1. Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3.90 per unit. Bluebird currently produces and sells 75,000 units at $7.90 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesalers name and would not affect Bluebirds sales through its normal channels. Production costs for these units are $4.85 per unit, which includes $2.70 variable cost and $2.15 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Multiple Choice

$58,500 increase.

$18,000 increase.

$40,500 increase.

$14,250 decrease.

$40,500 decrease.

2.

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $9,000. The division sales for the year were $1,056,000 and the variable costs were $866,000. The fixed costs of the division were $199,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Multiple Choice

$59,700 decrease

$130,300 decrease

$50,700 decrease

$190,000 increase

$190,000 decrease

3.

Granfield Company has a piece of manufacturing equipment with a book value of $41,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,200. Granfield can purchase a new machine for $122,000 and receive $22,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Multiple Choice

$23,000 increase

$76,800 decrease

$18,800 decrease

$52,700 increase

$23,000 decrease

4.

When computing payback period, the year in which a capital investment is made is year 1.

True or False

5.

The payback period reflects the amount of time for the investment to generate enough net cash flow to return the cash initially invested to purchase it.

True or False