AMIS 525 –Questions for Exam 3
This set of 13 questions, taken from prior examinations, covers some topics in Chapters 9, 15, 16, 21, 22, and 23.
The purpose of sample questions is to acquaint you with the style and substance of typical exam questions over this material. The exam will consist of “multiple choice” type questions, long problems and short problems. Both calculation type questions and concept type questions, without computations required, will be used.
Please be aware that:
1. sample questions are only one of many resources available to prepare for testing events – reading textbook chapters and working through chapter examples, studying the end-of-chapter review problem and accompanying solution, and reviewing assigned homework items and the published solutions may be more powerful methods to increase your understanding of the topics covered in the course.
2. the exam questions used this quarter will be similar but different from these example questions – understanding the main concepts in each chapter is critical to success on the testing events; remembering a sample question may be of some help but the format of a question on the same topic often differs rendering memory a distant second choice to understanding.

Exam #3

Practice Questions

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Question 1
WRL Company operates a snack food center at the Hartsfield Airport. On January 1, 2003, RL purchased a special cookie-cutting machine, which has been used for three years. It is January 1, 2006 and WRL is considering whether it should purchase a new, more-efficient  cookie-cutting machine. WRL has two options: (1) continue using the old machine or (2) sell the old machine and purchase a new machine. The seller of the new machine isn’t offering a tradein. The following information has been obtained:
Old
New
Machine
Machine
Initial Purchase cost of machines
$80,000
$120,000
Useful life from acquisition date (years)
7
4
Terminal disposal value at the end of useful life on Dec. 31, 2009, assumed for depreciation purposes
$10,000
$20,000
Expected annual cash operating costs:
Variable cost per cookie
$0.20
$0.14
Total fixed costs
$15,000
$14,000
Depreciation method for tax purposes
Straight line Straight line
Estimated disposal value of machines:
January 1, 2006
$40,000
$120,000
December 31, 2009
$7,000
$20,000
Expected number of cookies made and sold each
year
300,000
300,000
WRL is subject to a 40% income tax rate. Assume that any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by WRL in the year in which it occurs. WRL’s after-tax required rate of return is 16%. Assume all cash flows occur at year-end except for initial investment amounts.
1. You have been asked whether WRL should buy the new machine. To help in your analysis, calculate the following:
a. One-time after-tax cash effect of disposing of the old machine
b. Annual recurring after-tax cash operating savings from using the new machine (variable and fixed)
c. Cash tax savings due to the differences in annual depreciation of the old machine and the new machine
d. Difference in after-tax cash flow from terminal value disposal of new machine and old machine.
2. Use your calculations in requirement 1 and the net present value method to determine whether WRL should use the old machine or acquire the new machine.

Exam #3

Practice Questions

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Question 2
Instant Foods produces two types of microwavable products- beef-flavored ramen and shrimpflavored ramen. The two products share common inputs such as noodles and spices. The production of ramen results in a waste product referred to as stock, which Instant dumps at negligible costs at a local drainage area. In June 2009, the following data were reported for the production and sales of beef-flavored and shrimp-flavored ramen.
Joints Costs
Joint costs (costs of noodles, spices and other inputs and processing to splitoff points)

$ 240,000

Beef Shrimp
Ramen Ramen
0
0
10,000 20,000
10,000 20,000
$10
$15

Beginning inventory (tons)
Production (tons)
Sales (tons)
Selling price per ton

Due to the popularity of its microwavable products, Instant decides to add a new line of products that targets dieters. These new products are produced by adding a special ingredient to dilute the original ramen and are to be sold under the names Special B and Special S, respectively. The following is the monthly data for all the products
J
oints Costs
Joint costs (costs of noodles, spices and other inputs and processing to splitoff points)

$ 240,000

S
eparable costs of processing 10,000 tons of
Beef Ramen into 12,000 tons of S
pecial B

$48,000

S
eparable costs of processing 20,000 tons of
S
hrimp Ramen into 24,000 tons of S
pecial S

Beginning inventory (tons)
Production (tons)
Transfer to further processing (tons)
S
ales (tons)
S
elling price per ton

Exam #3

S
pecial B S
pecial S

$168,000
Beef
Ramen
0
10,000
10,000
$10

Practice Questions

S
hrimp
Ramen S
pecial B S
pecial S
0
20,000
12,000
24,000
20,000
12,000
24,000
$15
$18
$25

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Required
Calculate Instant’s gross-margin percentage for Special B and Special S when joint
costs are allocated using the following:
a. Sales value added at splitoff method
b. Net realizable value method
Problem 3
Division B has asked Division A of the same company to supply it with 4,000 units of part K932 this year to use in one of it’s products. Division B has received a bid from an outside supplier for the parts at a price of $31.00 per unit. Division A has the capacity to produce 10,000 units of part K932 per year. Division A expects to sell 8,000 units of part K932 to outside customers this year at a price of $36.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A produces part K932 at a variable cost of $18.00 per unit. In addition, the cost of packing and shipping the parts for outside customers is
$3.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division B.
Required:
1. What is the range of transfer prices within which both the Divisions’ profits would increase as a result of agreeing to the transfer of 4,000 parts this year from Division A to Division
B?
2. How much would profits change this year for the overall company if this transfer took place? Show all calculations.

