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

8. How are the following activities classified using ABC system?

1. Security
2. Product inspections
3. Insurance on the plant
4. Materials handling
5. Modifications made by engineering to the product design of
several products
6. Machine-related overhead
7. Set-ups

May 9, 2004 Page 1 of 23

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

8. Providing space and utilities Period expenses:

9. Moving of inventory Research & ( 70,000)
Unit Level Batch Level Product Facility development
Level Level Marketing ( 50,000)
A. 4,6,8 2,4,7 1,3 10 Life-cycle income P 30,000
B. 2,6 4,5 1,7 3,10 A 10% return on sales is required for new products. Because the
C. 6 2,4,7,10 5 1,3,8 proposed products did not have a 10% return on sales, the
D. 2 1,6,7 10 3,4,5,8 products were going to be dropped.
Relative to Product Y, Product X requires more research and
9. Protex Company makes two products, X and Z. X is being development costs but fewer resources to market the product.
introduced this period, whereas Z has been in production for 2 Sixty percent of the research and development costs are
years. For the period about to begin, 1,000 units of each product traceable to Product X and 30 percent of the marketing costs are
are to be manufactured. The only relevant overhead item is the traceable to Product X.
cost of engineering change orders. X and Z are expected to If research and development costs and marketing costs are
require eight and two change orders, respectively. X and Z are traced to each product, life-cycle income for Product Y would be
expected to require 2 and 3 machine hours, respectively. The A. P35,000 C. P12,000
cost of a change orderis P600. B. P20,000 D. P7,000
If Protex applies engineering change order cost on the basis of
machine hours, the overhead cost per unit to be assigned to X Cost Behavior
and Z, respectively, are 12. The following cost functions were developed for manufacturing
A. P2.40 and P3.60, respectively C. P4.80 and overhead costs:
P3.60, respectively Manufacturing Overhead Costs Cost Function
B. P3.60 and P2.40, respectively D. P3.60 and Electricity P100 + P20 per
P4.80, respectively direct labor hour
Maintenance P200 + P30 per
10. Zeta Co. is preparing its profit plan. As part of its analysis of the direct labor hour
profitability of individual products, the controller estimates the Supervisors’ salaries P10,000 per
amount of overhead that should be allocated to the individual month
product lines from the information given as follows: Indirect materials P16 per direct
Wall mirrors Special labor hour
windows
Units produced 25 25
Material moves per product line 5 15
Direct labor hours per unit 200 200
Budgeted materials handling P50,000
costs
Under each of the systems of costing, how much materials
handling costs should be allocated to one unit of wall mirrors?
A. B. C. D.
Based on direct P1,000 P 500 P2,000 P5,000
labor hours
Under activity- P 500 P1,000 P1,500 P2,500
based costing

Life-Cycle Costing
11. Richards, Inc. developed the following budgeted life-cycle income
statement for two proposed products. Each product’s life cycle is
expected to be two years.
Product X Product Y Total
Sales P200,000 P200,000 P400,000
Cost of goods sold ( 120,000) (130,000 ( 250,000)
)
Gross Profit P 80,000 P 70,000 P150,000

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 Sales commission, 10% of selling price 2.00
direct labor hours, estimated manufacturing overhead costs Monthly fixed costs P80,000
would be The firm’s salespersons would like to change their compensation
A. P109,300 C. P76,300 from a 10 percent commission to a 5 percent commission plus
B. P99,000 D. P10,366 P20,000 per month in salary. They now receive only
commission.
Cost-Volume-Profit Analysis The change in compensation plan should change the monthly
13. The Ship Company is planning to produce two products, Alt and breakeven point by
Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit A. 1,071 Increase C. 1,538
and 200,000 units of Tude at P3 a unit. Variable costs are 70% Increase
of sales for Alt and 80% of sales for Tude. In order to realize a B. 1,071 Decrease D. 1,538
total profit of P160,000, what must the total fixed costs be? Decrease
A. P80,000 C. P240,000
B. P90,000 D. P600,000 18. Brunei Corp. is developing a new product, surge protectors for
high-voltage electrical flows. The cost information for the product
14. Glow Co. wants to sell a product at a gross margin of 20%. The are: Direct materials, P3.25 per unit; Direct labor, P4.00 per unit;
cost of the product is P2.00. The selling price should be Distribution, P0.75 per unit. The company will also be absorbing
A. P1.60 C. P2.40 P120,000 of additional fixed costs associated with this new
B. P2.10 D. P2.50 product. A corporate fixed charge of P20,000 currently absorbed
by other products will be allocated to this new product.
15. The following relates to Gloria Corporation, which produced and How many surge protectors (rounded to the nearest hundred)
sold 50,000 units during a recent accounting period: must Brunei sell at a selling price of P14 per unit to increase
Sales after-tax income by P30,000? (effective income tax rate is 40%)
Fixed manufacturing costs A. 10,700 C. 20,000
Variable manufacturing costs B. 12,100 D. 28,300
Fixed selling and administrative expense
Variable selling and administrative expense 19. A manufacturer produces a product that sells for P10 per unit.
Income tax rate Variable costs per unit are P6 and total fixed costs are P12,000.
For the next accounting period, if production and sales are At this selling price, the company earns a profit equal to 10% of
expected to be 40,000 units, the company should anticipate a total peso sales. By reducing its selling price to P9 per unit, the
contribution margin per unit of manufacturer can increase its unit sales volume by 25%.
A. P1.00 C. P3.10 Assume that there are no taxes and that total fixed costs and
B. P13.30 D. P7.30 variable costs per unit remain unchanged. If the selling price
were reduced to P9 per unit, the profit would be
16. Madden, Company has projected its income before taxes for next A. P3,000 C. P5,000
year as shown below. Madden is subject to a 40% income tax B. P4,000 D. P6,000
rate.
Sales (160,000 P8,000,000
units)
Cost of sales
Variable costs P 2,000,000
Fixed costs 3,000,000 5,000,000
Income before P 3,000,000
taxes
Madden’s net assets are P36,000,000. The peso sales that must
be achieved for Madden to earn a 10 percent after tax return on
assets would be
A. P8,800,000 C. P12,000,000
B. P16,000,000 D. P6,880,000

