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Exam 16: Cost for Decision Making

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Question 41

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When a firm uses the net present value method for capital budgeting decisions with a 10% discount rate, what does a negative net present value indicate?

A) the proposal's rate of return exceeds 10%.
B) the proposal's rate of return is less than the minimum rate required.
C) the proposal earns a rate of return between 9% and 10%.
D) None of the answers are correct.

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Question 42

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ABC Company produces three products: X, Y, and Z.Product X has a contribution margin of $40 and requires 2 hour of machine time.Product Y has a contribution margin of $60 and requires 4 hours of machine time.Product Z has a contribution margin of $72 and requires 3 hours of machine time.If machine hours are considered scarce, in what product mix order should ABC Company schedule the production of Products X, Y, and Z for the available machine hours?

A) first X, then Y, then Z.
B) first Z, then X, then Y.
C) first Z, then Y, then X.
D) first Y, then Z, then X.

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Question 43

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Which of the following is typically not important when calculating the net present value of a project?

The cost of capital used in the capital budgeting analytical process is primarily a function of:

Wayside, Inc., produces a product that currently sells for $72 per unit.Current production costs per unit include direct materials, $20; direct labor, $24; variable overhead, $10; and fixed overhead, $10.Product engineering has determined that a certain part of the product conversion process could be outsourced for $8 per unit.Raw material costs would not be affected, but direct labor and variable overhead costs would be reduced by 30%.No other opportunity is currently feasible for unused production capacity.How much product cost can Wayside avoid if it outsources part of the conversion process?

As part of the capital budgeting process, capital expenditure analysis attempts to determine the impact of a proposed capital expenditure on the organization's:

Advanced Digital Design is analyzing a capital investment project for using new computing technology to reduce current operating costs.The new computing technology will have a five-year life with no salvage value at the end of five years.Advanced Digital Design's cost of capital is 12%.Relevant cash flows and present value factors for 5 years @ 12% are as follows: Investment in computer technology = $500,000. Annual net cash savings from new computer technology = $135,000. Salvage value of new computer technology = $0. Present value of $1 = 0.5674 Present value of an annuity of $1 = 3.6048 The net present value of the investment in new computing technology is:

A(n) ________ cost is a cost that would be classified "for decision-making purposes."

The profitability index of a proposed investment project will be:

Digital Devices, Inc.has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer.Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid.However, to process the order for export, an additional handling cost of $10 per unit is estimated.The order indicates that the price of the drives cannot exceed $200. The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity.Unit selling price and costs, based on estimated actual capacity being utilized, are as follows: $\begin{array}{lrr} \text { Selling price } &\$260\\ \text { Expenses: } &\\ \text {Direct materials } &\$80\\ \text {Direct labor } &40\\ \text { Variable manufacturing overhead} &50\\ \text { Fixed manufacturing overhead } &30\\ \text {Sales commission } &26\\ \text { Fixed administrative expenses } &\underline{8}\\ \text {Total } &\underline{\$234}\\\end{array}$ (a.)Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order. (b.)How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?

In a make or buy decision, which of the following costs would be considered relevant?

Superior Printing is considering a capital investment for a new printing press with a ten-year life.Superior's cost of capital is 10%.Relevant cash flows and related present value factors are as follows: Investment in printing press = $240,000. Investment in working capital items = $10,000 Annual net cash inflow from operating the press = $40,000. Salvage value of the press = $18,000. Present value of $1 (10 Years @ 10%) = 0.3855 Present value of an annuity of $1 (10 Years @ 10%) = 6.1446 The present value of the salvage value from the press is:

A capital budgeting decision method that considers the time value of money is the:

The principal weakness of the payback method for evaluating proposed investments is that it does not:

When considering the results of a proposed investment determined by present value analysis which indicates that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

A simple relevant cost analysis is not appropriate for which type of decisions?

When considering alternative projects, ________ costs are those that would result from selecting one alternative instead of the other.

When considering a sell as is or process further decision, the key decision factor is to determine that:

Acme Company is considering replacing outdated production equipment that will allow for production cost savings of $20,000 per month.The new equipment will have a five-year life and cost $800,000, with an estimated salvage value of $50,000.Acme's cost of capital is 10%. Calculate the payback period and the accounting rate of return for the new production equipment.

An investment project that provides a higher rate of return than the firm's cost of capital will likely: