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Only those fixed costs labeled "common" are charged to the individual segments when preparing a segment income statement.
A company has two divisions, each selling several product lines. If segment reports are prepared at the product line level, the division managers' salaries would be considered as common fixed costs of the product lines.
A segment margin is computed by deducting variable and traceable fixed expenses from the sales of a segment.
Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required ROR for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.
ROI encourages managers to accept all investment decisions that will benefit the company as a whole when it is used as a measure of performance.
If a cost is a common cost of the segments on a segmented income statement, the cost should:
A be allocated to the segments on the basis of segment sales
B not be allocated to the segments
C excluded from the income statement
D treated as a product cost rather than as a period cost
Spiedino Company sells products to both residential and commercial customers in eight sales territories. In which of the following ways could Spiedino be segmented?
A by product and then further segmented by type of customer
B by type of customer and then further by segmented by sales territory
C by sales territory and then further segmented by product line
D all of the above
Which of the following is generally considered to be part of the value chain of a manufacturing company?
A marketing activities
B customer service activities
C research and development activities
A national retail company has segmented its income statement by sales territories. If each sales territory statement is further segmented by individual stores, which of the following will most likely occur?
A some common fixed expenses in the sales territory segmented statement will become traceable fixed expenses in the individual store segmented statement
B some traceable fixed expenses in the sales territory segmented statement will become common fixed expenses in the individual store segmented statement
C the sum total of the individual stores' segment margins in each sales territory will be equal to the segment margin for the sales territory
D Both A and C
Hayworth Company has just segmented last year's ISs into ten product lines. The CEO is curious as to what effect dropping one of the product lines at the beginning of last year would have had on overall company profit. What is the best number for the CEO to look at to determine the effect of this elimination on the NOI of the company as a whole?
A the product line's sales $
B the droduct line's CM
C the product line's segment margin
D the product line's segment margin minus an allocated portion of common fixed expenses
In an income statement segmented by product line, a fixed expense that cannot be allocated among product lines on a cause-and-effect basis should be:
A classified as a variable expense
B allocated to the product lines on the basis of sales $
C allocated to the product lines on the basis of segment margin
D classified as a common fixed expense and not allocated
E classified as a traceable fixed expense and not allocated
Managerial performance can be measured in many different ways including ROI and residual income. A good reason for using residual income instead of ROI is:
A RI can be computed without having to measure operating assets
B Managers are more likely to accept projects that are beneficial to the company
C ROI does not take into account both turnover and margin
D A minimum ROR does not have to be specifies when the RI approach is used.
Which of the following performance measures will decrease if the minimum required ROR increases?
A Y Y
B N Y
C Y N
D N N
Which of the following performance measures will increase if inventory decreases and all else remains the same?
A Y Y
B N Y
C Y N
D N N
One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.
In a decision to drop a segments, the opportunity cost of the space occupied by the segment would be the profit that could be derived from the best alternative use of the space.
For which of the following decisions are opportunity costs relevant? The decision to :
Make or Buy Keep of Drop a product line
A Y Y
B Y N
C N Y
D N N
Which of the following costs are always irrelevant in decision making?
A avoidable costs
B sunk costs
C opportunity costs
D fixed costs
Allocated common fixed costs:
A can make a product line appear to be unprofitable
B are always incremental costs
C are always relevant in decisions involving dropping a product line
D A, B and C
In deciding whether to manufacture a part or buy it from an outside supplier, which of the following costs are irrelevant?
FOH that will continue (X)
Freight charges paid if bought from outside (O)
A Yx Yo
B Yx No
C Nx Yo
D Nx No
Consider a decision facing a company of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is:
C FOH that will be avoided if the special offer is accepted
D Common FOH that will continue if not accepted
UI manufactures a number of products at its factory. The need exceeds the factory capacity. To maximise profit, management should rank products based on their:
A gross margin
C selling price
D CM per unit of the constrained resource
Degner Inc has some material that originally cost $19,500. The material has a scrap value of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental effect on the company's overall profit of reworking and selling the material rather then selling it as is as scrap?
A study has been conducted to determine if one of the depts in P Co should be discontinued. The CM in the dept is $50,000/year. Fixed expenses charged to the dept are $65,000/year. It is estimated that $40,000 of these fixed expenses could be eliminated if the dept is discontinued. The data indicate that if the dept is discontinued the co's overall NOI would:
A decrease by $25,000/year
B increase by $25,000/year
C decrease by $10,000/year
D increase by $10,000/year
F S&A exp $35,000
In the co's accting system all fixed expenses of the co are fully allocated to products. Further investigation has revealed that $34,000 of the FMOH and $20,000 of the F S&A exp are avoidable if the product is discontinued. What would the effect on the co's overall NOI if the product were dropped?
F S&A $55,000
In the co's accting system all fixed expenses of the co are fully allocated to products. Further investigation has revealed that $41,000 of the FMOH and $25,000 of the F S&A are avoidable if the product is discontinued. What would be the effect on the co's NOI if the product is dropped?
The NPV method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.
When using IROR to evaluate investment projects, if the IROR is less than the required ROR, the project would be accepted.
In preference decision situations, a project with a high NPV will always be preferable to a project with a lower NPV.
An investment project with a project profitability index of of less than 0 should ordinarily be rejected.
Screening decisions follow preference decisions and seek to rank investment proposals in order of their desirability.
In capital budgeting, what will be the effect on the following if there is an increase in the discount rate?
A D I
B D D
C D No
D I No
E I I
The total-cost approach and the incremental-cost approach to evaluating two competing investment opportunities.
A are dissimilar in that one deals with NPV and the other IROR
B are similar in that they will recommend the same alternative as the best
C are dissimilar in that one uses the cost of capital as a discount rate and the ither does not
D are similar in that neither considers the time value of money
The payback period method measures
A how quickly investment $ may be recovered
B the cash flow from an investment
C the economic life of an investment
D the project profitability of an investment
Park co is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000/year for 6 years. The working capital would be released for use elsewhere when the project is completed. If the co's discount rate is 10%, the investment's NPV is:
The Whitton Co uses a discount rate of 16%. The co has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000/year for the next 3 years. The machine will have no salvage value. The NPV of this machine is:
One strength of the SROR method is that is takes into account the time value of $ in computing the return on an investment project.
The payback method of making capital budgeting decisions gives consideration to the time value of money.
Present investment req $12,000
Discount rate 12%
Life of project 10 years
What is the annual cost savings?
Boston Co is contemplating the purchase of a new machine:
Cost of machine $38,900
Annual cash inflows expected $10,000
Salvage value $5,000
Life of machine 6 years
Discount rate 16%
What is the NPV?
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