Discuss the importance of complementary effects in a keep-or-drop decision.
> Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero
> Which of the following is not true regarding the IRR? a. The IRR is the interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost. b. The IRR is the interest rate that sets the NPV equal to ze
> Elway Company provided the following income statement for the last year: Sales …………………………………………….. $1,040,000,000 Less: Variable expenses ……………………... 700,250,000 Contribution margin ………………………… $ 339,750,000 Less: Fixed expenses …………………………. 183,750,000 O
> Explain how creditors, investors, and managers can use common-size analysis as an aid in decision making.
> Assume that an investment of $1,000 produces a future cash flow of $1,000. The discount factor for this future cash flow is 0.80. The NPV is a. $0. b. $110. c. ($200). d. $911. e. none of these.
> If the present value of future cash flows is $4,200 for an investment that requires an outlay of $3,000, the NPV a. is $200. b. is $1,000. c. is $1,200. d. is $2,200. e. cannot be determined.
> Using NPV, a project is rejected if it is a. equal to zero. b. negative. c. positive. d. equal to the required rate of return. e. greater than the cost of capital.
> NPV is calculated by using a. the required rate of return. b. accounting income. c. the IRR. d. the future value of cash flows. e. none of these.
> NPV measures a. the profitability of an investment. b. the change in wealth. c. the change in firm value. d. the difference in present value of cash inflows and outflows. e. all of these.
> If the NPV is positive, it signals a. that the initial investment has been recovered. b. that the required rate of return has been earned. c. that the value of the firm has increased. d. all of these. e. both a and b.
> An investment of $2,000 provides an average net income of $400. Depreciation is $40 per year with zero salvage value. The ARR using the original investment is a. 44%. b. 22%. c. 20%. d. 40%. e. none of these.
> The ARR has one specific advantage not possessed by the payback period in that it a. considers the time value of money. b. measures the value added by a project. c. is always an accurate measure of profitability. d. is more widely accepted by financial
> The payback period suffers from which of the following deficiencies? a. It is a rough measure of the uncertainty of future cash flows. b. It helps control the risk of obsolescence. c. It ignores the uncertainty of future cash flows. d. It ignores the fi
> An investment of $1,000 produces a net cash inflow of $500 in the first year and $750 in the second year. What is the payback period? a. 1.67 years b. 0.50 year c. 2.00 years d. 1.20 years e. Cannot be determined.
> Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal produc
> An investment of $6,000 produces a net annual cash inflow of $2,000 for each of 5 years. What is the payback period? a. 2 years b. 1.5 year c. Unacceptable d. 3 years e. Cannot be determined.
> Mutually exclusive capital budgeting projects are those that a. if accepted or rejected do not affect the cash flows of other projects. b. if accepted will produce a negative NPV. c. if rejected preclude the acceptance of all other competing projects. d
> To make a capital investment decision, a manager must a. estimate the quantity and timing of cash flows. b. assess the risk of the investment. c. consider the impact of the investment on the firm’s profits. d. choose a decision criterion to assess viabi
> Capital investments should a. always produce an increase in market share. b. only be analyzed using the ARR. c. earn back their original capital outlay plus a reasonable return. d. always be done using a payback criterion. e. do none of these.
> Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPVs. Explain how a firm can legitimately choose between two such projects.
> Explain why NPV is generally preferred over IRR when choosing among competing or mutually exclusive projects. Why would managers continue to use IRR to choose among mutually exclusive projects?
> The IRR is the true or actual rate of return being earned by the project. Do you agree or disagree? Discuss.
> Explain how the NPV is used to determine whether a project should be accepted or rejected.
> What is the role that the required rate of return plays in the NPV model? In the IRR model?
> What is the cost of capital? What role does it play in capital investment decisions?
> Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate
> Explain the relationship between NPV and a firm’s value.
> The NPV is the same as the profit of a project expressed in present dollars. Do you agree? Explain.
> The time value of money is ignored by the payback period and the ARR. Explain why this is a major deficiency in these two models.
> Explain why the timing and quantity of cash flows are important in capital investment decisions.
> Explain the difference between independent projects and mutually exclusive projects.
> In the sell-or-process-further decision, a. joint costs are always relevant. b. total costs of joint processing and further processing are relevant. c. all costs incurred prior to the split-off point are relevant. d. the most profitable outcome may be t
> In the keep-or-drop decision, the company will find which of the following income statement formats most useful? a. A segmented income statement in the contribution margin format b. A segmented income statement in the full costing format that is used fo
> When a company faces a production constraint or scarce resource (e.g., only a certain number of machine hours are available), it is important to a. produce the product with the highest contribution margin in total. b. produce the product with the lowest
> Jennings Hardware Store marks up its merchandise by 30%. If a part costs $25.00, which of the following is true? a. The price is $7.50. b. The markup is $32.50. c. The price is $32.50. d. The markup is pure profit. e. All of the above.
