Question :
151.Standard Mediahas a required rate of return of 5 percent, : 1302907
151.Standard Mediahas a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management:
Audio DivisionVideo Division
NOPAT$1,400,000$2,000,000
Sales$10,000,000$12,500,000
Invested capital$15,000,000$17,500,000
An opportunity is available that yields an expected income of $45,900 on an investment of $450,000.If the divisions are evaluated based on return on investment, which division(s)will accept the opportunity?
A.Both will accept.
B.Neither will accept.
C.Only the VideoDivision will accept.
D.Only the Audio division will accept.
152.Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management:
Audio DivisionVideo Division
NOPAT$1,400,000$2,000,000
Sales$10,000,000$12,500,000
Invested capital$15,000,000$17,500,000
An opportunity is available that yields an expected income of $45,900 on an investment of $450,000. If the divisions are evaluated based on residual income, which division(s)will accept the opportunity?
A.Both will accept.
B.Neither will accept.
C.Only the Video Division will accept.
D.Only the Audio division will accept.
*153.RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10per tonand variable costs are $32per ton. The Air Division of RedExTransport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways.The RailDivision is operating at 100 percent of capacity.The Air Division currently buys the gravel for $55 per ton from an outside source. The Rail Division can save $5 per tonin variable costs on the transfer.What is the lowest price the Rail Division shouldconsider if it wishes to see no decline in profits?
A.$62.00
B.$27.00
C.$57.00
D.$67.00
*154.RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedExTransport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways.The RailDivision is operating at 100 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. What is the lowest price the RailDivision should accept if it wishes to see no decline in profits?
A.$62
B.$32
C.$42
D.$55
*155.RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedExTransport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways.The RailDivision is operating at 80 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. How muchis the lowest transfer price the Rail Division should accept to maintain current profitability?
A.$55
B.$32
C.$62
D.$30
*156.Electronic Division makes a partthat sells externally for $50.00 per unit.It has a variable production cost of $22.00 per unit, a variable selling and administrative cost of $7.00 per unit, a fixed production cost of $1,000,000 per year, and a fixed selling and administrative cost of $500,000 per year.Production capacity is 250,000 units per year. ElectronicDivision is selling all it can produce externally at $50.00 per unit. One-half of the variable selling and administrative cost can be eliminated on units transferred to the Digital Division. DigitalDivision can buy the part externally at $48.00 per unit and uses 30,000 parts annually. Should a transfer take place, and if so what are the rational limits on the range of transfer prices?
A.No transfer should take place.
B.A transfer should take place at $46.50.
C.A transfer should take place at $48.
D.A transfer should take place between $46.50 and $48.
157.BajaliaCompany compiled the following information for the year ending December 31, 2014:
Research and development costs$ 800,000
Sales6,400,000
Net income1,200,000
Interest expense400,000
Income tax rate30%
At the end of 2014, total assets totaled $6,900,000. Bajalia’stotal current liabilities were $1,400,000,of which $600,000 were interest-bearing obligations. Bajalia’s cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustmentmust Bajalia make to income for accounting distortions if EVA is to be calculated for 2014?
$420,000
$600,000
$180,000
$140,000
158.BajaliaCompany compiled the following information for the year ending December 31, 2014:
Research and development costs$ 800,000
Sales6,400,000
Net income1,200,000
Interest expense400,000
Income tax rate30%
At the end of 2014, total assets totaled $6,900,000. Bajalia’stotal current liabilities were $1,400,000,of which $600,000 were interest-bearing obligations. Bajalia’s cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustmentmust Bajalia make to invested capital for accounting distortions if EVA is to be calculated for 2014?
$420,000
$600,000
$800,000
$200,000
159.The following income statements and other information are available for the Biltmore Company:
20142013
Sales $230,000,000$220,000,000
Cost of goods sold105,000,000 96,000,000
Gross margin 145,000,000 124,000,000
Selling and administrative costs25,000,00022,500,000
Research and development15,600,000 12,400,000
Income from operations104,400,00089,100,000
Income taxes expense36,540,000 31,185,000
Net income $ 67,860,000 $ 67,915,000
Total assets $650,000,000$605,000,000
Noninterest-bearing current liabilities$15,000,000$12,300,000
Biltmore’s interest expense is $0, its income tax rate is 35 percent, and its cost of capital is 10 percent. Biltmore amortizes R&D over 4 years. By how much is invested capital adjusted as it relates to computing EVA for 2014?
A.$17,900,000
B.$7,800,000
C.$15,600,000
D.$21,000,000
160.Thomas Company compiled the following information from its financial records for the year ending December 31, 2014:
Research and development costs incurred during 2014$1,200,000
Total assets5,200,000
Current liabilities, interest bearing300,000
Current liabilities, noninterest-bearing800,000
Net income950,000
Sales11,300,000
Interest expense670,000
Cost of capital10%
Income tax rate30%
Thomas’ amortization policy is 4 years. How much is the accounting distortion adjustment to NOPAT when calculating EVA?
$900,000
$630,000
$840,000
$270,000
161.Thomas Company compiled the following information from its financial records for the year ending December 31, 2014:
Research and development costs incurred during 2014$1,200,000
Total assets5,200,000
Current liabilities, interest bearing300,000
Current liabilities, noninterest-bearing800,000
Net income950,000
Sales11,300,000
Interest expense670,000
Cost of capital10%
Income tax rate30%
Thomas’ amortization policy is 4 years. How much is the accounting distortion adjustment to invested capital when calculating EVA?
$900,000
$300,000
$840,000
$630,000
Material from the appendix to the chapter is marked with an asterisk (*).