Exam #3

Practice Questions

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Short Problem Type:
Question 4
Ignore income taxes in this problem.
Jarvey Company is studying a project that would have a ten year life and would require a  450,000 investment in equipment that has no salvage value. The project would provide net income each year as follows for the life of the project.
Sales
Less cash variable expenses
Contribution margin
Less fixed expenses:
Fixed cash expenses
Depreciation expenses
Net Income

$500,000
200,000
300,000
$150,000
45,000

195,000
$105,000

The company’s required rate of return is 12%. What is the payback period for this project?
Answer: __________

Question 5
Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
Operating
Income
$ 960,000
$1,200,000
$2,040,000

St. Louis
Cedar Rapids
Wichita

Assets
$ 4,000,000
$ 8,000,000
$12,000,000

Current
Liabilities
$ 200,000
$ 600,000
$1,200,000

What is the EVA for St. Louis?
Answer: $____________
Question 6
Flint began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 20,000 units at $27
Exam #3

Practice Questions

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each. Costs incurred were:
Fixed manufacturing overhead
Fixed selling and administrative cost
Variable manufacturing cost per unit
Variable selling and administrative cost per unit

$150,000
100,000
7
1

What would the company’s variable-costing income be?
Answer: $__________

Question 7
Extron Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of average operating assets and $1,000,000 of operating income. Based on this information, what was the minimum required rate of return?
Answer: ____________

Multiple Choice Type:
Question 8
Joy Company reported $65,000 of net income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there were no variances, net income under variable costing would be:
A.
B.
C.
D.
E.

$15,000
$55,000
$65,000
$75,000.
$115,000

Question 9
The Florida Division of McKenna Company makes and sells batteries that can either be sold to outside customers or transferred to the Alabama Division of McKenna Company. The following data are available from last month:
Exam #3

Practice Questions

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Florida Division:
Selling price per battery to outside customers……………………….
Variable cost per battery when sold to outside customers……….
Capacity in batteries………………………………………………………….

$50
$35
15,00
0

Alabama Division:
Number of batteries needed per month…………………………………
Price per battery paid to an outside supplier………………………….

5,000
$47

If Florida Division sells the batteries to Alabama Division, Florida Division can avoid $2 per battery in sales commissions.
Suppose that Florida Division sells 11,500 batteries each month to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A.
B.
C.
D.
E.

$47.00
$43.50
$37.50
$34.73
Some other amount.

Question 10
Lido manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25. Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an additional cost of $20,000 and later sold for $16. If Lido decides to process B beyond the split-off point, operating income will:
A.
B.
C.
D.
E.

increase by $10,000.
increase by $20,000.
decrease by $10,000.
decrease by $20,000.
decrease by $58,000.

Question 11
Sugarland Company is studying a capital project that will produce $500,000 of added sales revenue, $300,000 of additional cash operating expenses, and $40,000 of depreciation (all on an annual basis). Assuming a 30% income tax rate, the company’s after-tax cash annual inflow (outflow) is:
A.
B.
C.
D.
E.

$70,000.
$128,000.
$140,000.
$152,000.
some other amount.
Exam #3

Practice Questions

Page 7

Answer questions 12 and 13 using the information below:
Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method.
The following data from operations were collected for analysis:
Budgeted manufacturing overhead costs:
Service departments:
Maintenance
Personnel

$300,000
$ 160,000

Production departments:
Weaving
Colorizing

$650,000
$350,000

Services furnished:
By Maintenance (budgeted labor-hours):
to Personnel
1,000
to Weaving
7,000
to Colorizing
4,000
By Personnel (budgeted number of employees serviced):
Plant Maintenance
10
Weaving
30
Colorizing
20
Question 12
What is the complete reciprocated cost of the Maintenance Department?
A) $331,267
B) $326,667
C) $300,000
D) $0
Question 13
What is the total indirect cost of the Colorizing Department after allocation?
A) $937,042
B) $350,000
C) $522,958
D) $503,333