Question 1(72 MARKS)

For each of the following questions below select the most correct answer and present your answer in your submission in this format: 1.1.1. a

1.1Which of the following is not an appropriate term for the required rate of return?(2) a.Discount rate

b.Hurdle rate

c.Cost of capital

d.All these answers are correct

1.2 The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value

of expected cash outflows is the:(2)

a.Net present value method

b.Accrual accounting rate of return method

c.Payback method

d.Internal rate of return method

1.3The net initial investment for a piece of construction equipment is R1 000 000. Annual cash inflows are expected to increase by R200 000 per year. The

equipment has an 8-year useful life. What is the payback period?(2) a.8 years

b.7 years

c.6 years

d.5 years

2

1.4 In capital budgeting, the payback method approach to the investment decision

highlights:(4)

a.cash flow over the life of the investment

b.the liquidity of the investment

c.the tax savings of the depreciation amounts

d.having as lengthy payback time as possible

1.5 The approach to capital budgeting which divides an accounting measure of

income by an accounting measure of investment is the:(2) a. net present value

b.internal rate of return

c.accrual accounting rate of return

d.payback method

1.6In capital budgeting, a project is accepted only if the internal rate of return

equals or:(2)

a.Exceeds the required rate of return

b.Is less than the required rate of return

c.Exceeds the net present value

d.Exceeds the accrual accounting rate of return

1.7In the analysis of a capital budgeting proposal, which of the following items

have no after-tax consequences?(2)

a.Cash flow from operations

b.Gain or loss on the disposal of the asset

c.Reduction of working capital balances at the end of the useful life of the capital asset

d.None of these answers are correct

1.8 In multiproduct situations, when sales mix shifts toward the product with the

highest contribution margin then:(2)

a.Total revenues will decrease

b.Breakeven quantity will increase

c.Total contribution margin will decrease

d.Operating income will increase

Lebo Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3 000 units.

Currently

Projected

Demand

20 000 units

17 000 units

Selling price

R4.50

R5.00

Incremental cost per unit

R3.00

R3.00

1.10If the price increase is implemented, operating profit is projected to:(2) a.Increase by R4 000

b.Decrease by R4 000

c.Increase by R6 000

d.Decrease by R4 500

1.11A computer system installed last year is an example of a(n):(2)

a.Sunk cost

b.Relevant cost

c.Differential cost

d.Avoidable cost

1.12In evaluating different alternatives, it is useful to concentrate on:(2) a.variable costs

b.fixed costs

c.total costs

d.relevant costs

1.13Relevant information has all of these characteristics EXCEPT:(2)

a.past costs are irrelevant

b.all future revenues and expenses are relevant

c.different alternatives can be compared by examining differences in total revenue and expenses

d.qualitative factors should be considered

Buco Limited has provided the following cost data for last year when 100 000 units (normal production) were produced and sold (selling for R10 per unit):

Raw material

R250 000

Direct labour

R110 000

Manufacturing overhead

R370 000

Selling and administrative expense

R120 000

All costs are variable except for R100 000 of manufacturing overhead and R100 000 of selling and administrative expense. There is no opening or closing inventory.

1.14The break-even in units for Buco Limited is:(6)

a.57 143 units

b.47 669 units

c.83 420 units

d.54 054 units

1.15.2The contribution ratio of a company is 75%. The contribution is R900 000.

Total fixed cost is double the total variable cost at the particular activity level.

The degree of operating leverage is:(4)

a.Not enough information is provided to calculate the degree of operating leverage

b.1.2

c.3.0

d.The company is making a loss at this particular activity level.

Therefore, degree of operating leverage is 0

1.15 Gardner Furniture produces two kinds of chairs: an oak model and a chestnut wood model. The oak model sells for R60 and the chestnut wood model sells for R100.

The variable expenses are as follows:

Oak

Chestnut

Variable production cost per unit

R30

R35

Variable selling & admin per unit

R6

R5

Expected sales for nextyearare:5 000oakchairsand1 000chestnutchairs.

Fixed expenses are budgeted at R135 000 per year.

1.15.1The annual break-even point in total sales for the expected sales mix is:(4) a.R270 000

b.R300 000

c.R485 000

d.R500 000

1.15.2The company's overall contribution margin ratio for the expected sales mix is:(4)

a.40%

b.45%

c.50%

d.60%

1.16 When there is a production constraint, a company should emphasise the

products with:(2)

a.The highest unit contribution margins.

b.The highest unit contribution margin ratios.

c.The highest unit contribution margin per unit of the limited resource.

d.The highest unit contribution margins and contribution margin ratios

1.17Under the internal rate of return capital budgeting technique, it is assumed

that cash flows are reinvested at the:(2) a.Company's cost of capital.

b.Hurdle rate of return.

c.Internal rate of return.

d.Discount rate.

1.18 If investment A has a bayback period of 3 year and investment B has apay back period of 4 years, then (2)

a.A is more profitable than B.

b.A is less profitable than B.

c.A and B are equally profitable.

d.The relative profitability of A and B cannot be determined using only the payback periods.

1.19Which item is not an example of a sunk cost?(2)

a.Materials needed for production.

b.Purchase cost of machinery.

c.Depreciation.

d.All are sunk costs

1.20Which of the following methods uses income instead of cash flows?(2) a.Payback.

b.Accounting rate of return.

c.Internal rate of return.

d.Net present value.

1.21 Porterhouse Company has both fixed and variable production costs.If volume goes up by 20%, how would that affect the total fixed costs? (Assume all volumes are within the relevant range.)

a.Would go up by 20%.

b.Would remain the same.

cWould go up by less than 20%.

d.Would go down.(4)

1.22 A budget prepared for different levels of activity is called a:

a.rolling budget.

b.static budget.

c.flexible budget.

d.operating budget(2)

1.23 An example of a favourable variance is when:

a.actual material prices are greater than expected material prices.

b.actual expenses are less than expected expenses.

c.expected labour costs are less than actual labour costs.

d.actual revenues are less than expected revenues.(2)

1.24 The following information should be used to answer Question 1.24.1 - 1.24.2 below:

Telcom Ltd has the following information available:

Budgeted cost of direct materials at 900 000 unitsR900 000

Budgeted cost of direct materials at 820 000 unitsR820 000 Actual cost of direct materials at 820 000 unitsR840 000

Actual level of output (units)820 000 Planned level of output (units)900 000

1.24.1What is the static budget variance for direct material costs?

a.R60 000 favourable.

b.R60 000 unfavourable.

c.R20 000 favourable.

d.R20 000 unfavourable.(4)

1.24.2What is the flexible budget variance for direct material costs?

a.R60 000 favourable.

b.R60 000 unfavourable.

c.R20 000 favourable.

d.R20 000 unfavourable.(4)