17. The following data relate to Homer Company which sells a single
product:
Unit selling price
Purchase cost per unit

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 whether or not production ceases. Depreciation on the
was 30%. This year, fixed costs are expected to be P120,000, equipment is P20,000 a year. If production is stopped, the
the same as last year, and sales are forecasted at P550,000 a equipment can be sold for P18,000, if production continues,
10% increase over last year. For the company to increase however, it will be useless at the end of 1 year and will have no
income by P15,000 in the coming year, the marginal contribution salvage value. The selling price is P10 a unit. Ignoring taxes,
margin rate must be the minimum units to be sold in the current year to break even on
A. 20% C. 40% a cash flow basis is
B. 30% D. 70% A. 4,500 units C. 1,800 units
B. 5,000 units D. 36,000 units
21. Wilson Co. prepared the following preliminary forecast
concerning product G for next year assuming no expenditure for Questions 24 through 28 are based on the Statement of Income of
advertising: Davao, Inc. which represents the operating results for the current
Selling price per unit fiscal year ending December 31. Davao had sales of 1,800 tons of
Units sales product during the current year. The manufacturing capacity of
Variable costs Davao’s facilities is 3,000 tons of product. Consider each question’s
Fixed costs situation separately.
Based on a market study in December of this year, Wilson Sales P900,000
estimated that it could increase the unit selling price by 15% and Variable costs
increase the unit sales volume by 10% if P100,000 were spent on Manufacturing P315,000
advertising. Assuming that Wilson incorporates these changes in Selling costs 180,000
its forecast, what should be the operating income from product Total variable costs 495,000
G? Contribution margin P405,000
A. P175,000 C. P205,000 Fixed costs
B. P190,000 D. P365,000 Manufacturing P 90,000
Selling 112,500
22. Shoes, Unlimited operates a chain of shoe stores around the Administration 45,000
country. The stores carry many styles of shoes that are all sold Total fixed costs 247,500
at the same price. To encourage sales personnel to be Net income before income taxes P157,500
aggressive in their sales efforts, the company pays a substantial Income taxes (40%) (63,000)
sales commission on each pair of shoes sold. Sales personnel Net income after income taxes P 94,500
also receive a small basic salary.
The following cost and revenue data relate to Store 21 and are 24. The breakeven volume in tons of product for the year is
typical of the company’s many sales outlets: A. 420 C. 1,100
Selling price B. 495 D. 550
Variable expenses:
Invoice costs
Sales commission

Fixed expenses per year:

Rent
Advertising
Salaries
Total
The company is considering paying the store manager a P60
commission on each pair of shoes sold in excess of break-even
point. If this change were made, what will be the store’s before
tax profit or loss assuming 23,500 pairs of shoes are sold in a
year?
A. P(360,000) C. P840,000
B. P2,930,000 D. P1,330,000

23. BE&H Co. is considering dropping a product. Variable costs are

$6.00 per unit. Fixed overhead costs, exclusive of depreciation,
have been allocated at a rate of $3.50 per unit and will continue

