MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Quality Costs 3. If quality costs had been reduced to 2.5 percent of sales in the current year, profits would have
1. The following activities are typical in production management: increased by
1. Warranty work A. P177,000 C. P61,000
2. Labor and overhead incurred for rework of defective products found by an inspector B. P58,000 D. P25,000
3. Quality training program
4. The costs of a consumer complaint department 4. For the current year, the respective percentages based on sales of the different quality costs,
5. In-process inspection costs respectively, are:
6. Reinspection of reworked products Prevention Appraisal Internal Failure External failure
7. Downtime attributed to quality problems A. 0.15% 1.40% 2.50% 1.50%
8. Product recalls B. 0.15% 1.40% 4.00% 2.75%
9. Lower sales due to poor product performance C. 0.65% 1.00% 1.50% 4.25%
10. Quality audits D. 0.65% 1.00% 2.50% 1.50%
To what classification of quality costs do the foregoing described costs belong?
Prevention Appraisal Internal Failure External Failure Productivity Measures
A. 3,7,10 3,5 2 1,4,8,9 Questions 5 & 6 are based on the following information.
B. 3,10 5 2,6,7 1,4,8,9 Information about Rose Company is as follows:
C. 10 3 2,5,6 1,4,7,8,9 2001 2002
D. 3,10 5 1,2,10 4,7,8,9 Output (units) 80,000 84,000
Selling price per unit P25 P25
Questions 2 thru 4 are based on the following information. Input quantities:
At the beginning of the year, Joshua Corporation initiated a quality improvement program. The Materials (pounds) 4,000 4,000
program was successful in reducing scrap and rework costs. To help assess the impact of the Labor (hours) 3,200 3,250
quality improvement program, the following data was collected for the current and preceding year. Input prices:
Preceding Year Current Year Materials (per pound) P5.00 P5.50
Sales P1,000,000 P 1,000,000 Labor (per hour) P7.00 P7.50
Recruiting 1,000 1,500
Packaging inspections 2,500 4,000 5. What are the materials productivity, and labor productivity ratio for 2001?
Downtime 20,000 15,000 A. B. C. D.
Reinspection 40,000 25,000 Materials 20.00 100.00 25.00 20.00
Product inspection 5,000 10,000 Labor 25.00 95.45 24.00 24.00
Product liability 35,000 27,500
6. By how much did profits change as a result of changes in productivity related to materials, and
2. As a result of quality improvements, profits have increased by labor, respectively?
A. P32,500 C. P7,500
A. B. C. D.
B. P20,500 D. P5,00
Materials P(1,100) P1,100 P(625) P625
Labor P (825) P 825 P 625 P625

May 9, 2004 Page 1 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Activity-Based Costing Material moves per product line 5 15

7. Designing and changing are activities that are classified as: Direct labor hours per unit 200 200
A. Unit-level C. Product-level Budgeted materials handling costs P50,000
B. Batch-level D. Facility-level Under each of the systems of costing, how much materials handling costs should be allocated
to one unit of wall mirrors?
8. How are the following activities classified using ABC system? A. B. C. D.
1. Security Based on direct labor hours P1,000 P 500 P2,000 P5,000
2. Product inspections Under activity-based costing P 500 P1,000 P1,500 P2,500
3. Insurance on the plant
4. Materials handling
Life-Cycle Costing
5. Modifications made by engineering to the product design of several products
11. Richards, Inc. developed the following budgeted life-cycle income statement for two proposed
6. Machine-related overhead
products. Each products life cycle is expected to be two years.
7. Set-ups
8. Providing space and utilities Product X Product Y Total
9. Moving of inventory Sales P200,000 P200,000 P400,000
Cost of goods sold ( 120,000) (130,000) ( 250,000)
Unit Level Batch Level Product Level Facility Level
Gross Profit P 80,000 P 70,000 P150,000
A. 4,6,8 2,4,7 1,3 10
Period expenses:
B. 2,6 4,5 1,7 3,10
Research & development ( 70,000)
C. 6 2,4,7,10 5 1,3,8
Marketing ( 50,000)
D. 2 1,6,7 10 3,4,5,8
Life-cycle income P 30,000
9. Protex Company makes two products, X and Z. X is being introduced this period, whereas Z A 10% return on sales is required for new products. Because the proposed products did not
has been in production for 2 years. For the period about to begin, 1,000 units of each product have a 10% return on sales, the products were going to be dropped.
are to be manufactured. The only relevant overhead item is the cost of engineering change Relative to Product Y, Product X requires more research and development costs but fewer
orders. X and Z are expected to require eight and two change orders, respectively. X and Z resources to market the product. Sixty percent of the research and development costs are
are expected to require 2 and 3 machine hours, respectively. The cost of a change orderis traceable to Product X and 30 percent of the marketing costs are traceable to Product X.
P600. If research and development costs and marketing costs are traced to each product, life-cycle
If Protex applies engineering change order cost on the basis of machine hours, the overhead income for Product Y would be
cost per unit to be assigned to X and Z, respectively, are A. P35,000 C. P12,000
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively B. P20,000 D. P7,000
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively
Cost Behavior
10. Zeta Co. is preparing its profit plan. As part of its analysis of the profitability of individual 12. The following cost functions were developed for manufacturing overhead costs:
products, the controller estimates the amount of overhead that should be allocated to the Manufacturing Overhead Costs Cost Function
individual product lines from the information given as follows: Electricity P100 + P20 per direct labor hour
Maintenance P200 + P30 per direct labor hour
Wall mirrors Special windows
Supervisors salaries P10,000 per month
Units produced 25 25 Indirect materials P16 per direct labor hour
May 9, 2004 Page 2 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated Maddens net assets are P36,000,000. The peso sales that must be achieved for Madden to
manufacturing overhead costs would be earn a 10 percent after tax return on assets would be
A. P109,300 C. P76,300 A. P8,800,000 C. P12,000,000
B. P99,000 D. P10,366 B. P16,000,000 D. P6,880,000

Cost-Volume-Profit Analysis 17. The following data relate to Homer Company which sells a single product:
13. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell Unit selling price P 20.00
100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are Purchase cost per unit 11.00
70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, Sales commission, 10% of selling price 2.00
what must the total fixed costs be? Monthly fixed costs P80,000
A. P80,000 C. P240,000 The firms salespersons would like to change their compensation from a 10 percent
B. P90,000 D. P600,000 commission to a 5 percent commission plus P20,000 per month in salary. They now receive
only commission.
14. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. The change in compensation plan should change the monthly breakeven point by
The selling price should be A. 1,071 Increase C. 1,538 Increase
A. P1.60 C. P2.40 B. 1,071 Decrease D. 1,538 Decrease
B. P2.10 D. P2.50
18. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows.
15. The following relates to Gloria Corporation, which produced and sold 50,000 units during a The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00
recent accounting period: per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of
Sales P850,000 additional fixed costs associated with this new product. A corporate fixed charge of P20,000
Fixed manufacturing costs 210,000 currently absorbed by other products will be allocated to this new product.
Variable manufacturing costs 140,000 How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling
Fixed selling and administrative expense 300,000 price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is
Variable selling and administrative expense 45,000 40%)
Income tax rate 40% A. 10,700 C. 20,000
For the next accounting period, if production and sales are expected to be 40,000 units, the B. 12,100 D. 28,300
company should anticipate a contribution margin per unit of
A. P1.00 C. P3.10 19. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6
B. P13.30 D. P7.30 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
16. Madden, Company has projected its income before taxes for next year as shown below. increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
Madden is subject to a 40% income tax rate. costs and variable costs per unit remain unchanged. If the selling price were reduced to P9
Sales (160,000 units) P8,000,000 per unit, the profit would be
Cost of sales A. P3,000 C. P5,000
Variable costs P 2,000,000 B. P4,000 D. P6,000
Fixed costs 3,000,000 5,000,000
Income before taxes P 3,000,000
May 9, 2004 Page 3 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

20. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs The company is considering paying the store manager a P60 commission on each pair of
are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a shoes sold in excess of break-even point. If this change were made, what will be the stores
10% increase over last year. For the company to increase income by P15,000 in the coming before tax profit or loss assuming 23,500 pairs of shoes are sold in a year?
year, the marginal contribution margin rate must be A. P(360,000) C. P840,000
A. 20% C. 40% B. P2,930,000 D. P1,330,000
B. 30% D. 70%
23. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed
21. Wilson Co. prepared the following preliminary forecast concerning product G for next year overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and
assuming no expenditure for advertising: will continue whether or not production ceases. Depreciation on the equipment is P20,000 a
Selling price per unit P 10 year. If production is stopped, the equipment can be sold for P18,000, if production continues,
Units sales 100,000 however, it will be useless at the end of 1 year and will have no salvage value. The selling
Variable costs P600,000 price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break
Fixed costs P300,000 even on a cash flow basis is
Based on a market study in December of this year, Wilson estimated that it could increase the A. 4,500 units C. 1,800 units
unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent B. 5,000 units D. 36,000 units
on advertising. Assuming that Wilson incorporates these changes in its forecast, what should
be the operating income from product G? Questions 24 through 28 are based on the Statement of Income of Davao, Inc. which represents
A. P175,000 C. P205,000 the operating results for the current fiscal year ending December 31. Davao had sales of 1,800
B. P190,000 D. P365,000 tons of product during the current year. The manufacturing capacity of Davaos facilities is 3,000
tons of product. Consider each questions situation separately.
22. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many Sales P900,000
styles of shoes that are all sold at the same price. To encourage sales personnel to be Variable costs
aggressive in their sales efforts, the company pays a substantial sales commission on each Manufacturing P315,000
pair of shoes sold. Sales personnel also receive a small basic salary. Selling costs 180,000
The following cost and revenue data relate to Store 21 and are typical of the companys many Total variable costs 495,000
sales outlets: Contribution margin P405,000
Selling price P 800 Fixed costs
Variable expenses: Manufacturing P 90,000
Invoice costs P360 Selling 112,500
Sales commission 140 Administration 45,000
500 Total fixed costs 247,500
Fixed expenses per year: Net income before income taxes P157,500
Rent P1,600,000 Income taxes (40%) (63,000)
Advertising 3,000,000 Net income after income taxes P 94,500
Salaries 1,400,000
Total P6,000,000 24. The breakeven volume in tons of product for the year is
A. 420 C. 1,100
B. 495 D. 550
May 9, 2004 Page 4 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

25. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs 30. The following information relates to Ore Companys 2003 manufacturing activities:
stay at the same levels and amounts next year, the after-tax net income that Davao can expect Standard direct labor hours per unit 2
for the next year is Number of units produced 5,000
A. P135,000 C. P110,25 Standard variable overhead per standard direct labor hours P3
B. P283,500 D. P184,500 Actual variable overhead P28,000
Unfavorable overhead efficiency variance P 1,500
26. Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. The number of actual direct labor hours are
Assume that all of Davaos costs would be at the same levels and rates as last year. What net A. 10,500 C. 10,000
income after taxes would Davao make if it took this order and rejected some business from B. 11,000 D. 12,400
regular customers so as not to exceed capacity?
A. P297,500 C. P252,000 Questions 31 & 32 are based on the following information.
B. P211,500 D. P256,500 Rainbow Company uses a standard cost system. Information about its direct labor costs for
Product Lux for the month of January follows:
27. Without prejudice to your answers to previous questions, and assume that Davao plans to Standard hours allowed for actual production 1,500
market its product in an new territory. Davao estimates that an advertising and promotion Actual hourly rate paid P61.00
program costing P61,500 annually would need to be undertaken for the next two or three Standard hourly rate P60.00
years. In addition , a P25 per ton sales commission over and above the current commission to Labor efficiency variance, Favorable P6,000
the sales force in the new territory would be required. How many tons would have to be sold
in the new territory to maintain Davaos current after-tax income of P94,500? 31. How many direct labor hours were actually worked during the month of January?
A. 307.5 C. 1,095 A. 1,400 C. 1,402
B. 273.33 D. 1,545 B. 1,498 D. 1,600

28. Without prejudice to preceding questions, assume that Davao estimates that the per ton 32. How much was the direct labor rate variance?
selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed A. P1,400 F C. P1,400 U
costs will not change. What sales volume in pesos will be required to earn an after-tax net B. P1,600 F D. P1,600 U
income of P94,500 next year?
A. P1,140,000 C. P825,000 33. STA Company uses a standard cost system. The following information pertains to direct labor
B. P1,500,000 D. P1,350,000 costs for the month of June:
Standard direct labor rate per hour P10.00
Standard Costing & Variance Analysis Actual direct labor rate per hour P 9.00
29. Dahl Company, a clothing manufacturer, uses a standard costing system. Each unit of finished Labor rate variance P12,000 favorable
product contains 2 yards of cloth. However, there is unavoidable waste of 20% calculated on Actual output 2,000 units
input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 per yard. The Standard hours allowed for actual production 10,000 hours
standard direct material cost for cloth per unit of finished product is: How many actual labor hours were worked during March for STA Company?
A. P4.80 C. P7.00 A. 10,000 C. 8,000
B. P6.00 D. P7.50 B. 12,000 D. 10,500

May 9, 2004 Page 5 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

34. If annual overhead costs are expected to be P1,000,000 and 200,000 total labor hours are 40. Fidelity Company uses a flexible budget system and prepared the following information for the
anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is year: Fidelity operated at 80 percent of capacity during the year, but applied factory overhead
A. P6.25 C. P25.00 based on the 90 percent capacity level. Assuming that actual factory overhead was equal to
B. P5.00 D. P4.00 the budgeted amount of overhead, how much was the overhead volume variance for the year?
Percent of Capacity 80 Percent 90 Percent
35. ABC had a P28,000 favorable volume variance, a P25,000 unfavorable variable overhead Direct labor hours 24,000 27,000
spending variance, and P12,000 total overapplied overhead. The fixed overhead budget Variable factory overhead P54,000 P60,750
variance was Fixed factory overhead P81,000 P81,000
A. P9,000 favorable C. P9,000 unfavorable Total factory overhead rate pre DLH P5.625 P5.25
B. P26,000 favorable D. P26,000 unfavorable A. P9,000 U C. P9,000 F
B. P15,750 U D. P15,750 F
36. Given for the variable factory overhead of X Products Inc.: P39,500 actual input at budgeted
rate, P41,500 flexible budget based on standard input allowed for actual output, P2,500 41. Using the information presented below, calculate the total overhead spending variance.
favorable flexible budget variance. Compute the spending variance: Budgeted fixed overhead P10,000
A. P500 U C. P500 F Standard variable overhead (2 DLH at P2 per DLH) P4 per unit
B. P2,000 F D. P2,000 U Actual fixed overhead P10,300
Actual variable overhead P19,500
37. Bacon had a P28,000 unfavorable volume variance, a P5,000 unfavorable fixed overhead Budgeted volume (5,000 units x 2 DLH) 10,000 DLH
budget variance, and P22,000 total underapplied overhead. The variable overhead spending Actual direct labor hours (DLH) 9,500
variance was Units produced 4,500
A. P11,000 favorable C. P11,000 unfavorable A. P500 U C. P1,000 U
B. P1,000 favorable D. P23,000 unfavorable B. P800 U D. P1,300 U
38. Acme had a P22,000 favorable fixed overhead budget variance, a P15,000 unfavorable 42. STA Companys standard fixed overhead cost is P3 per direct labor hour based
variable overhead spending variance, and P2,000 total overapplied overhead. The volume
on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours
variance was
A. P13,000 overapplied C. P5,000 overapplied
per unit. During 2001, STA produced 55,000 units of product, incurred
B. P13,000 underapplied D. P5,000 underapplied P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
labor. What are the fixed overhead variances?
39. Aldorp had a P10,000 unfavorable fixed overhead budget variance, a P6,000 unfavorable A. B. C. D.
variable overhead spending variance, and a P2,000 favorable volume variance. The total Fixed OH spending (budget) variance P15,000 U P33,000 U P15,000 U P33,000 U
overhead was Fixed OH Volume variance P30,000 F P30,000 F P18,000 F P18,000 F
A. P14,000 overapplied C. P18,000 overapplied
B. P14,000 underapplied D. P18,000 underapplied Questions 43 and 44 are based on the following information.
Raff Co.s monthly normal volume is 50,000 units (100,000 direct labor hours.) Raff Co.s standard
cost system contains the following overhead costs:
Variable P6 per unit
Fixed 8 per unit
May 9, 2004 Page 6 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

The following information pertains to the month of March The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
Units actually produced 38,000 hours. Edney planned to produce 25,000 units each month during the year. The budgeted annual
Actual direct labor hours worked 80,000 manufacturing overhead is
Actual overhead incurred: Variable P3,600,000
Variable P250,000 Fixed 3,000,000
Fixed 384,000 During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in
43. For March, the unfavorable variable overhead spending variance was November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000
A. P6,000 C. P12,000 fixed and 315,000 variable. The total manufacturing overhead applied during November was
B. P10,000 D. P22,000 P572,000.

