Question

Upton evaluates future projects by using the profitability index. The company is currently reviewing five similar projects and must choose one of the following:

Project	Initial Investment				Present Value of Cash Inflows
1	$	100,000			$	97,000
2		50,000				80,000
3		75,000				110,000
4		60,000				100,000
5		150,000				200,000

Which project should Upton select if the decision is based entirely on the profitability index?

Multiple Choice

• Project 1.

• Project 2.

• Project 3.

• Project 4.

• Project 5.

q2.

The pool rate is defined as the cost per unit of the cost driver for a particular activity cost pool.

True or False

q3.

Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers.

True or False

q4.

Which of the following would likely not be a cost driver?

Multiple Choice

• Product orders

• Product inspections

• Cost accountant’s labor hours

• Material requisitions

• Machine setups

Answer 1

Answer 1. Project 4(option4)

Reason: Profitability Index is calculated by dividing present value of future inflow by intial investment,

therefore in question ;

1. 97000/100000 = 0.97

2.80000/50000 = 1.6

3. 110000/75000 = 1.46

4. 100000/60000 = 1.66

5. 200000/150000 = 1.33

under profitability index method the project having highest Index value is selected,here in this question the project 4 having highest value, hence it is selected.

question no:2

Answer . True

Reason: Pool rate is the rate used to assign the overhead cost in cost pool to cost object. It is caculated by dividing total cost in cost pool with cost driver. So will get cost per unit of cost driver as we devided with cost driver. The statement is true.

Question 3.

Answer: False

Reason: Activity Based costing is an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. It does not deals with customer profitabilty analysis.

Question 4.

Answer: product orders

Reason: cost driver is any factor that influence cost. A change in cost driver will lead to a change in total cost of related cost object. In this question change in all other items except product order will lead to change in total cost. So it will not be likely a cost driver.