19,500
Clara desires to reduce the normal completion time of Job 181 and,
at the same time, report the highest possible income for the year.
Clara should crash
A. BC 1 week and EF 1 week C. EF 2 weeks
B. BC 2 weeks D. DE 1 week and EF
1week

Information Systems
153. A major advantage of obtaining a package of applications
programs from a software vendor is
A. the likelihood of reducing the time span from planning to
implementation
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance the programs will be written in a high-level
language

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Answer Key COMPREHENSIVE:

1. B 11. D 21. C 31. A 41. B 1. Gasco Co. is a very large company with common stock listed on the
2. B 12. A 22. B 32. B 42. A Philippine Stock Exchange and bonds traded over the counter. As of
3. B 13. A 23. A 33. B 43. B the current balance sheet, it has three bond issues outstanding:
4. B 14. D 24. B 34. A 44. A P150 million of 10 percent series 2013
5. A 15. B 25. A 35. A 45. B P50 million of 7 percent series 2007
6. B 16. C 26. C 36. C 46. B P75 million of 5 percent series 2004
7. C 17. A 27. A 37. A 47. B The vice president of finance is planning to sell P75 million of bonds
8. C 18. D 28. D 38. D 48. C next year to replace the debt due to expire in 2004. Present market
9. A 19. A 29. D 39. B 49. A yields on similar Baa-rated bonds are 12.1 percent. Gasco also has
10. A 20. B 30. A 40. A 50. B P90 million of 7.5 percent noncallable preferred stock outstanding,
and it has no intentions of selling any preferred stock at any time in
the future. The preferred stock is currently priced at P80 per share,
51. A 61. A 71. C 81. B 91. C
and its dividend per share is P7.80.
52. B 62. A 72. A 82. A 92. D The company has had very volatile earnings, but its dividends per
53. A 63. C 73. B 83. D 93. C share have had a very stable growth rate of 8 percent and this will
54. B 64. B 74. C 84. A 94. C continue. The expected dividend is P1.90 per share, and the
55. A 65. B 75. C 85. D 95. D common stock is selling for P40 per share. The company’s
56. B 66. C 76. B 86. C 96. C investment banker has quoted the following flotation costs to
57. A 67. B 77. C 87. D 97. B Gasco: P2.50 per share for preferred stock and P2.20 per share for
58. B 68. C 78. A 88. B 98. A common stock.
59. A 69. D 79. B 89. D 99. B On the advice of its investment banker, Gasco has kept its debt at
60. C 70. B 80. A 90. C 100. D 50 percent of assets and its equity at 50 percent. Gasco sees no
need to sell either common or preferred stock in the foreseeable
101. C 111. C 121. C 131. A 141. C future as it generated enough internal funds for its investment
102. D 112. C 122. A 132. C 142. A needs when these funds are combined with debt financing. Gasco’s
103. A 113. A 123. B 133. A 143. C corporate tax rate is 40 percent.
104. B 114. D 124. D 134. D 144. D
105. B 115. A 125. A 135. A 145. C Compute the cost of capital for the following:
106. A 116. D 126. C 136. C 146. D 1. Bond (debt)
107. C 117. C 127. A 137. D 147. D 2. Preferred stock
108. D 118. A 128. A 138. A 148. C 3. Common equity in the form of retained earnings
109. C 119. B 129. A 139. A 149. B 4. New common stock
110. D 120. C 130. D 140. A 150. C 5. Weighted average cost of capital

2. Andres Company has a single product called Kad. The company

151. C 152. D 153. A
normally produces and sells 60,000 Kads each year at a selling

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price of P32 per unit. The company’s unit costs at this level of A number of questions relating to the production and sales of Kads
activity are given below: follow. Each question is independent.
Direct materials P10.00
Direct Labor 4.50 1. Assume that Andres Company has sufficient capacity to produce
Variable manufacturing overhead 2.30 90,000 Kads each year without any increase in fixed
Fixed manufacturing overhead 5.00 (P300,000 total) manufacturing overhead costs. The company could increasein
Variable selling expenses 1.20 sales by 25% above the present 60,000 units each year if it were
Fixed selling expenses 3.50 (P210,000 total) willing to increase the fixed selling expenses by P80,000. What
would be the effect of the increase in both sales and fixed
expenses on the company profit?

2. Assume again that Andres Company has sufficient capacity to

produce 90,000 Kads each year. A customer in a foreign market
wants to purchase 20,000 Kads. Import duties on the Kads
would be P1.70 per unit, and costs for permits and licenses
would be P9,000. The only selling costs that would be
associated with the order would be P3.20 per unit shipping
costs. What is the breakeven price on this order?

3. The company has 1,000 Kads on hand that have some

irregularities and are therefore considered to be “seconds”. Due
to the irregularities, it will be impossible to sell these units at the
normal price through regular distribution channels. What unit
costs figure is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andres Company is unable

to purchase more material for the production of Kads. The strike
is expected to last for two months. Andres Company has
enough material on hand to continue to operate at 30% of
normal levels for the two-month period. As an alternative,
Andres could close its plant down entirely for the two months. If
the plant were closed, fixed overhead costs would continue at
60% of their normal level during the two-month period; the fixed
selling costs would be reduced by 20% while the plant was
closed. What would be the peso advantage or disadvantage of
closing the plant for the two-month period?

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5. An outside manufacturer has offered to produce Kads for Andres

Company and to ship them directly to Andres’ customers. If
Andres accepts this offer, the facilities that it uses to produce
Kads would be idle; however, fixed overhead costs would be
reduced by 75% to their present value. Since the outside
manufacturer would pay for all the costs of shipping, the
variable selling costs would be only two-thirds of their present
amount. What the unit cost figure that is relevant for
comparison to whatever quoted price is received from the
outside manufacturer?

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