Profitability index criterion

Question

Question 1.

Evergreen Corp. has provided the following data:

Sales per period                    1,000 units
Selling price                          $40 per unit
Variable manufacturing cost    $12 per unit
Selling expenses                    $5,100 plus 5% of selling price
Administrative expenses         $3,000 plus 20% of selling price

The number of units needed to achieve a target net operating income of $63,900 would be:

• 4,000 units
• 3,950 units
• 4,150 units
• 4,050 units

Question 2. Garth Company sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then:

• Contribution Margin Per Unit - Increases, Contribution Margin Ratio - Increases, Break-Even in Units - Decreases
• Contribution Margin Per Unit - No Change, Contribution Margin Ratio - No Change, Break-Even in Units - No Change
• Contribution Margin Per Unit - No Change, Contribution Margin Ratio - Increases, Break-Even in Units - No Change
• Contribution Margin Per Unit - Increases, Contribution Margin Ratio -No Change, Break-Even in Units - Decreases

Question 3. Variable expenses for Alpha Company are 40% of sales. What are sales at the break-even point, assuming that fixed expenses total $150,000 per year:

• $250,000
• $375,000
• $600,000
• $150,000

Question 4.  The following data were provided by Trusty Corp., which produces a single product:

                          Year 1    Year 2    Year 3
Units produced      6,000    7,000     8,000
Units Sold             6,000     6,000    6,000

The selling price per unit, variable costs per unit, and total fixed costs are the same for each year. If variable costing is in use, one would expect:

• net operating income to be erratic over the three-year period.
• net operating income to be the same for each year.
• the break-even point to be lower in Year 2 than in Year 3.
• net operating income to be higher in Year 2 than in Year 1.

Question 5. Sagon Corporation has provided data concerning the company's Manufacturing Overhead account for the month of September. Prior to the closing of the overapplied or underapplied balance to Cost of Goods Sold, the total of the debits to the Manufacturing Overhead account was $76,000 and the total of the credits to the account was $66,000. Which of the following statements is true?

• Manufacturing overhead transferred from Finished Goods to Cost of Goods Sold during the month was $76,000
• Actual manufacturing overhead incurred during the month was $66,000
• Manufacturing overhead applied to Work in Process for the month was $76,000
• Manufacturing overhead for the month was underapplied by $10,000

Question 6. Monica Company uses a predetermined overhead rate based on machine-hours to apply manufacturing overhead to jobs. The company manufactures tools to customer specifications. The following data pertain to Job 1501:

Direct materials used $4,200
Direct labor hours worked 400
Direct labor rate per hour $7.50
Machine hours used 200
Predetermined overhead rate per machine hour $15.00

What is the total manufacturing cost recorded on Job 1501?

$8,800
$10,200
$10,300
$11,100

Question 7. An investment project for which the net present value is $300 would result in which of the following conclusions?

• the net present value is too small; the project should be rejected
• the investment project promises slightly more than the required rate of return
• the net present value method is not suitable for evaluating this project; the internal rate of return method should be used
• the investment project should only be accepted if net present value is zero; a positive net present value indicates an error(s) in the estimates associated with the analysis of this investment.

Question 8. Logan Company is considering two projects, A and B. The following information has been gathered on these projects:

Project A    Project B
Initial investment needed................................................................... $40,000    $60,000
Present value of future cash flows...................................................... 60,000    85,000
Useful life......................................................................................... 4 years    4 years

Based on this information, which of the following statements is (are) true?

I. Project A has the highest ranking according to the profitability index criterion.
II. Project B has the highest ranking according to the net present value criterion.

• Only I
• Only II
• Both I and II
• Neither I and II