Accounting for Decision Making and Control 9th Edition Zimmerman Test Bank

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Accounting for Decision Making and Control 9th Edition Zimmerman Test Bank

 

2-1
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Chapter 02
The Nature of Costs
Multiple Choice Questions
1. Opportunity Costs:
A. must never be negative
B. may be found in financial statements (annual report)
C. reflect the benefit of the next best alternative
D. are pecuniary in nature
E. none of the above
2. John invested $12,000 in the stock of Hyper Cyber Eight years later, Hyper Cyber’s shares
reached $125,000, but John held onto the shares in the belief that their price would double in the
next five years. Unfortunately, Hyper Cyber did not double. Rather the market value of John’s
shares today is $4,000. If the shares were sold and the proceeds invested in another investment,
they would likely earn 5% per annum. Which of the following terms and values is correct?
A. $125,000 is the opportunity cost of selling the shares today
B. $12,000 is a sunk cost
C. $250,000 is the opportunity cost
D. $2000 is the opportunity cost
E. None of the above
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3. Which of the following can be an opportunity cost?
A. Interest on cost of inventory
B. Cost of idle capacity
C. Cost of underutilized labor
D. The decline in an asset’s value
E. All of the above
4. Davos Inc. makes fiberglass ski-boards in Switzerland. Identify the correct matching of terms.
A. Fiberglass is factory overhead
B. Plant real estate taxes are a period cost
C. Depreciation on delivery trucks is a product cost
D. Payroll taxes for workers in the Packaging Department are direct labor
E. None of the above
5. Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe, which
normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month.
Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost.
This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In
November, Umberto offers to buy 1,500 ounces for €6,000.
If Pamela accepts the order, she must design a special label for Umberto at a cost of €500. Each
label will cost 25 cents to make and apply. Pamela should:
A. accept the order, at a gain of €625
B. reject the order, at a loss of €1,875
C. reject the order, at a loss of €2,375
D. accept the order, at a gain of €1,125
E. none of the above
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6. Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe, which
normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month.
Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost.
This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In
November, Umberto offers to buy 1,500 ounces for €6,000.
Now assume that the order is received in July, peak season. If Pamela accepts the order, she
will turn away regular customers who order 500 ounces. Pamela should:
A. reject the order, which loses €1,875
B. reject the order as it is less than her cost
C. accept the order if Umberto raises the price higher than €6.58/ounce
D. accept the order if Umberto raises the price higher than €5.58/ounce
E. none of the above
7. Francois French manufactures cheese, which he normally sells at €20/kg, on which sales
commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs Costs per kg.
Plant depreciation €8,000 Direct materials €4
Other plant costs 15,000 Direct labor 2
Corporate salaries 10,000 Var. factory O/H 3
Advertising 3,000
The number of kilograms to sell to break-even is:
A. 3,273
B. 3,600
C. 3,000
D. 2,300
E. none of the above
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8. Francois French manufactures cheese, which he normally sells at €20/kg, on which sales
commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs Costs per kg.
Plant depreciation €8,000 Direct materials €4
Other plant costs 15,000 Direct labor 2
Corporate salaries 10,000 Var. factory O/H 3
Advertising 3,000
If sales are 5,000 kgs, which of the following is true?
A. Total contribution margin is €50,000
B. Ratio of total contribution margin to net income before taxes is 3.57
C. Taxes payable are €4,200
D. Operating leverage is 42%
E. All of the above
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McGraw-Hill Education.
9. Francois French manufactures cheese, which he normally sells at €20/kg, on which sales
commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs Costs per kg.
Plant depreciation €8,000 Direct materials €4
Other plant costs 15,000 Direct labor 2
Corporate salaries 10,000 Var. factory O/H 3
Advertising 3,000
Francois French wants to increase after-tax profits to €35,000. Assuming sufficient demand,
which strategy achieves this goal?
A. Sell 7,100 kgs at the present price
B. Pay the dairy €1/kg less and sell 7,500 kgs
C. Sell 8,000 kgs at €20.79/kg
D. Sell 7,500 kgs at the present price and eliminate the sales commission
E. None of the above
10. The Mojave Water Agency (MWA) sets water policy and water rates for a desert area that faces a
severe water shortage. It has 200,000 customers who are charged $100 per month for the first
20,000 cubic feet (cu.ft) and 1 cent per cu.ft thereafter. The average customer bill is $200 per
month. It costs the agency ¼ cent per cu.ft to monitor and bill for usage. The MWA wants to cut
costs by replacing metered billing with a flat fee which would be added to each property owner’s
real estate tax bill. Which is true?
A. The proposed policy will be more expensive to operate and will lead to decreased water usage
B. The proposed policy will be cheaper to operate and will lead to increased water usage
C. The proposed policy will be cheaper to operate and will lead to decreased water usage
D. The most that the MWA should pay the County Real Estate Department for handling the
proposed billing process is $6,000,000
E. b) and d) above
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11. Hardley sells mamburgers. He faces fixed costs of $18,000 per month and variable production
and marketing costs of $2 per mamburger. Market research has developed the following demand
schedule. Which price/volume combination should Yardley choose?
A. Price: $12; Quantity: 4,000
B. Price: $10; Quantity: 5,500
C. Price: $8; Quantity: 7,000
D. Price: $6; Quantity: 9,000
E. Unable to determine
12. Bertie’s Burritos, a fast food enterprise, wants to understand his cost structure. He collected data,
which appears below, to analyze costs using the high-low method.

