Multiple Choice 3
Question 1. Question : (TCO D) Return on investment (ROI) is equal to the margin multiplied by
Question 2. Question : (TCO D) For which of the following decisions are opportunity costs relevant?
The decision to make or buy a needed part The decision to keep or drop a product line
Question 3. Question : (TCO D) Last year, the House of Orange had sales of $826,650, net operating income of $81,000, and operating assets of $84,000 at the beginning of the year and $90,000 at the end of the year. What was the company’s turnover, rounded to the nearest tenth?
Question 1. Question : (TCO D) Data for December concerning Dinnocenzo Corporation’s two major business segments-Fibers and Feedstocks-appear below.
Sales revenues, Fibers $870,000
Sales revenues, Feedstocks $820,000
Variable expenses, Fibers $426,000
Variable expenses, Feedstocks $344,000
Traceable fixed expenses, Fibers $148,000
Traceable fixed expenses, Feedstocks $156,000
Common fixed expenses totaled $314,000 and were allocated as follows: $129,000 to the Fibers business segment and $185,000 to the Feedstocks business segment.
Prepare a segmented income statement in the contribution format for the company. Omit percentages; show only dollar amounts.
Question 2. Question : (TCO D) Wryski Corporation had net operating income of $150,000 and average operating assets of $500,000. The company requires a return on investment of 19%.
i. Calculate the company’s current return on investment and residual income.
ii. The company is investigating an investment of $400,000 in a project that will generate annual net operating income of $78,000. What is the ROI of the project? What is the residual income of the project? Should the company invest in this project?
ii. Return on investment = Net operating income / Average operating assets = $78,000 / $400,000 = 19.5%
Question 3. Question : (TCO D) Tjelmeland Corporation is considering dropping product S85U. Data from the company’s accounting system appear below.
Variable Expenses $158,000
Fixed Manufacturing Expenses $119,000
Fixed Selling and Administrative Expenses $94,000
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $55,000 of the fixed manufacturing expenses and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is discontinued.
i. According to the company’s accounting system, what is the net operating income earned by product S85U? Show your work!
ii. What would be the effect on the company’s overall net operating income of dropping product S85U? Should the product be dropped? Show your work!
Question 4. Question : (TCO D) Rosiek Corporation uses part A55 in one of its products. The company’s accounting department reports the following costs of producing the 4,000 units of the part that are needed every year.
Direct Materials $2.80
Direct Labor $6.30
Variable Overhead $8.50
Supervisor’s Salary $2.60
Depreciation of Special Equipment $6.80
Allocated General Overhead $6.10
An outside supplier has offered to make the part and sell it to the company for $32.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $4,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part A55 could be used to make more of one of the company’s other products, generating an additional segment margin of $26,000 per year for that product.
i. Prepare a report that shows the effect on the company’s total net operating income of buying part A55 from the supplier rather than continuing to make it inside the company.
ii. Which alternative should the company choose?
Question 5. Question : (TCO D) A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows.
Direct Materials $18.50
Direct Labor $1.20
Variable manufacturing overhead $8.40
Fixed manufacturing overhead $3.90
Unit product cost $32.00
Direct labor is a variable cost. The special order would have no effect on the company’s total fixed manufacturing overhead costs. The customer would like some modifications made to product M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company’s other sales. The company has ample spare capacity for producing the special order.
Determine the effect on the company’s total net operating income of accepting the special order. Show your work!
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