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, 30. The following information relates to Ore Company’s 2003
and if the prices and costs stay at the same levels and amounts manufacturing activities:
next year, the after-tax net income that Davao can expect for the Standard direct labor hours per unit 2
next year is Number of units produced 5,000
A. P135,000 C. P110,25 Standard variable overhead per standard direct labor hours
B. P283,500 D. P184,500 P3
Actual variable overhead P28,000
26. Davao has a potential foreign customer that has offered to buy Unfavorable overhead efficiency variance P 1,500
1,500 tons at P450 per ton. Assume that all of Davao’s costs The number of actual direct labor hours are
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 B. 11,000 D. 12,400
rejected some business from regular customers so as not to
exceed capacity? Questions 31 & 32 are based on the following information.
A. P297,500 C. P252,000 Rainbow Company uses a standard cost system. Information about
B. P211,500 D. P256,500 its direct labor costs for Product Lux for the month of January follows:
Standard hours allowed for actual production 1,500
27. Without prejudice to your answers to previous questions, and Actual hourly rate paid P61.00
assume that Davao plans to market its product in an new Standard hourly rate P60.00
territory. Davao estimates that an advertising and promotion Labor efficiency variance, Favorable P6,000
program costing P61,500 annually would need to be undertaken
for the next two or three years. In addition , a P25 per ton sales 31. How many direct labor hours were actually worked during the
commission over and above the current commission to the sales month of January?
force in the new territory would be required. How many tons A. 1,400 C. 1,402
would have to be sold in the new territory to maintain Davao’s B. 1,498 D. 1,600
current after-tax income of P94,500?
A. 307.5 C. 1,095 32. How much was the direct labor rate variance?
B. 273.33 D. 1,545 A. P1,400 F C. P1,400 U
B. P1,600 F D. P1,600 U
28. Without prejudice to preceding questions, assume that Davao
estimates that the per ton selling price will decline 10% next year. 33. STA Company uses a standard cost system. The following
Variable costs will increase P40 per ton and the fixed costs will information pertains to direct labor costs for the month of June:
not change. What sales volume in pesos will be required to earn Standard direct labor rate per hour P10.00
an after-tax net income of P94,500 next year? Actual direct labor rate per hour P 9.00
A. P1,140,000 C. P825,000 Labor rate variance P12,000 favorable
B. P1,500,000 D. P1,350,000 Actual output 2,000 units
Standard hours allowed for actual production 10,000 hours
Standard Costing & Variance Analysis How many actual labor hours were worked during March for STA
29. Dahl Company, a clothing manufacturer, uses a standard costing Company?
system. Each unit of finished product contains 2 yards of cloth. A. 10,000 C. 8,000
However, there is unavoidable waste of 20% calculated on input B. 12,000 D. 10,500
quantities, when the cloth is cut for assembly. The cost of the
cloth is P3 per yard. The standard direct material cost for cloth 34. If annual overhead costs are expected to be P1,000,000 and
per unit of finished product is: 200,000 total labor hours are anticipated (80% direct, 20%
A. P4.80 C. P7.00 indirect), the overhead rate based on direct labor hours is
B. P6.00 D. P7.50 A. P6.25 C. P25.00
B. P5.00 D. P4.00

35. ABC had a P28,000 favorable volume variance, a P25,000

unfavorable variable overhead spending variance, and P12,000
total overapplied overhead. The fixed overhead budget variance
was
A. P9,000 favorable C. P9,000
unfavorable