Month Volume Total costs
January 5,000 $2,700
February 7,000 $3,700
March 6,000 $3,400
Which is true?
A. Estimated variable costs are 70 cents per burrito
B. Fixed costs cannot be estimated
C. Estimated fixed costs are $200
D. Total costs at volume of 8,000 are estimated at $4,200
E. c) and d) only
Essay Questions
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13. Fixed, Variable, and Average Costs
Midstate University is trying to decide whether to allow 100 more students into the university.
Tuition is $5,000 per year. The controller has determined the following schedule of costs to
educate students:

Number of Students Total Costs
4,000 $30,000,000
4,100 30,300,000
4,200 30,600,000
4,300 30,900,000
The current enrollment is 4,200 students. The president of the university has calculated the cost
per student in the following manner: $30,600,000/4,200 students = $7286 per student. The
president was wondering why the university should accept more students if the tuition is only
$5,000.
Required:
a. What is wrong with the president’s calculation?
b. What are the fixed and variable costs of operating the university?
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14. The Elements of Cost Volume Profit
The M Company’s variable costs are 75% of the sales price per unit and their fixed costs are
$240,000. If the company earned $60,000 before taxes in selling 150,000 units, what was the
sales price per unit?
15. Opportunity Costs
The First Church has been asked to operate a homeless shelter in part of the church. To operate
a homeless shelter the church must hire a full time employee for $1,200/month to manage the
shelter. In addition, the church would have to purchase $400 of supplies/month for the people
using the shelter. The space that would be used by the shelter is rented for wedding parties. The
church averages about 5 wedding parties a month that pay rent of $200 per party. Utilities are
normally $1,000 per month. With the homeless shelter, the utilities will increase to $1,300 per
month.
What is the opportunity cost to the church of operating a homeless shelter in the church?
2-9
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16. Fixed and Variable Costs:
The university athletic department has been asked to host a professional basketball game at the
campus sports center. The athletic director must estimate the opportunity cost of holding the
event at the sports center. The only other event scheduled for the sports center that evening is a
fencing match that would not have generated any additional costs or revenues. The fencing
match can be held at the local high school, but the rental cost of the high school gym would be
$200. The athletic director estimates that the professional basketball game will require 20 hours
of labor to prepare the building. Clean-up depends on the number of spectators. The athletic
director estimates the time of clean-up to be 2 minutes per spectator. The labor would be hired
especially for the basketball game and would cost $16 per hour. Utilities will be $500 greater if the
basketball game is held at the sports center. All other costs would be covered by the professional
basketball team.
Required:
a. What is the variable cost of having one more spectator?
b. What is the opportunity cost of allowing the professional basketball team to use the sports
center if 10,000 spectators are expected?
c. What is the opportunity cost of allowing the professional basketball team to use the sports
center if 12,000 spectators are expected?
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17. Opportunity Cost of Attracting Industry
The Itagi Computer Company from Japan is looking to build a factory for making Wi-Fi routers in
the United States. The company is concerned about the safety and well-being of its employees
and wants to locate in a community with good schools. The company also wants the factory to be
profitable and is looking for subsidies from potential communities. Encouraging new business to
create jobs for citizens is important for communities, especially communities with high
unemployment.
Wellville has not been very well since the shoe factory left town. The city officials have been
working on a deal with Itagi to get the company to locate in Wellville. Itagi officials have identified
a 20 acre undeveloped site. The city has tentatively agreed to buy the site for $50,000 for Itagi
and not require any payment of property taxes on the factory by Itagi for the first five years of
operation. The property tax deal will save Itagi $3,000,000 in taxes over the five years. This deal
was leaked to the local newspaper. The headlines the next day were: “Wellville Gives Away
$3,000,000 + to Japanese Company”.
Required:
a. Do the headlines accurately describe the deal with Itagi?
b. What are the relevant costs and benefits to the citizens of Wellville of making this deal?
2-11
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18. Cost, Volume, Profit Analysis
With the possibility of the US Congress relaxing timber cutting restrictions, a local lumber
company is considering an expansion of its facilities. The company believes it can sell lumber for
$0.18/board foot. A board foot is a measure of lumber. The tax rate for the company is 30
percent. The company has the following two opportunities:
• Build Factory A with annual fixed costs of $20 million and variable costs of $0.10/board foot.
This factory has an annual capacity of 500 million board feet.
• Build Factory B with annual fixed costs of $10 million and variable costs of $0.12/board foot.
This factory has an annual capacity of 300 million board feet.
Required:
a. What is the break-even point in board feet for Factory A?
b. If the company wants to generate an after tax profit of $2 million with Factory B, how many
board feet would the company have to process and sell?
c. If demand for lumber is uncertain, which factory is riskier?
d. At what level of board feet would the after-tax profit of the two factories be the same?