44. For March, the fixed overhead volume variance was 46. The variable manufacturing overhead variances for November are
A. P96,000 U C. P80,000 U A. B. C. D.
B. P96,000 F D. P80,000 F Spending P9,000 U P6,000 F P4,000 U P 9,000 F
Efficiency P3,000 U P9,000 U P1,000 F P12,000 U
45. Smile Corporation uses a standard cost system. Information for the month of April is as
follows: 47. The fixed manufacturing overhead variances for November are
Actual manufacturing overhead costs (P13,000 is fixed) P40,000 A. B. C. D.
Direct labor:
Spending P10,000 F P10,000 U P6,000 F P 4,000 U
Actual hours worked 12,000 hours
Volume P10,000 f P10,000 F P3,000 U P22,000 F
Standard hours allowed 10,000 hours
Average actual labor cost per hour P9
The factory overhead rate is based on a normal volume of 12,000 direct labor hours 48. The total variance related to efficiency of the manufacturing operation for November is:
Standard cost data at 12,000 direct labor hours was: A. P9,000 U C. P21,000 U
Variable factory overhead P24,000 B. P12,000 U D. P12,000 U
Fixed factory overhead 12,000
Total factory overhead P36,000 Questions 49 thru 53 are based on the following information.
What are the following overhead variances? The following data are actual results for Roadtrek company for October:
Actual output 9,000 cases
A. B. C. D.
Actual variable overhead P405,000
Variable OH Spending P3,000 U P3,000 U P7,000 U P7,000 U Actual fixed overhead P122,000
Variable OH Efficiency P2,000 U P4,000 U P2,000 U P4,000 U Actual machine time 40,500 machine hours
Fixed OH Spending P4,000 U P1,000 U P1,000 U P4,000 U
Standard cost and budget information for Roadtrek Company follows:
Questions 46 thru 48 are based on the following information. Standard variable overhead rate P9.00 per MH
Edney Company employs standard absorption system for product costing. The standard cost of its Standard quantity of machine hours 4 hours per case
product is as follows: Budgeted fixed overhead P1,440,000 per year
Raw materials P14.50 Budgeted output 10,000 cases per month
Direct labor (2 DLH x P8) 16.00
Manufacturing overhead (2 DLH x P11) 22.00
May 9, 2004 Page 7 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

49. The variable overhead spending variance for the month of October is Relevant Costing
A. P40,500 U C. P45,000 U 56. An important concept in decision making is described as the contribution to income that is
B. P81,000 U D. P81,000 F forgone by not using a limited resources in its best alternative use. This concept is called
A. Marginal cost C. Potential cost
50. The overhead efficiency variance is B. Opportunity costs D. Relevant cost
A. P4,500 U C. P4,500 F
B. P40,500 U D. P40,500 F 57. If revenues are P210,000 under alternative A and P216,000 under alternative B, and costs are
P190,000 for A and P204,000 for B, then using the basic approach in incremental analysis,
51. The amount of fixed overhead controllable variance is incremental revenues, costs, and net income, in comparing B to A are respectively
A. P2,000 U C. P42,500 U A. P6,000, P(14,000), P(8,000) C. P6,000, P14,000, P8,00
B. P2,000 F D. P42,500 F B. P(6,000), P14,000, P8,000 D. P(6,000), P(14,000), P(8,000)

52. The amount of fixed overhead volume variance is 58. For the year ended April 30, 2003, Leba Company incurred direct costs of P800,000 based on
A. P12,000 F C. P21,000 F a particular course of action. Had a different course of action been taken, direct costs would
B. P12,000 U D. P21,000 U have been P650,000. In addition, Lebas fixed costs during the fiscal year were P110,000.
The incremental (decremental) costs was:
53. The amount variable overhead volume variance is A. P40,000 C. P(40,000)
A. Zero C. P12,000 F B. P150,000 D. P(150,000)
B. P9,000 U D. P2,250 U
59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
Absorption Costing & Variable Costing Product B each week by incurring a common variable costs of P400,000.
54. Which of the following statements is true for a firm that uses variable (direct) costing? These two products can be sold as is or processed further. Further processing
A. The cost of a unit of product changes because of changes in the number of units of either product does not delay the production of subsequent batches of the
manufactured. joint product. Data gathering there two products are as follows:
B. Profits fluctuate with sales
C. An idle facility variation is calculated Product A Product B
D. Product costs include direct (variable) administrative costs. Selling price per pound without further Processing P 12.00 P 9.00
Selling price per pound with further Processing P 15.00 P 11.00
55. At its present level of operations, a small manufacturing firm has total variable costs equal to Total separate weekly variable costs of Further processing P50,000 P45,000
75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales To maximize Wallace Companys manufacturing contribution margin, the total separate
change by P1.00, income will change by variable costs of further processing that should be incurred each week are
A. P0.25 C. P0.75 A. P45,000 C. P95,000
B. P0.12 D. P0.10 B. P50,000 D. P0

60. Blue & Company sells a product for P20 with variable cost of P8 per unit. Blue could accept a
special order for 1,000 units at P14. If Blue accepted the order, how many units could it lose
at the regular price before the decision become unwise?
A. 1,000 units C. P500 units
May 9, 2004 Page 8 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

B. P200 units D. 0 units Direct labor 5

Overhead (2/3 of which is fixed) 6
61. Geary Manufacturing has assembled the following data pertaining to two popular products. P15
Blender Electric mixer A special order offering to buy 20,000 units was received from a foreign distributor. The only
Direct materials P 6 P 11 selling costs that would be incurred on this order would be P3 per unit for shipping. Wagner
Direct labor 4 9 has sufficient existing capacity to manufacture the additional units
Factory overhead @ P16 per hour 16 32 To achieve an increase in operating income of P40,000. Wagner should charge a selling price
Cost if purchased from an outside supplier 20 38 of
Annual demand (units) 20,000 28,000 A. P14 C. P16
Past experience has shown that the fixed manufacturing overhead component included in the B. P15 D. P18
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it
means purchasing units from outside suppliers. 64. Yardley Co. has considerable excess manufacturing capacity. A special job orders cost sheet
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal includes the following applied manufacturing overhead costs:
strategy, it should Variable costs P56,250
A. produce 25,000 electric mixers, and purchase all other units as needed Fixed costs 45,000
B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-
needed house design will be done. Instead, the special job will require the use of external designers
C. produce 20,000 blenders and purchase all other units as needed costing P13,750. What is the minimum acceptable price of the job?
D. purchase all units as needed A. P63,050 C. P101,250
B. P70,000 D. P108,200
62. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is
determined as follows: 65. MC Industries manufactures a product with the following costs per unit at the expected
Product X Product Y production of 30,000 units:
Direct materials P 4
Revenue P 130 P80
Direct labor 12
Variable costs 70 38
Variable manufacturing overhead 6
Contribution margin P 60 P42
Fixed manufacturing overhead 8
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce The company has the capacity to produce 40,000 units. The product regularly sells for P40. A
resource. 42,000 machine hours are available during the year. Product X requires 6 machine wholesaler has offered to pay P32 a unit for 2,000 units.
hours per unit while product Y requires 3 machine hours per unit. If the firm is at capacity and the special order is accepted, the effect on operating income
How many units of X and Y should Hingis Corporation produce? would be
A. B. C. D. A. a P20,000 increase C. a P4,000 increase
Product X 16,000 8,000 7,000 3,000 B. a P16,000 decrease D. P0
Product Y -0- 4,000 -0- 8,000
66. Gata Co. plans to discontinue a department with a P48,000 contribution to overhead, and
63. Wagner sells product A at a price of P21 per unit. Wagners cost per unit based on the full allocated overhead of P96,000, of which P42,000 cannot be eliminated. What would be the
capacity of 200,000 units is as follows: effect of this discontinuance on Gatas pretax profit?
Direct materials P 4 A. increase of P48,000 C. increase of P6,000
May 9, 2004 Page 9 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

