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Exam 26: Standard Costs and Balanced Scorecard

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Question 31

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Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback on this investment is

A) 15 years.
B) 10 years.
C) 6 years.
D) 3 years.

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Question 32

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The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost.

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Question 33

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Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are allocated. Results of June follow: Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line.

The higher the rate of return for a given risk, the

If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative.

Yanik Company is considering investing in a project that will cost $162,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $45,000 each year. The company has a hurdle or cutoff rate of return of 8% and uses the following compound interest table: Instructions Using the internal rate of return method, determine if this project is acceptable by calculating an approximate interest yield for the project.

Nonfinancial information that management might evaluate in making a decision would not include

In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.

Giraldi Company has identified that the cost of a new computer will be $60,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is:

The payback method is criticized on the grounds that it

NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a price of $85 on the assembled unit. What decision should NF Toy make?

Use the following table, A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $420,000 and is expected to generate cash inflows of $168,000 at the end of each year for three years. The net present value of this project is

The decision rule on whether to sell or process further

Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. The unassembled bikes are sold to retailers at $400 each. Speedy currently has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. (b) Should Speedy sell or process further? Why or why not?

If a company has limited resources, the key factor in performing incremental analysis is

Laramie Service Center just purchased an automobile hoist for $13,000. The hoist has a 5-year life and an estimated salvage value of $960. Installation costs were $2,900, and freight charges were $740. Laramie uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $65 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $10. Instructions (a) Compute the payback period for the new hoist. (b) Compute the annual rate of return for the new hoist. (Round to one decimal.)

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: If the old machine is replaced, it can be sold for $20,000. Which of the following amounts is relevant to the replacement decision?

The discounted cash flow technique considers estimated total cash inflows from the investment but not the time value of money.

Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________, (2) _________________, and (3) ___________________.

A company is considering purchasing factory equipment that costs $320,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $90,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the equipment is purchased, the annual rate of return expected on this equipment is