Question

1. Gordy Company is a price-taker and uses a target-pricing approach. Refer to the following information:

Production volume	602,000	units per year
Market price	$32	per unit
Desired operating income	15%	of total assets
Total assets	$13,700,000

What is Gordy's target full product cost in total for the year? Assume all units produced are sold.

1. $90,300

2. $2,055,000

3. $13,700,000

4. $17,209,000

2. Kaden's Head Gear, Inc. has two product lines—batting helmets and football helmets. The income statement data for the most recent year is as follows:

	Total	Batting Helmets	Football Helmets
Sales revenue	$900,000	$500,000	$400,000
Variable costs	(480,000)	(200,000)	(280,000)
Contribution margin	$420,000	$300,000	$120,000
Fixed costs	(230,000)	(80,000)	(150,000)
Operating income (loss)	$190,000	$220,000	$(30,000)

If $90,000 of fixed costs will be eliminated by dropping the football helmets line, how will dropping football helmets affect operating income of the company?

A) Operating income will increase by $90,000.

B) Operating income will increase by $120,000.

C) Operating income will decrease by $30,000.

D) Operating income will decrease by $150,000.

3. Isaac Ison Industries, Inc. (4-I) manufactures a component used in the production of one of its main products. The following cost information is available:

Direct materials	$420
Direct labor (variable)	110
Variable manufacturing overhead	80
Fixed manufacturing overhead	30

A supplier has offered to sell the component to CM for $650 per unit. If 4-I buys the component from the supplier, the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually. Assuming that 4-I needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if 4-I outsources?

A) Operating income would increase by $10,000.

B) Operating income would increase by $160,000.

C) Operating income would decrease by $10,000.

D) Operating income would decrease by $150,000.

4. Which of the following is a capital budgeting method that ignores the time value of money?

A) Payback

B) Internal rate of return (IRR)

C) Return on assets

D) Net present value (NPV)

5. Which of the following describes the time value of money?

A) The time value of money has no effect on the timing of capital investments.

B) Money loses its purchasing power over time through inflation.

C) The fact that invested cash may not earn interest over time is called the time value of money.

D) A dollar received today is worth more than a dollar to be received in the future.

6. Dartis Tools Co. is considering investing in specialized equipment costing $610,000. The equipment has a useful life of five years and a residual value of $69,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below:

Year 1	$210,000
2	159,000
3	160,000
4	95,000
5	136,000
	$760,000

What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

A) 14.36%

B) 16.19%

C) 12.90%

D) 6.45%

Answer 1

		Qns	total Assets	$13,700,000
			Operating Income	$2,055,000
			15%
			Sales price	$        19,264,000
			(602000*32)
			Product Cost	$        17,209,000
		So option $ 17209000 is correct
					Batting Helmets
	Operating Income			$220,000
	Less: Unavoidable Fixed Cost		$60,000
	Net operating Income		$160,000
	Option C - Operating Income will decrease by $30000.
	As contribution margin will be $ 10000 so operating income will
	increase by $10000.
	Option A
	Option A Payback
	Option D - A dollar received today is worth more than a dollar to be
	received in future
	Accounting rate of return		43800/339500*100
	Accounting rate of return		12.90	%
	Depreciation			(610000-69000)/5
	Depreciation			108200
	Average income			760000/5
	Average income			152000
	net income			43800
	Average investment		(610000+69000)/2
	Average investment		339500
	Option C is correct