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Chapter 16
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Gravity
Terms in this set (48)
The method of evaluating financial data that change under different courses of action is called:
A. financial statement analysis.
B. break-even analysis.
C. incremental analysis.
D. cost-benefit analysis.
incremental analysis.
Opportunity costs are:
A. included in inventory.
B. foregone benefits.
C. sunk costs.
D. included in cost of goods sold.
foregone benefits.
A sunk cost is a cost that:
A. has been incurred and cannot be eliminated.
B. is never relevant in decision-making.
C. is never a differential cost.
D. all of these.
all of these.
_____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price:
A. Relevant costing
B. Product costing
C. Differential costing
D. Target costing
Target costing
______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another:
A. Target cost
B. Sunk cost
C. Opportunity cost
D. Allocated cost
Opportunity cost
_____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other:
A. Allocated
B. Differential
C. Sunk
D. Irrelevant
Differential
Which of the following cost classifications would not be considered relevant in comparing decision alternatives?
A. opportunity cost.
B. differential cost.
C. sunk cost.
D. None of these.
sunk cost.
In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?
A. Direct labor.
B. Direct materials.
C. Variable manufacturing overhead.
D. Fixed manufacturing overhead that cannot be avoided.
Fixed manufacturing overhead that cannot be avoided.
A cost classified "for decision-making purposes" would include:
A. period cost.
B. opportunity cost.
C. controllable cost.
D. inventoriable cost.
opportunity cost.
Relevant costs in decision-making:
A. are future costs that represent differences between decision alternatives.
B. result from past decisions.
C. should not influence the decision.
D. None of these.
are future costs that represent differences between decision alternatives.
A cost is considered relevant if:
A. it is positive.
B. it is sunk.
C. it makes a difference.
D. if it can't be changed.
it makes a difference.
If a cost is irrelevant to a decision, the cost could not be a:
A. fixed cost.
B. sunk cost.
C. differential cost.
D. variable cost.
differential cost.
The potential rental value of space used in the manufacturing process:
A. is a variable production cost.
B. is an unavoidable production cost.
C. is a sunk production cost.
D. is an opportunity cost if production is not outsourced.
is an opportunity cost if production is not outsourced.
The key to analyzing a sell as is or process further decision is to determine that:
A. opportunity costs exceed sunk costs.
B. incremental revenues exceed incremental costs.
C. differential costs do not exist.
D. all allocated costs are included in the decision.
incremental revenues exceed incremental costs.
In a make or buy decision, which of the following costs would be considered relevant?
A. avoidable costs.
B. unavoidable costs.
C. sunk costs.
D. allocated costs.
avoidable costs.
Which of the following qualitative factors favors the buy option in the make or buy decision?
A. Production scheduling.
B. Utilization of idle capacity.
C. Ability to control quality.
D. Technical expertise of supplier.
Technical expertise of supplier.
A(n) _____________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned.
A. relevant cost
B. opportunity cost
C. incremental cost
D. target cost
target cost
Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:
A. $28.
B. $45.
C. $52.
D. $80.
$52.
Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?
A. avoidable costs.
B. unavoidable costs.
C. opportunity costs.
D. differential costs.
unavoidable costs.
The decision to continue or discontinue a segment of the business should focus on:
A. sales minus total variable expenses and total fixed expenses.
B. sales minus total variable expenses and avoidable fixed expenses of the segment.
C. sales minus total variable expenses and allocated fixed expenses of the business.
D. None of these.
sales minus total variable expenses and avoidable fixed expenses of the segment.
The decision for solving production mix problems involving multiple products and scarce production resources should focus on:
A. gross profit of each product.
B. sales price of each product.
C. contribution margin per unit of scarce resource.
D. contribution margin of each product.
contribution margin per unit of scarce resource.
XYZ Company produces three products: A, B, and C. Product A has a contribution margin of $20 and requires 1 hour of machine time. Product B has a contribution margin of $30 and requires 2 hours of machine time. Product C has a contribution margin of $36 and requires 1.5 hours of machine time. If machine hours are considered scarce, in what product mix order should XYZ Company schedule the production of Products A, B, and C for the available machine hours?
A. First A, then B, then C.
B. First C, then A, then B.
C. First C, then B, then A.
D. First B, then C, then A.
First C, then A, then B.
A principal difference between operational budgeting and capital budgeting is the time frame of the budget. Because of this difference, capital budgeting:
A. is an activity that involves only the financial staff.
B. is done on a rolling budget period basis.
C. focuses on the present value of cash flows from investments.
D. is concerned with a long-term net income forecast.
focuses on the present value of cash flows from investments.
Capital budgeting differs from operational budgeting because:
A. depreciation calculations are required.
B. it considers the time value of money.
C. operating expenses are not relevant.
D. capital budgets don't affect cash flow.
it considers the time value of money.
Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:
A. segment margin.
B. contribution margin.
C. ROI.
D. cost of capital.
ROI.
The cost of capital used in the capital budgeting analytical process is primarily a function of:
A. ROE.
B. ROI.
C. the cost of acquiring the funds that will be invested.
D. the discount rate.
the cost of acquiring the funds that will be invested.
