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Q3: 21. A flexible budget can be used to determine what costs should have been at a given level of activity. True False 46-51. Franklin Glass Works uses a standard cost system in which manufacturing overhead is applied on the basis of standard direct labor-hours. Each unit requires two standard hours of direct labor for completion. The denominator activity for the year was based on budgeted production of 200,000 units. Total overhead was budgeted at $900,000 for the year, and the fixed manufacturing overhead rate was $1.50 per direct labor-hour. The actual data pertaining to the manufacturing overhead for the year are presented below: 46. The standard hours allowed for actual production for the year total: 396,000 247,500 400,000 495,000 47. Franklin's variable overhead efficiency variance for the year is: $33,000 favorable $33,000 unfavorable $35,200 favorable $35,200 unfavorable 48. Franklin's variable overhead rate variance for the year is: $22,000 favorable $22,000 unfavorable $20,000 favorable $20,000 unfavorable 49. Franklin's fixed manufacturing overhead budget variance for the year is: $25,000 favorable $25,000 unfavorable $19,000 favorable $19,000 unfavorable 50. The fixed manufacturing overhead applied to Franklin's production for the year is: $600,000 $575,000 $594,000 $484,200 51. Franklin's fixed manufacturing overhead volume variance for the year is: $25,000 favorable $55,000 unfavorable $6,000 unfavorable $19,000 favorable 52-56. The Chase Company uses a standard cost system in which manufacturing overhead costs are applied to products on the basis of standard machine-hours. For November, the company's flexible budget for manufacturing overhead showed the following total budgeted costs at the denominator activity level of 40,000 machine-hours: During November 42,000 machine-hours were used to complete 13,200 units of product with the following actual overhead costs: The standard time allowed to complete one unit of product is 3.6 machine-hours. 52. The total predetermined overhead rate per machine-hour for November was: $1.40 $2.40 $2.97 $1.75 53. The total amount of overhead cost applied to Work in Process during November was: $47,520 $66,528 $114,048 $106,528 54. The variable overhead efficiency variance for utilities cost for November was: (Do not round intermediate calculations.) $2,760 favorable $3,760 unfavorable $1,000 favorable $3,760 favorable 55. The variable overhead rate variance for maintenance cost for November was: $5,620 unfavorable $7,420 unfavorable $9,820 unfavorable $2,400 favorable 56. The fixed manufacturing overhead budget variance for November was: $22,900 unfavorable $2,970 unfavorable $4,550 favorable $7,520 favorable 57-60. The Phelps Company applies overhead costs to products on the basis of standard direct labor-hours. The standard cost card shows that 5 direct labor-hours are required per unit of product. Phelps Company had the following budgeted and actual data for March: The budgeted direct labor-hours is used as the denominator activity for the month. 57. The variable overhead rate variance for March is: $7,000 unfavorable $11,000 unfavorable $13,000 unfavorable $9,000 unfavorable 58. The variable overhead efficiency variance for March is: $4,000 unfavorable $4,000 favorable $8,000 unfavorable $8,000 favorable 59. The fixed manufacturing overhead budget variance for March is: $2,000 favorable $500 favorable $2,000 unfavorable $2,500 favorable 60. The fixed manufacturing overhead volume variance for March is: $5,000 favorable $1,000 favorable $2,500 unfavorable $5,000 unfavorable Q4: 2. When an intermediate market price for a transferred item exists, it represents a lower limit on the charge that should be made on transfers between divisions. True False 4. When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, then the lowest acceptable transfer price as far as the selling division is concerned is: the market price charged to outside customers, less costs saved by transferring internally. the full absorption cost of producing a unit of product. the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use. variable cost of producing a unit of product. 7. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be: $225,000 $600,000 $750,000 $135,000 9. Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A? $30 $29 $38 $40 10-11. The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last year: Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the ability to produce 200,000 pounds of chocolate annually. 10. Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000 pounds of chocolate from the Milk Chocolate Division. Milk Chocolate will be able to increase its profit by accepting any transfer price above: $0.15 per pound $0.40 per pound $0.08 per pound $0.25 per pound 11. Assume that the Milk Chocolate Division is currently operating at its capacity of 200,000 pounds of chocolate. Also assume again that the Peanut Butter Division wants to purchase an additional 20,000 pounds of chocolate from Milk Chocolate. Under these conditions, what amount per pound of chocolate would Milk Chocolate have to charge Peanut Butter in order to maintain its current profit? $0.15 per pound $0.40 per pound $0.08 per pound $0.25 per pound 12-13. Division X makes a part with the following characteristics: Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. 12. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be: worse off by $70,000 each period. worse off by $60,000 each period. better off by $10,000 each period. worse off by $20,000 each period. 13. Suppose that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at $17 per unit, the company as a whole will be: better off by $10,000 each period. worse off by $20,000 each period. worse off by $10,000 each period. There will be no change in the status of the company as a whole. 14-15. Division A produces a part with the following characteristics: Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. 14. Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than: $20 $28 $29 $27 15. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than: $29 $30 $17 $18 16-18. The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: The total fixed costs would be the same for all the alternatives considered below. 16. Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Post Division? $1.35 $1.41 $0.90 $1.75 17. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post Division? $1.41 $0.90 $1.35 $1.75 18. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division, the change in net operating income for the company as a whole would have been: (Do not round intermediate calculations.) $10,250 increase $13,750 decrease $1,000 decrease $1,250 decrease 19-20. The Pole Division of Hillyard Company produces poles which can be sold to outside customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division bought 50,000 poles from Pole at $2.50 each. The following data are available for last year's activities in the Pole Division: In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000 poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to outside customers (rather than only 350,000 poles as shown above) if it were not making sales to the Flag Division. 19. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? $2.50 $3.00 $2.60 $2.00 20. Suppose that last year an outside supplier would have been willing to provide the Flag Division with the basic poles at $2.10 each. If Flag had chosen to buy all of its poles from the outside supplier instead of the Pole Division, the change in net operating income for the company as a whole would have been: $20,000 increase $25,000 increase $20,000 decrease $45,000 increase 35-36. Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement. Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months. 35. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income of: $(6,000) $(10,800) $(800) $4,000 36. Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease) in Cosmo's operating income of: $(1,400) $(16,800) $7,000 $3,400 37-38. The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows: If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year. 37. If the new cabinet product line is added next year, the increase in net operating income resulting from this decision would be: $80,000 $225,000 $105,000 $125,000 38. What is the lowest selling price per unit that could be charged for the new cabinets from the following list and still make it economically desirable to add the new product line? $151 $160 $171 $164 41. If the internal rate of return exceeds the required rate of return for a project, then the net present value of that project is positive. True False 44. The project profitability index is used to compare the internal rates of return of two companies with different investment amounts. True False 45. If a company has computed the project profitability index of an investment project as 0.15, then: the project's internal rate of return is greater than the discount rate. the project's internal rate of return is equal to the discount rate. the project's internal rate of return is less than the discount rate. the relation between the rate of return and the discount rate is impossible to determine from the given data. 48. The discount rate must be specified in advance for which of the following methods? Option D Option C Option A Option B 49. In capital budgeting, what will be the effect on the following if there is an increase in the working capital needed for a project? Option C Option E Option A Option B Option D