B. decrease of P48,000 D. increase of P6,000 Operating income P 14,000 P24,000 P (10,000)

One-fourth of each stores direct fixed expenses would continue through December 31, 2001,
67. Pili Company plans to discontinue a segment with a P32,000 segment margin. Common if either store were closed. Management estimates that closing the Town Store would result in
expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be a ten percent decrease in Hall Store. Hall Store would not affect Town Store sales. The
eliminated if the segment were closed. The effect of closing down the segment on Pili operating results for November 2000 are representative of all months.
Companys before tax profit would be A decision of Cosmo, Inc. to close the Town Store would result in a monthly increase
A. P12,000 decrease C. P12,000 increase (decrease) in Cosmos operating income during 2001 of
B. P 7,000 decrease D. P 7,000 increase A. P4,000 C. (P800)
B. (P10,800) D. (P6,000)
68. Division B earns a contribution margin of P200,000 and has a divisional margin of P70,000. If
Division B is closed, all of the direct divisional expenses and P110,000 of common expenses 71. Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity.
can be eliminated. These facts indicate that closing the division will cause the firms operating Pelusos plant manager is considering making the headlights now being purchased for P1,100
income to each, a price that is not expected to change in the near future. The Peluso plant has the
A. increase by P90,000 C. increase by P40,000 equipment and labor force required to manufacture the headlights. The design engineer
B. decrease by P90,000 D. decrease by P40,000 estimates that each headlight requires P400 of direct materials and P300 of direct labor.
Pelusos plant overhead rate is 200 percent of direct labor costs, and 40 percent of the
69. Consider the following portion of a segmented income statement for the year just ended. overhead is fixed cost. A decision by Peluso Company to manufacture the headlights will
Assume that the fixed expenses of Division X include P30,000 of direct expenses and that the result in a gain (loss) for each headlight of
discontinuance of the department will not affect the sales of the other departments nor reduce A. P(200) C. P40
the common expenses: B. P160 D. P280
Net sales P100,000
Variable manufacturing costs 60,000 Questions 72 thru 74 are based on the following information:
Gross profit P 40,000 Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar
Fixed expenses (direct and allocated) 50,000 equipment. The unit cost to manufacture one unit of KJ37 is presented below.
Loss from operations P (10,000) Direct materials P1,000
What would be the effect on the firms operating income if Division X were discontinued? Materials handling (20% of direct material cost) 200
A. increase of P10,000 C. decrease of P100,000 Direct labor 8,000
B. decrease of P40,000 D. decrease of P10,000 Manufacturing overhead (150% of direct labor) 12,000
Material handling represents the direct variable costs of the Receiving department that are applied
70. Condensed monthly operating income data for Cosmo Inc. for November 2000 is presented to direct materials and purchased components on the basis of their cost. This is a separate charge
below. Additional information regarding Cosmos operation follows the statement. in addition to manufacturing overhead. Lelands annual manufacturing overhead budget is one-
Total Hall Store Town Store third variable and two-thirds fixed. Scott Supply, one of Lelands reliable vendors, has offered to
Sales P200,000 P80,000 P120,000 supply Part No. KJ137 at a unit price of P15,000.
Less Variable costs 116,000 32,000 84,000
Contribution margin P 84,000 P48,000 P 36,000 72. If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these
Less direct fixed expense 60,000 20,000 40,000 parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of
Store segment margin P 24,000 P28,000 P ( 4,000) KJ37 would
Less common fixed expenses 10,000 4,000 6,000 A. increase by P4,800 C. decrease by P3,200
May 9, 2004 Page 10 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

B. decrease by P6,200 D. increase by P1,800 73. Assume Leland Manufacturing is able to rent all idle capacity for P25,000 per month. If Leland
decided to purchase the 10 units from Scott Supply, Lelands monthly cost for KJ37 would
A. increase P48,000 C. decrease P7,000
B. increase P23,000 D. decrease P57,000

74. Assume that Leland does not wish to commit to a rental agreement but could use idle capacity
to manufacture another product that would contribute P52,000 per month. If Leland elects to
manufacture KJ37 in order to maintain quality control, Lelands opportunity cost is
A. P18,000 C. P4,000
B. (P20,000) D. (P48,000)

Responsibility Accounting & Transfer Pricing

75. A management decision may be beneficial for a given profit center, but not for the entire
company. From the overall company viewpoint, this decision would lead to
A. goal congruence C. suboptimization
B. centralization D. maximization

76. Company L had its operating asset turnover increased by 50% and the operating income
margin increased by 50%. Company U had its operating asset turnover increased by 30% and
the operating income margin decreased by 30%. What changes are expected for ROI of
Company L and Company U, respectively?
A. B. C. D.
Company L 50% increase 125% increase 225% increase 125% increase
Company U 9% decrease 9% decrease no change no change

77. The manager of the Queen Division of Pusoy Company expects the following results in 2004
(pesos in millions):
Sales P49.60
Variable costs (60%) 29.76
Contribution margin P19.84
Fixed costs 12.00
Profit P 7.84
Investment:
Plant equipment P19.51
Working capital 14.88
P34.39
ROI P7.84/P34.39 22.80%

May 9, 2004 Page 11 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

The division has a target ROI of 30 percent, and the manager has asked you to determine how 80. An appropriate transfer price between two divisions of the Star Corporation can be determined
much sales volume the division would need to reach that. He states that the sales mix is from the following data:
relatively constant so variable costs should be close to 60 percent of sales, fixed cost and Fabrication Division
plant and equipment should remain constant, and working capital (cash, receivables, and Market price of subassembly P50
inventories) should vary closely with sales in the percentage reflected above. The peso sales Variable cost of subassembly P20
that the division needs in order to reach the 30 percent ROI target is Excess capacity (in units) 1,000
A. P19,829,032 C. P57,590,322 Assembling Division
B. P44,373,871 D. P59,510,000 Number of units needed 900
What is the natural bargaining range for the two divisions?
78. Ace Division of Card, Inc. expects the following result for 2004: A. Between P20 and P50 C. Any amount less than P50
Unit sales 70,000 B. Between P50 and P70 D. P50 is the only acceptable price
Unit selling price P 10
Unit variable cost P 4 81. Pacific Company has three plants: one located in Malaysia, one in India and another plant
Total fixed costs P 300,000 located in the Philippines. Both plants manufactures a component used in a finished product
Total investment P 500,000 manufactured in the Philippine plant. Currently, both plants are operating at 70 percent
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A capacity. In Malaysia the income tax rate is 42% while in India the tax rate 35%; in the
foreign customer has approached Houstons manager with an offer to buy 10,000 units at P7 Philippines, the corporate income tax rate is 40%.
each. Houston Division has capacity of 75,000 units and the foreign customer will not accept The market price of the component, in peso equivalent, is P100 and the foreign plants costs to
fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and manufacture the component are as follows:
investment by P40,000. Direct materials P10
At the price of P7 offered by foreign customer, what is the maximum number of units in regular Direct labor 20
sales that Houston could sacrifice and still maintain its expected residual income? Variable overhead 5
A. 2,333 C. 2,667 Fixed overhead 25
B. 3,333 D. 3,667 Which transfer price would be in the best interest of the overall corporation?
A. B. C. D.
79. Family Company has two division, Ma and Pa. Information for each division Malaysia P35 P 35 P100 P100
is as follows: India P35 P100 P100 P 35
Ma Pa
Net earnings for division P20,000 P65,000 82. The Engine Division provides motors for the Auto Division of a company. The standard unit
Asset base for division P50,000 P300,000 costs for Engine Division are as follows:
Target rate of return 15% 18% Direct materials 10,000
Operating income margin 10% 20% Direct labor 20,000
Weighted average cost of capital 12% 12% Variable Overhead 5,000
What is the Economic Value Added for Ma and Pa, respectively? Fixed Overhead 2,500
A. P20,000, P36,000 C. P12,500, P11,000 Market price P45,500
B. P14,000, P29,000 D. P20,000, P29,000 What is the best transfer price to avoid transfer price problems?
A. P45,500 C. P35,000
B. P30,000 D. P37,500
May 9, 2004 Page 12 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