For most firms, the cost of capital is probably in the range of:
A. the prime rate, plus or minus 2 percentage points.
B. less than 10%.
C. between 10% and 20%.
D. more than 20%.
between 10% and 20%.
When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:
A. the quantitative analysis indicates that it should not be made.
B. management's assessment of qualitative factors overrides the quantitative analysis.
C. the timing of the cash flows of the investment will not be as assumed in the present value calculation.
D. post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized.
management's assessment of qualitative factors overrides the quantitative analysis.
Which of the following is not an important qualitative factor to consider in the capital budgeting decision?
A. regulations that mandate investment to meet safety, environmental, or access requirements.
B. technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.
C. commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.
D. all of these are important qualitative factors to consider.
all of these are important qualitative factors to consider.
Which of the following is typically not important when calculating the net present value of a project?
A. Timing of cash flows from the project.
B. Income tax effect of cash flows from the project.
C. Method of financing the project.
D. Amount of cash flows from the project.
Method of financing the project.
Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?
A. initial investment.
B. income taxes.
C. salvage value.
D. working capital.
income taxes.
In order to calculate the net present value of a proposed investment, it is necessary to know:
A. the cash flows expected from the investment.
B. the net income expected from the investment.
C. the interest rate paid on funds borrowed to make the investment.
D. the cash dividends paid on the stock each year.
the cash flows expected from the investment.
Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:
A. 7% rate.
B. 8% rate.
C. 9% rate.
D. all of these.
9% rate.
If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:
A. increase ROI.
B. decrease ROI.
C. increase payback.
D. decrease payback.
increase ROI.
If the net present value of the investment is $8,510, then:
A. the rate of return is less than the cost of capital.
B. the present value of the cash flows are more than the investment.
C. the cost of capital is higher than the internal rate of return.
D. the present value of the cash flows is $8,510 less than the investment.
the present value of the cash flows are more than the investment.
If the net present value of a proposed investment is positive:
A. the investment not will be made.
B. the cost of capital is higher than the internal rate of return.
C. the cost of capital is positive.
D. the cost of capital is lower than the internal rate of return.
the cost of capital is lower than the internal rate of return.
The present value ratio of a proposed investment will be:
A. less than 1.0 if the net present value is positive.
B. negative if the proposed investment meets the cost of capital target.
C. less than 1.0 if the net present value is negative.
D. greater than 1.0 if the cost of capital exceeds the internal rate of return.
less than 1.0 if the net present value is negative.
The principal weakness of the payback method for evaluating proposed investments is that it does not:
A. provide a way of ranking projects in order of desirability.
B. consider cash flows that continue after the investment has been recovered.
C. result in an easily understood "answer".
D. recognize the time value of money.
recognize the time value of money.
42. The accounting rate of return method for evaluating proposed investments:
A. is based on cash receipts and disbursements related to the investment.
B. uses accounting net income from the operating budget.
C. does not recognize the time value of money.
D. is easier to use than the net present value method.
does not recognize the time value of money.
The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the:
A. internal rate of return.
B. accounting rate of return.
C. payback period.
D. net present value.
accounting rate of return.
An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that:
A. only one set of present value calculations using a required discount rate is made.
B. the actual rate of return on the project is calculated.
C. projects can be ranked in order of profitability using the net present value amount.
D. estimates of future cash flows do not have to be made.
only one set of present value calculations using a required discount rate is made.
If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is
A. 8 years.
B. 7 years.
C. 6 years.
D. 5 years.
8 years.
Which of the following statements are true regarding the payback period?
A. The time value of money is considered when calculating the payback.
B. The payback analysis is more accurate than the net present value analysis.
C. The payback period is less accurate than the accounting rate of return.
D. The time value of money is not considered when calculating the payback.
The time value of money is not considered when calculating the payback.
In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate?
A. The proposal's rate of return exceeds 12%.
B. The proposal's rate of return is less than the minimum rate required.
C. The proposal earns a rate of return between 10% and 12%.
D. None of these.
The proposal's rate of return is less than the minimum rate required.
A capital budgeting decision method that considers the time value of money is the
A. accounting rate of return method.
B. return on stockholders' equity method.
C. cash payback method.
D. internal rate of return method.
internal rate of return method.
Which of the following is a true statement regarding the internal rate of return in capital budgeting?
A. It provides the same basic information as the net present value method.
B. It calculates the net present value of future cash flows.
C. It calculates the proposal's rate of return.
D. It doesn't consider the time value of money.
It calculates the proposal's rate of return.
Which of the following is a true statement regarding the net present value method in capital budgeting?
A. It provides the same basic information as the accounting rate of return.
B. It calculates the present value of future cash flows.
C. It calculates the proposal's rate of return.
D. It doesn't consider the time value of money.
It calculates the present value of future cash flows.
Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because:
A. a lower IRR is a less risky investment.
B. the highest NPV is not necessarily the highest IRR.
C. qualitative factors override quantitative analysis techniques.
D. sometimes management makes the wrong decision.
qualitative factors override quantitative analysis techniques.
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