> Carroll Company, a manufacturer of vitamins and minerals, has been asked by a large drugstore chain to provide bottles of vitamin E. The bottles would be labeled with the name of the drugstore chain, and the chain would pay Carroll $2.30 per bottle rathe
> Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours.
> In a make-or-buy decision, a. the company must choose between expanding or dropping a product line. b. the company must choose between accepting or rejecting a special order. c. the company would consider the purchase price of the externally provided go
> Which of the following statements is false? a. Fixed costs are never relevant. b. Variable costs are never relevant. c. Usually, variable costs are irrelevant. d. Step costs are irrelevant when a decision alternative requires moving outside of the exist
> Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the ho
> Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the ho
> Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the ho
> Costs that cannot be affected by any future action are called a. differential costs. b. sunk costs. c. inventory costs. d. relevant costs. e. joint costs.
> Which of the following is not a step in the short-run decision-making model? a. Defining the problem. b. Identifying alternatives. c. Identifying the costs and benefits of feasible alternatives. d. Assessing qualitative factors. e. All of these are step
> The model for making tactical decisions described in the text has six steps. These steps are listed, out of order, below. Required: Put the steps in the correct order, starting with the step that should be taken first. 1. Select the alternative with the
> Suppose that a firm produces two products. Should the firm always place the most emphasis on the product with the largest contribution margin per unit? Explain.
> Suppose that a product can be sold at split-off for $5,000 or processed further at a cost of $1,000 and then sold for $6,400. Should the product be processed further?
> Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours.
> Should joint costs be considered in a sell-or-process-further decision? Explain.
> Why would a firm ever offer a price on a product that is below its full cost?
> Give an example of a future cost that is not relevant.
> Explain why depreciation on an existing asset is always irrelevant.
> What role do past costs play in relevant costing decisions?
> What are some ways that a manager can identify a feasible set of decision alternatives?
> What is the difference between tactical and strategic decisions?
> If ROI for a division is 15% and the company’s minimum required cost of capital is 18%, then a. residual income for the division is negative. b. residual income for the division takes on a value between zero and positive one. c. residual income cannot b
> The key difference between residual income and EVA is that EVA a. uses the actual cost of capital for the company rather than a minimum required cost of capital. b. uses the minimum required cost of capital for a company rather than the actual percentag
> Burt Inc. has a number of divisions, including the Indian Division, a producer of liquid pumps, and Maple Division, a manufacturer of boat engines. Indian Division produces the h20-model pump that can be used by Maple Division in the production of motors
> If sales and average operating assets for Year 2 are identical to their values in Year 1, yet operating income is higher, Year 2 return on investment (compared with Year 1 ROI) will a. decrease. b. increase. c. stay the same. d. The direction of change
> A responsibility center in which a manager is responsible only for costs is a (n) a. investment center. b. revenue center. c. profit center. d. cost center.
> Which of the following is not a reason for decentralizing? a. Training and motivating managers b. Unmasking inefficiencies in subdivisions of an overall profitable company c. Allowing top management to focus on strategic decision making d. Allowing top
> The practice of delegating authority to division-level managers by top management is a. decentralization. b. good business practice. c. centralization. d. autonomy. e. never done in business today.
> The length of time it takes to produce a unit of output from the time raw materials are received until the good is delivered to finished goods inventory is called a. velocity. b. cycle time. c. manufacturing cycle efficiency. d. theoretical cycle time.
> Which of the following is a perspective of the Balanced Scorecard? a. Learning and growth (infrastructure) b. Internal business process c. Customer d. Financial e. All of these are perspectives of the Balanced Scorecard.
> Division A manufactures an aircraft engine component with unit variable product cost of $38 and market price of $50. Division A incurs shipping costs of $3 per unit for sales to outside parties only. Division B uses this component in the manufacture of i
> Division A manufactures an aircraft engine component with unit variable product cost of $38 and market price of $50. Division A incurs shipping costs of $3 per unit for sales to outside parties only. Division B uses this component in the manufacture of i
> What is a transfer price?
> Can residual income or EVA ever be negative? What is the meaning of negative residual income or EVA?