83. To avoid waste and maximize efficiency when transferring products among divisions in a Questions 87 & 88 concern Paradise Company, which budgets on annual basis for its fiscal year.
competitive economy, a large diversified corporation should base transfer prices on: The following beginning and ending inventory levels (in units) are planned for the fiscal year of July
A. Full cost C. variable costs 1, 2000 through June 30, 2001.
B. replacement cost D. market price July 1, 2000 June 30, 2001
Raw material* 40,000 50,000
Product Pricing Decision Work-in-process 10,000 10,000
84. Garden Corp. had the following information: Finished goods 80,000 50,000
Revenues P500,000 *Two (2) units of raw material are needed to produce each unit of finished product.
Cost of goods sold:
Direct materials P100,000 87. If Paradise Company plans to sell 480,000 units during the 200-2001 fiscal year, the number of
Direct labor 75,000 units it would have to manufacture during the year would be
Overhead 125,000 300,000 A. 440,000 C. 510,000
Gross profit P200,000 B. 480,000 D. 450,000
Selling and admin expenses 75,000
Operating income P125,000 88. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by
What are the mark up based on: Paradise Company, the units of raw material needed to be purchased would be
A. B. C. D. A. 1,000,000 units C. 1,020,000 units
Cost of goods sold 66.7% 166.7% 66.7% 166.7% B. 1,010,000 units D. 990,000 units
Prime costs 185.7% 42.9% 42.9% 185.7%
Direct materials 400.0% 500.0% 400.0% 500.0% 89. The Pentagon Co. expects sales of P4,400,000 in June, P5,300,000 in July, and P6,100,000 in
August. On average, 30% of its sales are cash, 50% of credit sales are collected in one
Master Budget month, and 45% are collected in the second month. The remainder are written off to bad debt
85. The method of budgeting which adds one months budget to the end of the plan when the in the third month after sale. What are the expected cash inflow for August and expected
current months budget is dropped from the plan refers to receivable balance on August 31?
A. Long-term budget C. Incremental budget A. B. C. D.
B. Operations budget D. Continuous budget Cash Inflow P5,050,000 P4,084,000 P1,830,000 P5,071,000
Aug 31 AR Balance P7,140,000 P6,093,500 P7,232,000 P6,279,000
86. Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a
growth in sales of 5 percent per month. The target ending inventory in units of the product is 90. Dolyar, Inc. prepared the following sales budget:
80% of the next months estimated sales. There are 150,000 units in inventory as of the end Month Cash Sales Credit Sales
of September. The production requirement in units of Batik for the quarter ending December
February P 80,000 P340,000
31 would be
March 100,000 400,000
A. 670,560 C. 665,720
April 90,000 370,000
B. 691,525 D. 675,925
May 120,000 460,000
June 110,000 380,000

May 9, 2004 Page 13 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Collection pattern is: 40% percent in the month of sale, 45% in the month following the sale, 94. Sensitivity analysis, if used with capital projects,
and 10% two months following the sale. The remaining 5% is expected to be uncollectible. A. Is used extensively when cash flows are known with certainty
The companys total budgeted collection from April to June amounts to B. Measures the change in the discounted cash flows when using the discounted payback
A. P1,090,000 C. P1,468,500 method rather than the net present value method.
B. P1,325,500 D. P1,397,500 C. Is a what-if technique that asks how a given outcome will change if the original estimates
of the capital budgeting model are changed.
91. Beta Co. has the following sales forecasts for the selected three-month period in 2004 D. Is a technique used to rank capital expenditure requests.
April P120,000
May 70,000 95. If Sol Company expects to get a one-year loan to help cover the initial financing of capital
June 80,000 project, the analysis of the project should
Seventy percent of sales are collected in the month of the sale, and the remainder are A. offset the loan against any investment in inventory or receivable required by the project
collected in the following month. B. show the loan as an increase in the investment
Accounts receivable balance (April 1, 2004) P100,000 C. show the loan as a cash outflow in the second year of the projects life
Cash balance (April 1, 2004) 50,000 D. ignore the loan
Minimum cash balance is P50,000. Cash can be borrowed in P10,000 increments from the
local bank (assume no interest charges). 96. Royal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new one
What is the cash balance at the end of April, assuming that cash is received only from costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over
customers and that P200,000 out during April? 15 years to a zero salvage value. Royal will sell this old equipment for P6,000 cash. The new
A. P34,000 C. P54,000 equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value.
B. P50,000 D. P55,000 Assuming a 40% marginal tax rate, Royals net cash investment at the time of purchase is the
old grinder is sold and the new one purchased is
Capital Budgeting A. P19,000 C. P17,400
92. Which of the following would decrease the net present value of a project? B. P15,000 D. P25,000
A. A decrease in the income tax rate
B. A decrease in the initial investment 97. Flow Industries is analyzing a capital investment proposal for new machinery to produce a new
C. An increase in the useful life of the project product over the next 10 years. At the end of the 10 years, the machinery must be disposed of
D. An increase in the discount rate with a net zero book value but with a scrap salvage value of P20,000. It will require some
P30,0000 to remove the machinery. The applicable tax rate is 35%. The appropriate end of
93. A weakness of the internal rate of return method for screening investment projects is that it: life cash flow based on the foregoing information is
A. does not consider the time value of money A. inflow of P30,000 C. outflow of P10,000
B. implicitly assumes that the company is able to reinvest cash flows from the project at the B. outflow of P6,500 D. outflow of P17,000
companys discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the 98. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax
internal rate of return purposes will be P100,000 annually for six years. The new machine is expected to produce
D. fails to consider the timing of cash flows cash flow from operations, net of income taxes, of P150,000 a year in each of the next six
years. The accounting (book value) rate of return on the initial investment is expected to be
A. 8.3% C. 16.7%
B. 12.0% D. 25.0%
May 9, 2004 Page 14 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

99. Barf is considering a 10-year capital investment project with forecasted revenues of P40,000 102.Janet Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is
per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the being evaluated that costs P450,000 and has a 5-year life. Straight-line depreciation will be
equipment of the project is P23,000 and Barfield expects to sell the equipment for P9,000 at used; no salvage value is anticipated. Janet is subject to a 40% income tax rate. To meet the
the end of the tenth year. The equipment will be depreciated over 7 years. The project companys payback goal, the sorter must generate reductions in annual cash operating costs
requires a working capital investment of P7,000 at its inception and another P5,000 at the end of
of year 5. Using a 40% marginal tax rate, the expected net cash flow from the project in the A. P60,000 C. P150,000
tenth year is B. P100,000 D. P190,000
A. P32,000 C. P20,000
B. P24,000 D. P11,000 103.Moorman Products Company is considering a new product that will sell for P100 and have a
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
100.Brand is considering, an investment in a new cheese-cutting machine to replace its existing having a five-year useful life and no salvage value is needed, and will be depreciated using the
cheese cutter. Information on the existing machine and the replacement machine follow: straight-line method. The machine has cash operating costs of P20,000 per year. The firm is
Cost of the new machine P40,000 in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1,
Net annual savings in operating costs 9,000 end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
Salvage value now of the old machine 6,000 How many units per year the firm must sell for the investment to earn 12 percent internal rate
Salvage value of the old machine in 8 years 0 of return?
Salvage value of the new machine in 8 years 5,000 A. 12,838 C. 8,225
Estimated life of the new machine 8 years B. 10,403 D. 7,625
What is the expected payback period for the new machine?
A. 4.44 years C. 8.50 years 104.Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life.
B. 2.67 years D. 3.78 years Managers at Highpoint have estimated the cash flows associated with the tangible costs and
benefits of automation, but have been unable to estimate the cash flows associated with the
101.Cause Company is planning to invest in a machine with a useful life of five years and no intangible benefits. Using the companys 10% discount rate, the net present value of the cash
salvage value. The machine is expected to produce cash flow from operations, net of income flows associated with just the tangible costs and benefits is a negative P184,350. How large
taxes, of P20,000 in each of the five years. Causes expected rate of return is 10%. would the annual net cash inflows from the intangible benefits have to be to make this a
Information on present value and future amount factors is as follows: financially acceptable investment?
1 2 3 4 5 A. P18,435 C. P35,000
Present value of P1 at 10% .909 .826 .751 .683 .621 B. P30,000 D. P37,236
Present value of an annuity of
P1 at 10% .909 1.736 2.487 3.170 3.791 Questions 105 thru 107 are based on the following information.
Future amount of P1 at 10% 1.100 1.210 1.33 1.464 1.611 A firm must choose between leasing a new asset of purchasing it with funds from a term loan.
Future amount of an annuity Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6%
of P1 at 10% 1.000 2.100 3.310 4.641 6.105 interest on the unpaid balance. Principal and interest are due at the end of each year for five
How much will the machine cost? years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400
A. P32,220 C. P75,820 with payments due at the beginning of each year. The corporate tax rate is 35% and the
B. P62,100 D. P122,100 appropriate after tax cost of capital is 12%.

