1. Determination of the optimum short-term product mix needs to include an analysis of: (Points : 2)
- Fully absorbed costs.
- Production constraints.
- Sales-mix costs.
- Revenue forecasts.
- Joint manufacturing costs.
2. In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to this short-run decision is:
- Direct labor.
- Variable overhead.
- Fixed overhead that will be avoided if the part is bought from an outside vendor.
- Fixed overhead that will continue even if the part is bought from an outside vendor.
3. Which one of the following issues would least likely be addressed during the regular review of product profitability?
- Which product managers should be rewarded?
- Which products are most profitable?
- Which products provide the greatest contribution margin per unit of the scarce resource?
- Which products should be promoted and advertised most aggressively?
- Are the products priced properly?
4. Joint (common) costs in a joint production process are relevant for determining:
- Whether to produce at all.
- Which products should be produced up to the split-off point in the production process.
- Which products should be produced internally and which products should be outsourced.
- The set of products that should be subjected to additional processing.
- The selling price of individual products produced as part of the joint production process.
5. Operating at or near full capacity will require a firm considering a special sales order to potentially recognize the:
- Opportunity cost from lost sales.
- Value of full employment.
- The use of operating leverage.
- Need for good management.
- Importance of facility-level cost drivers.
6. Which of the following items does NOT have to be considered when evaluating a make-or-buy decision?
- The reliability of the supplier's delivery schedule.
- Quality of the supplier's product.
- Net book value of the production equipment used to make the item in question.
- Contribution margin generated by an alternative use of the production equipment.
7. Within the context of capital budgeting, a primary goal-congruency problem exists when DCF models are used for decision-making purposes but accrual-based earnings figures are used for subsequent performance evaluation purposes. Which of the following items is not likely useful for addressing this goal-congruency problem?
- Monte Carlo simulation.
- Use of EVA® as the financial-performance metric.
- Separating incentive compensation (i.e., "reward") from budgeted performance.
- Conducting post-audits of capital investment decisions.
8. Which one of the following is true for the internal rate of return (IRR) method?
It assumes cash proceeds during the life of a project can be reinvested to earn the same rate of return as the weighted-average cost of capital.
- Unlike the NPV method, it assumes only a single discount rate.
- IRRs of multiple projects are additive (that is, can be added together).
- It can be used to make optimal decisions regarding mutually exclusive investment projects.
- It makes it easy to incorporate multiple costs of capital.
9. For capital budgeting purposes, a depreciation tax shield is:
- An after-tax cash outflow.
- A reduction in income taxes otherwise due.
- The expense caused by depreciation.
- Equal to the amount of depreciation expense × (1 - t), where t = the income tax rate.
- Caused by the fact that depreciation does not require a cash outflow.
10. Which of the following methods can be used to deal formally with uncertainty in the capital-budgeting process?
- Real options analysis.
- Net present value (NPV) analysis.
- Capital rationing analysis.
- Linear programming optimization.
11. Results from the net present value (NPV) method and the internal rate of return (IRR) method may differ between projects if the projects differ in all of the following except:
- Required initial investment.
- Cash-flow pattern.
- Cost of capital (i.e., discount rate).
- Length of useful life of the two projects.
- Book (accounting) rate of return on the two projects.
12. Which of the following is not used to deal with uncertainty in the capital budgeting process?
- What-if analysis.
- Sensitivity analysis.
- Monte Carlo simulation.
- Real options analysis.
- Linear programming analysis.
13. You just bought a new car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop with an excellent reputation offers to rebuild it for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will run like a new car and nobody will be able to tell the difference. What would you do from a financial point of view?
- Rebuild to save $13,000.
- Rebuild to save $28,000.
- Rebuild to save $38,000.
- Sell to Weird Wally and save $7,000.
14. Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.
What is the net after-tax cash inflow in Year 1 from the investment?
- $72,000.
- $96,000.
- $108,000.
- $112,000.
- $120,000.
15. Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.
What is the net present value (NPV) of the investment? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.
- ($270,480).
- $63,936.
- $109,428.
- $154,920.