> If sales and average operating assets for Year 2 are identical to their values in Year 1, yet operating income is higher, Year 2 turnover (compared with Year 1 turnover) will a. decrease. b. increase. c. stay the same. d. The direction of change in turn
> What are the three benefits of ROI? Explain how each benefit can lead to improved profitability.
> A responsibility center in which a manager is responsible for revenues, costs, and investments is a (n) a. investment center. b. revenue center. c. profit center. d. cost center.
> Explain why firms choose to decentralize.
> What is decentralization?
> Rebert Inc. showed the following balances for last year: Rebert’s net income for last year was $3,182,000. Required: 1. Calculate the average common stockholders’ equity. 2. Calculate the return on stockholders&acir
> Busch Company’s balance sheet shows total liabilities of $510,900, total equity of $126,000, and total assets of $636,900. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio. 3. CONCEP
> Delater Company had sales of $3,948,340 and a gross margin of $1,859,260. Delater had beginning inventory of $53,420 and ending inventory of $62,640. Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate th
> Belt Company had net sales of $2,225,500,000 and cost of goods sold of $1,557,850,000. Belt had the following balances: Required: Note: Round answers to two decimal places. 1. Calculate the average inventory. 2. Calculate the inventory turnover ratio.
> Whalen Company had net sales of $6,500,300. Whalen had the following balances: Required: Note: Round answers to two decimal places. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the acco
> Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $5 each. The new customer is geographically separated from the company’s other customers, and existing sales would not be af
> Knowlton Company had net sales of $3,906,000. Knowlton had the following balances: Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the a
> Cuneo Company’s income statements for the last 3 years are as follows: Required: 1. Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: R
> Sundahl Company’s income statements for the past 2 years are as follows: Required: 1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nea
> Sundahl Company’s income statements for the past 2 years are as follows: Required: Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: Ro
> Rebert Inc. showed the following balances for last year: Rebert’s net income for last year was $3,182,000. Also, assume that the market price per share for Rebert is $51.50. Required: 1. Compute the dollar amount of preferred divide
> A high inventory turnover ratio provides evidence that a company is having problems with stockouts and disgruntled customers. Do you agree? Explain.
> The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Somerville Company Statement of Retained Earnings For the Year Ended December 31, 2014 Balance, beginning of period …&acir
> The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Somerville Company Statement of Retained Earnings For the Year Ended December 31, 2014 Balance, beginning of period …&acir
> The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Somerville Company Statement of Retained Earnings For the Year Ended December 31, 2014 Balance, beginning of period …&acir
> East Mullett Manufacturing earned operating income last year as shown in the following income statement: Sales ……………………………………………………………….. $3,750,000 Cost of goods sold ……………………………………………… 2,250,000 Gross margin …………………………………………………… $1,500,000 Selling and
> Last year, Nikkola Company had net sales of $2,299,500,000 and cost of goods sold of $1,755,000,000. Nikkola had the following balances: Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate the inventory
> Last year, Nikkola Company had net sales of $2,299,500,000 and cost of goods sold of $1,755,000,000. Nikkola had the following balances: Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the
> Chen Company has current assets equal to $5,000,000. Of these, $1,000,000 is cash, $2,250,000 is accounts receivable, $500,000 is inventory, and the remainder is marketable securities. Current liabilities total $4,000,000. Required: Note: Round answers
> Scherer Company provided the following income statements for its first 3 years of operation: Required: Prepare common-size income statements by using net sales as the base. (Note: Round answers to the nearest whole percentage.) Year 1 Year 2 Year 3
> Scherer Company provided the following income statements for its first 3 years of operation: Required: Prepare common-size income statements by using Year 1 as the base period. (Note: Round answers to the nearest whole percentage.) Year 1 Year 2 Ye
> The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Somerville Company Statement of Retained Earnings For the Year Ended December 31, 2014 Balance, beginning of period …&acir
> Pete Donaldson, president and owner of Donaldson Mining Supplies, was concerned about the firm’s liquidity. He had an easy time selling supplies to the local coal mines but had a difficult time collecting the receivables. He had even tried offering disco
> In computing the period’s net operating cash flows, why are increases in current liabilities and decreases in current assets added back to net income?
> The income statement for the Mendelin Corporation is as follows: Additional information is as follows: a. Interest expense includes $1,800 of discount amortization. b. The prepaid insurance expense account decreased by $2,000 during the year. c. Wages
> Consider the following independent activities. a. Payment of a cash dividend b. Amortization of intangible asset c. Gain on disposal of equipment d. Exchange of common stock for land e. Increase in accrued wages f. Retirement of preferred stock g. Purcha
> Describe the four perspectives of the Balanced Scorecard.