May 9, 2004 Page 15 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

105.Which of the following is closest to the PV of the after-tax interest payment? 111.Lawton Co. is expanding its manufacturing plant, which requires an investment of P4,000,000
A. P360 C. P640 in new equipment and plant modifications. Lawtons sales are expected to increase by
B. P453 D. P726 P3,000,000 per year as a result of the expansion. Cash investment in current assets
averages 30% of sales; accounts payable and other current liabilities are 10% sales. What is
106.Which of the following is closes to the present value of cost if leasing the asset? the estimated total investment for this expansion?
A. P3,694 C. P3,849 A. P3,400,000 C. P4,600,000
B. P3,779 D. P3,992 B. P4,300,000 D. P4,000,000

107.Which of the following is closest to the PV of cost of purchasing the new asset with a term 112.Par Co. is reviewing the following data relating to an energy saving investment proposal:
loan? Investment P50,000
A. P3,777 C. P4,058 Residual value at the end of 5 years 10,000
B. P3,952 D. P4,153 Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
Questions 108 through 110 are based on the following information: What would be the annual savings needed to make the investment realize a 12% yield?
Logo Co. is planning to buy a coin-operated machine costing P40,000. For book and tax purposes, A. P8,189 C. P12,306
this machine will be depreciated P8,000 each year for five years. Logo estimates that this machine B. P11,111 D. P13,889
will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. Logos desired
rate of return on its investments is 12%. At the following discount rates, the NPVs of the 113.Investors Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
investment in this machine are: analysis for four projects for the upcoming year.
Discount rate NPV Project 1 Project 2 Project 3 Project 4
12% +P3,258 Initial cash outlay P200,000 P298,000 P248,000 P272,000
14% + 1,197 Annual net cash inflows
16% - 708 Year 1 P 65,000 P100,000 P 80,000 P 95,000
18% - 2,474 Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
108.Logos accounting rate of return on its initial investment in this machine is expected to be Year 4 40,000 65,000 80,000 60,000
A. 30% C. 12% Net present value ( 3,798) 4,276 14,064 14,662
B. 15% D. 10% Profitability index 98% 101% 106% 105%
Internal rate of return 11% 13% 14% 15%
109.Logos expected payback period for its investment in this machine is Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
A. 2.0 years C. 3.3 years amount of funds?
B. 3.0 years D. 5.0 years No Budget Restriction P600,000 Available Funds P300,000Available Funds
A. Projects 2, 3 & 4 Projects 3 & 4 Project 3
110.Logos expected IRR on its investment in this machine is
B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4
A. 3.3% C. 12.0%
C. Projects 1, 3 & 4 Projects 2 & 3 Project 2
B. 10.0% D. 15.3%
D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4

May 9, 2004 Page 16 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Questions 114 thru 117 are based on the following information. 117.The overall discounted cash flow impact of Gunnings working capital investment for the new
In order to increase production capacity, Gunning Industries is considering replacing an existing production machine would be
production machine with a new technologically improved machine effective January 1, 2002. The A. P(7,959) C. P(13,265)
following information is being considered by Gunning Industries: B. P(10,080) D. P(35,000)
The new machine would be purchased for P160,000 in cash. Shipping installation, and testing
would cost an additional P30,000. Financial Statement Analysis
The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 118. Sales (in millions) for a three year period are: Year 1 P4, Year 2 P4.6, and Year 3 P5.0. Using
per unit. Incremental operating costs include P30 per unit in variable costs and total fixed Year 1 as the base year the percentage increase in sales in Years 2 and 3 are, respectively
costs of P40,000 per year. A. 115% and 125% C. 115% and 130%
The investment in the new machine will require an immediate increase in working capital of B. 115% and 109% D. 87% and 80%
P35,000. This cash outflow will be recovered at the end or year 5.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. 119. A company has total sales of P300,000 with a gross profit ratio of 35%. Inventory at the
The new machine has an estimated useful life of 5 years and zero salvage value beginning of the period was P50,000 and at the end of the period was P70,000. Net income is
P40,000. Inventory turnover is
Gunning is subject to a 40% corporate income tax rate.
A. 5 times C. 1.75 times
Gunning uses the net present value method to analyze investments and will employ the following
B. 3.25 times D. 0.67 times
factors and rates:
Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10% 120.The times interest earned ratio of McHoggan Company is 4.5times. The interest expense for
1 .909 .909 the year was P20,000 and the companys tax rate is 40%. The companys net income is:
2 .826 1.736 A. P22,000 C. P42,000
3 .751 2.487 B. P54,000 D. P66,000
4 .683 3.170
5 .621 3.791 121.If the North Division of Alliance Products Company had an operating asset turnover of 4.2 and
an operating income margin of 0.10, the return on investment would be
114.Gunning Industries net cash outflow in a capital budgeting decision is A. 23.8% C. 42.0%
A. P190,000 C. P204,525 B. 420.0% D. 4.2%
B. P195,000 D. P225,000
122.Selected data from Sheridan Corporations year-end financial statements are presented below.
115.Gunning Industries discounted annual depreciation tax shield for the year 2002 is The difference between average and ending inventory is immaterial.
A. P13,817 C. P20,725 Current ratio 2.0
B. P16,762 D. P22,800 Quick ratio 1.5
Current liabilities P120,000
116.The acquisition of the new production machine by Gunning will contribute a discounted net-of- Inventory turnover (based on cost of sales) 8 times
tax contribution margin of Gross profit margin 40%
A. P242,624 C. P363,936 Sheridans net sales for the year were
B. P303,280 D. P454,920 A. P800,000 C. P1,200,000
B. P480,000 D. P672,000

May 9, 2004 Page 17 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

123.Jade Corporation has a practical production capacity of a million units. The current years
master budget was based on the production and sales of 700,000 units during the current 127.Lyman Company has the opportunity to increase annual sales P100,000 by selling to a new
year. Actual production for the current year was 720,000 units, while actual sales amounted to riskier group of customers. The uncollectible expense is expected to be 15% and collection
only 600,000 units. The units are sold for P20 each and the contribution margin ratio is 30%. costs will be 5%. The companys manufacturing and selling expenses are 70% of sales, and
The peso amount that best qualifies the Marketing Departments failure to achieve budgeted its effective tax rate is 40%. If Lyman should accept this opportunity, the companys after tax
performance for the current year is: profits would increase by
A. P720,000 unfavorable C. P2,400,000 unfavorable A. P6,000 C. P10,200
B. P600,000 unfavorable D. P2,000,000 unfavorable B. P10,000 D. P14,400

124.The gross profit of Rea Company for each of the years ended as indicated follow: 128.The following information regarding a change in credit policy was assembled by the Willis
2001 2000 Company. The company has a required rate of return of 10% and a variable cost ratio of 60%.
Sales P792,000 P800,000 Old Credit Policy New Credit Policy
Cost of goods sold 463,000 480,000 Sales P3,600,000 P3,960,000
Gross profit P328,000 P320,000 Average Collection period 30 days 36 days
Assuming that 2001 selling price was 10% lower, what would be the decrease in gross profit The pretax cost of carrying the additional investment in receivable, using 360-day year would
due to change in the selling price? be
A. P8,000 C. P79,200 A. P5,760 C. P8,160
B. P72,000 D. P88,000 B. P9,600 D. P960

125.Garfield Company, which sells a single product, provided the following data from its income 129.The sales director of Lloyd Company suggested that certain credit terms be modified. He
statements for the years 2001 and 2000: estimates the following effects:
2001 2000 Sales will increase by at least 20%
Sales (150,000 units in 2001; 180,000 units in 2000) P750,000 P720,000 Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
Cost of goods sold 525,000 575,000 times
Gross profit P225,000 P145,000 Bad debts, now at 1% of sales will increase to 1.5%
In an analysis of variation in gross profit between the two years, what would be the effects of Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the desired
changes in sales price and sales volume, respectively? rate of return is 20%. Fixed expenses amount to P150,000.
A. P150,000 F; P120,000 U C. P180,000 F; P150,000 U Should the company allow revision of its credit terms?
B. P150,000 U; P120,000 F D. P180,000 U; P150,000 F A. Yes, because income will increase by P64,800
B. Yes, because losses will be reduced by P73,800
Working Capital Management C. No, because income will be reduced by P13,000
126.Gear Inc., has a total annual cash requirement of P9,075,000 which are to be paid uniformly. D. No, because losses will be increased by P28,000
Gear has the opportunity to invest the money of 24% per annum. The company spends, on
the average, P40 for every cash conversion to marketable securities. 130.A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker P50.00
What is the optimal cash conversion size? to locate a supplier and handle the ordering and delivery arrangements. Storage and handling
A. P60,000 C. P55,000 costs are P0.02 per case per month. If each case costs P0.78 the most economical order
B. P45,000 D. P72,500 quantity (rounded to the next whole number) is

May 9, 2004 Page 18 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

A. 884 cases C. 1,133 cases 131.Expected annual usage of a particular raw material is 2,000,000 units and the standard order
B. 625 cases D. 1,000 cases size is 10,000 units. The invoice cost of each unit is P500, and the cost to place one purchase
order is P80. The estimated annual order costs is
A. P16,000 C. P32,000
B. P100,000 D. P50,000

132.The Handy Company has the following information available concerning one of its inventory
items:
Cost of placing an order P 32.00
Unit of carrying cost per year P 4.00
Annual unit demand 5,625
Safety stock 100
Average daily demand 25
Normal lead time in days 10
The reorder point for the inventory item is
A. 250 C. 350
B. 600 D. 300

133.The G Corporation purchases 60,000 headbands per year. The average purchase lead time is
20 working days. Maximum lead time is 27 working days. The corporation works 240 days
per year. The appropriate safety stock level and the reorder point for the company are:
A. B. C. D.
Safety Stock 1,750 1,750 1,167 1,167
Reorder Point 6,750 5,250 6,750 5,250

134.Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
annum. The bank requires 10 percent of loan as compensating balance in its new checking
account. The loan is payable at the end of 6 months. The effective interest rate of this loan is
A. 28.21 percent C. 27.27 percent
B. 14.29 percent D. 15.38 percent

135.The Manunuba Company was recently quoted terms on a commercial bank loan of 7% interest
with 20% compensating balance. The term of the loan is one year. The effective cost of
borrowing (rounded to the nearest hundredth) for each interest arrangements are:
A. B. C. D.
Discounted interest 9.59% 8.75% 7.53% 7.53%
Payable upon maturity 8.75% 9.59% 8.75% 9.59%

May 9, 2004 Page 19 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

Cost of Capital & Risk 142.Williams Co. is interested in measuring its overall cost of capital and has gathered the
136.For 2003, Bee Company increased earnings before interest and taxes by 17%. During the following data. Under the terms described below, the company can sell unlimited amounts of
same period, net income after tax increased by 42%. The degree of financial leverage that all instruments.
existed during 2003 is Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest
A. 1.70 C. 2.47 payments. In selling the issue, an average premium of P30 per bond would be received,
B. 4.20 D. 5.90 and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is
estimated to be 4.8%.
137.Mars Company plans to issue some P100 preferred stock with an 11 percent dividend. The Williams can sell 8% preferred stock at P105 per share. The cost of issuing and selling
stock is selling on the market for P97, and Mars must pay flotation costs of 5 percent of the the preferred stock is expected to be P5 per share.
market price. The company is under the 40 percent corporate tax rate. Williams common stock is currently selling for P100 per share. The firm expects to pay
The cost of preferred stock for Mars Company is cash dividends of P7 per share next year, and the dividends are expected to remain
A. 7.16 percent C. 11.34 percent constant. The stock will have to be underpriced by P3 per share, and flotation costs are
B. 6.80 percent D. 11.94 percent expected to amount to P5 per share.
Williams expects to have available P100,000 of retained earnings in the coming year;
138.ABC Corp. stocks beta is .50. If the market return is 16%, and the risk-free rate is 6%, what is once these retained earnings are exhausted, the firm will use new common stock as the
the required rate of return on ABC stock? form of common stock equity financing.
A. 11% C. 13% Williams preferred capital structure is
B. 12% D. 14% Long-term debt 30%
Preferred stock 20%
139.The following data are related to WXY stock: Common stock 50%
Required return on WXY common 15 percent What are the corresponding weighted-average cost of capital under each financing needs?
Beta coefficient 1.5
A. B. C. D.
Risk-free rate 9.0 percent
P200,000 6.5% 6.8% 4.5% 7.3%
The required market return is
P1,000,000 6.8% 4.8% 6.5% 9.1%
A. 13.0 percent C. 18.0 percent
B. 25.0 percent D. 16.0 percent
Questions 143 & 144 are based on the following information.
140.The Taurus Companys last dividend was P3.00; its growth rate is 6 percent and the stock now The earnings, dividends, and stock price of Larry Technics, Inc. are expected to grow at 7 percent
sells for P36. New stock can be sold to net the firm P32.40 per share. per year after this year. Larrys common stock sells for P23 per share, its last dividend was P2.00
What is the Taurus Companys cost of retained earnings? and the company pay P2.14 at the end of the current year. Larry should pay P2.50 flotation cost.
A. 14.83 percent C. 15.81 percent
B. 15.26 percent D. 9.69 percent 143. If the firms beta is 1.75, the risk-free rate is 8 percent, and the average return on the market is
12 percent, what will be the firms cost of equity using the CAPM approach?
141.The Leonard Companys last dividend was P3.00; its growth rate is 6 percent and the stock A. 16.05 percent C. 15.00 percent
now sells for P36. New stock can be sold to net the firm P32.40 per share. B. 14.27 percent D. 14.00 percent
A. 14.83 percent C. 15.81 percent
B. 15.26 percent D. 9.69 percent
May 9, 2004 Page 20 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

144.Using the dividend growth model, what is the expected cost of retained earnings for Larry What is the expected value of Doughs decision to buy 100 additional boxes of muffins?
Technics, Inc.? A. P28 C. P52
A. 10.44 percent C. 16.30 percent B. P40 D. P68
B. 9.30 percent D. 17.44 percent
149.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft
Quantitative Methods drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
145.Reina, Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first cold, the profit will be P2,000. The probability of cold weather on a given day at this time is
batch take? 60%.
A. 360 hours C. 140.63 hours The expected payoff for either selling coffee or soft drinks and the expected payoff if the
B. 57.6 hours D. 230.4 hours vendor has perfect information are
A. B. C. D.
146.A company is designing a new regional distribution warehouse. To minimize delays in loading Coffee P1,360 P1,960 P2,200 P3,900
and unloading trucks, an adequate number of loading docks must be built. The most relevant Soft drinks P1,600 P1,600 P1,900 P1,900
technique to assist in determining the proper number docks is Perfect Information. P3,000 P2,200 P1,360 P1,960
A. Cost-volume-profit analysis C. PERT/CPM analysis
B. Linear programming D. Queuing theory 150.A construction contractor has been invited to submit a bid on a large and complicated
construction project. The preparation of the bid proposal will cost about P20,000.
147.Following is a table for two separate product lines, X and Y: Management feels that if the company bids low enough to result in a net profit of P50,000,
Probability X Profit Y Profit there would be a 60% chance of getting the job. If the company bids high enough to result in a
20% P5,000 P 500 P100,000 net profit, the chance of getting the contract would be only 20%. What should the
70% 3,000 4,000 company do?
10% 6,000 8,000 A. Bid only high enough to allow for P50,000 profit because the expected value of the payoff
The product line to obtain maximum utility for a risk-averse decision maker is is P22,000.
A. X because it has the highest expected profit. B. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is
B. Y because it has the highest dispersion P4,000
C. Y because it has the highest expected profit C. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is
D. X because it has the lowest dispersion P20,000.
D. Make no bid.
148.Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of
muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular 151.Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large,
stores are sold through Doughs thrift store for P1. Dough assigns the following probabilities to complex projects by determining the critical path from a single time estimate for each event in
selling additional boxes: a project. The critical path:
Additional sales Probability A. Is the shortest path from the first event to the last event for a project.
60 .6 B. Is an activity within the path that requires the most number of time.
100 .4 C. Is the earliest time to complete the project.
D. Is the maximum amount of time an activity may be delayed without delaying the total
project beyond its target time.
May 9, 2004 Page 21 of 23
MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

152.Clara Building Corporation uses the critical path method to monitor construction jobs. The Answer Key
company is currently 2 weeks behind schedule on Job 181, which is subject to a P10,500-per- 1. B 11. D 21. C 31. A 41. B
week completion penalty. Path A-B-C-F-G-H-I has normal completion time of 20 weeks, and 2. B 12. A 22. B 32. B 42. A
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities 3. B 13. A 23. A 33. B 43. B
can be crashed: 4. B 14. D 24. B 34. A 44. A
Activities Cost to Crash 1 Week Cost to Crash 2 Weeks 5. A 15. B 25. A 35. A 45. B
BC P 8,000 P15,000 6. B 16. C 26. C 36. C 46. B
DE 10,000 19,600 7. C 17. A 27. A 37. A 47. B
EF 8,800 19,500 8. C 18. D 28. D 38. D 48. C
Clara desires to reduce the normal completion time of Job 181 and, at the same time, report 9. A 19. A 29. D 39. B 49. A
the highest possible income for the year. Clara should crash 10. A 20. B 30. A 40. A 50. B
A. BC 1 week and EF 1 week C. EF 2 weeks
B. BC 2 weeks D. DE 1 week and EF 1week 51. A 61. A 71. C 81. B 91. C
52. B 62. A 72. A 82. A 92. D
Information Systems 53. A 63. C 73. B 83. D 93. C
153.A major advantage of obtaining a package of applications programs from a software vendor is 54. B 64. B 74. C 84. A 94. C
A. the likelihood of reducing the time span from planning to implementation 55. A 65. B 75. C 85. D 95. D
B. the ability to more easily satisfy the unique needs of users 56. B 66. C 76. B 86. C 96. C
C. greater operating efficiency from the computer 57. A 67. B 77. C 87. D 97. B
D. the assurance the programs will be written in a high-level language
58. B 68. C 78. A 88. B 98. A
59. A 69. D 79. B 89. D 99. B
60. C 70. B 80. A 90. C 100. D

101. C 111. C 121. C 131. A 141. C

102. D 112. C 122. A 132. C 142. A
103. A 113. A 123. B 133. A 143. C
104. B 114. D 124. D 134. D 144. D
105. B 115. A 125. A 135. A 145. C
106. A 116. D 126. C 136. C 146. D
107. C 117. C 127. A 137. D 147. D
108. D 118. A 128. A 138. A 148. C
109. C 119. B 129. A 139. A 149. B
110. D 120. C 130. D 140. A 150. C

151. C 152. D 153. A

May 9, 2004 Page 22 of 23

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Pre-week Quizzer

COMPREHENSIVE:
1. Gasco Co. is a very large company with common stock listed on the Philippine Stock
Exchange and bonds traded over the counter. As of the current balance sheet, it has three
bond issues outstanding:
P150 million of 10 percent series 2013
P50 million of 7 percent series 2007
P75 million of 5 percent series 2004
The vice president of finance is planning to sell P75 million of bonds next year to replace the
debt due to expire in 2004. Present market yields on similar Baa-rated bonds are 12.1
percent. Gasco also has P90 million of 7.5 percent noncallable preferred stock outstanding,
and it has no intentions of selling any preferred stock at any time in the future. The preferred
stock is currently priced at P80 per share, and its dividend per share is P7.80.
The company has had very volatile earnings, but its dividends per share have had a very
stable growth rate of 8 percent and this will continue. The expected dividend is P1.90 per
share, and the common stock is selling for P40 per share. The companys investment banker
has quoted the following flotation costs to Gasco: P2.50 per share for preferred stock and
P2.20 per share for common stock.
On the advice of its investment banker, Gasco has kept its debt at 50 percent of assets and its
equity at 50 percent. Gasco sees no need to sell either common or preferred stock in the
foreseeable future as it generated enough internal funds for its investment needs when these
funds are combined with debt financing. Gascos corporate tax rate is 40 percent.
Compute the cost of capital for the following:
1. Bond (debt)
2. Preferred stock
3. Common equity in the form of retained earnings
4. New common stock
5. Weighted average cost of capital
A number of questions relating to the production and sales of Kads follow. Each question is
independent.
1. Assume that Andres Company has sufficient capacity to produce 90,000 Kads each year
without any increase in fixed manufacturing overhead costs. The company could
increasein sales by 25% above the present 60,000 units each year if it were willing to
increase the fixed selling expenses by P80,000. What would be the effect of the increase
in both sales and fixed expenses on the company profit?
2. Assume again that Andres Company has sufficient capacity to produce 90,000 Kads each
year. A customer in a foreign market wants to purchase 20,000 Kads. Import duties on
the Kads would be P1.70 per unit, and costs for permits and licenses would be P9,000.
The only selling costs that would be associated with the order would be P3.20 per unit
shipping costs. What is the breakeven price on this order?
3. The company has 1,000 Kads on hand that have some irregularities and are therefore
considered to be seconds. Due to the irregularities, it will be impossible to sell these
units at the normal price through regular distribution channels. What unit costs figure is
relevant for setting a minimum selling price?
4. Due to a strike in its suppliers plant, Andres Company is unable to purchase more
material for the production of Kads. The strike is expected to last for two months. Andres
Company has enough material on hand to continue to operate at 30% of normal levels for
the two-month period. As an alternative, Andres could close its plant down entirely for the
two months. If the plant were closed, fixed overhead costs would continue at 60% of their
normal level during the two-month period; the fixed selling costs would be reduced by
20% while the plant was closed. What would be the peso advantage or disadvantage of
closing the plant for the two-month period?

2. Andres Company has a single product called Kad. The company normally produces and sells 5. An outside manufacturer has offered to produce Kads for Andres Company and to ship
60,000 Kads each year at a selling price of P32 per unit. The companys unit costs at this them directly to Andres customers. If Andres accepts this offer, the facilities that it uses to
level of activity are given below: produce Kads would be idle; however, fixed overhead costs would be reduced by 75% to
Direct materials P10.00 their present value. Since the outside manufacturer would pay for all the costs of
Direct Labor 4.50 shipping, the variable selling costs would be only two-thirds of their present amount. What
Variable manufacturing overhead 2.30 the unit cost figure that is relevant for comparison to whatever quoted price is received
Fixed manufacturing overhead 5.00 (P300,000 total) from the outside manufacturer?
Variable selling expenses 1.20
Fixed selling expenses 3.50 (P210,000 total)
May 9, 2004 Page 23 of 23