May 9, 2004 Page 5 of 23

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

B. P26,000 favorable D. P26,000 40. Fidelity Company uses a flexible budget system and prepared
unfavorable the following information for the year: Fidelity operated at 80
percent of capacity during the year, but applied factory overhead
36. Given for the variable factory overhead of X Products Inc.: based on the 90 percent capacity level. Assuming that actual
P39,500 actual input at budgeted rate, P41,500 flexible budget factory overhead was equal to the budgeted amount of overhead,
based on standard input allowed for actual output, P2,500 how much was the overhead volume variance for the year?
favorable flexible budget variance. Compute the spending Percent of Capacity 80 Percent 90 Percent
variance: Direct labor hours 24,000 27,000
A. P500 U C. P500 F Variable factory overhead P54,000 P60,750
B. P2,000 F D. P2,000 U Fixed factory overhead P81,000 P81,000
Total factory overhead rate pre P5.625 P5.25
37. Bacon had a P28,000 unfavorable volume variance, a P5,000 DLH
unfavorable fixed overhead budget variance, and P22,000 total A. P9,000 U C. P9,000 F
underapplied overhead. The variable overhead spending B. P15,750 U D. P15,750 F
variance was
A. P11,000 favorable C. P11,000 41. Using the information presented below, calculate the total
unfavorable overhead spending variance.
B. P1,000 favorable D. P23,000 Budgeted fixed overhead P10,000
unfavorable Standard variable overhead (2 DLH at P2 per DLH) P4 per
unit
38. Acme had a P22,000 favorable fixed overhead budget variance, Actual fixed overhead P10,300
a P15,000 unfavorable variable overhead spending variance, and Actual variable overhead P19,500
P2,000 total overapplied overhead. The volume variance was Budgeted volume (5,000 units x 2 DLH) 10,000 DLH
A. P13,000 overapplied C. P5,000 Actual direct labor hours (DLH) 9,500
overapplied Units produced 4,500
B. P13,000 underapplied D. P5,000 A. P500 U C. P1,000 U
underapplied B. P800 U D. P1,300 U
39. Aldorp had a P10,000 unfavorable fixed overhead budget 42. STA Company’s standard fixed overhead cost is P3 per direct
variance, a P6,000 unfavorable variable overhead spending labor hour based on budgeted fixed costs of P300,000. The
variance, and a P2,000 favorable volume variance. The total standard allows 2 direct labor hours per unit. During 2001, STA
overhead was produced 55,000 units of product, incurred P315,000 of fixed
A. P14,000 overapplied C. P18,000 overhead costs, and recorded 106,000 actual hours of direct
overapplied labor. What are the fixed overhead variances?
B. P14,000 underapplied D. P18,000 A. B. C. D.
underapplied
Fixed OH P15,000 P33,000 P15,000 P33,000
spending U U U U
(budget) variance
Fixed OH Volume P30,000 P30,000 P18,000 P18,000
variance F F F F

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 315,000 variable. The total manufacturing overhead applied during
Units actually produced November was P572,000.
Actual direct labor hours worked
Actual overhead incurred: 46. The variable manufacturing overhead variances for November
Variable are
Fixed A. B. C. D.
43. For March, the unfavorable variable overhead spending variance Spending P9,000 U P6,000 F P4,000 U P 9,000 F
was Efficiency P3,000 U P9,000 U P1,000 F P12,000 U
A. P6,000 C. P12,000
B. P10,000 D. P22,000 47. The fixed manufacturing overhead variances for November are
A. B. C. D.
44. For March, the fixed overhead volume variance was
Spending P10,000 F P10,000 U P6,000 F P 4,000 U
A. P96,000 U C. P80,000 U
Volume P10,000 f P10,000 F P3,000 U P22,000 F
B. P96,000 F D. P80,000 F

45. Smile Corporation uses a standard cost system. Information for 48. The total variance related to efficiency of the manufacturing
the month of April is as follows: operation for November is:
Actual manufacturing overhead costs (P13,000 is fixed) A. P9,000 U C. P21,000 U
B. P12,000 U D. P12,000 U
Direct labor:
Actual hours worked Questions 49 thru 53 are based on the following information.
Standard hours allowed The following data are actual results for Roadtrek company for
Average actual labor cost per hour October:
The factory overhead rate is based on a normal volume of 12,000 Actual output 9,000 cases
direct labor hours Actual variable overhead P405,000
Standard cost data at 12,000 direct labor hours was: Actual fixed overhead P122,000
Variable factory overhead Actual machine time 40,500 machine hours
Fixed factory overhead
Total factory overhead Standard cost and budget information for Roadtrek Company follows:
What are the following overhead variances? Standard variable overhead rate P9.00 per MH
Standard quantity of machine hours 4 hours per case
A. B. C. D.
Budgeted fixed overhead P1,440,000 per year
Variable OH P3,000 U P3,000 U P7,000 U P7,000 U Budgeted output 10,000 cases per month
Spending
Variable OH P2,000 U P4,000 U P2,000 U P4,000
Efficiency U
Fixed OH P4,000 U P1,000 U P1,000 U P4,000 U
Spending

Questions 46 thru 48 are based on the following information.

Edney Company employs standard absorption system for product
costing. The standard cost of its product is as follows:
Raw materials
Direct labor (2 DLH x P8)
Manufacturing overhead (2 DLH x P11)
The manufacturing overhead rate is based upon a normal activity
level of 600,000 direct labor hours. Edney planned to produce 25,000
units each month during the year. The budgeted annual
manufacturing overhead is
Variable
Fixed
During November, Edney produced 26,000 units. Edney used 53,500
direct labor hours in November at a cost of P433,350. Actual
manufacturing overhead for the month was P260,000 fixed and

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 Relevant Costing
October is 56. An important concept in decision making is described as the
A. P40,500 U C. P45,000 U contribution to income that is forgone by not using a limited
B. P81,000 U D. P81,000 F 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
A. P4,500 U C. P4,500 F cost
B. P40,500 U D. P40,500 F
57. If revenues are P210,000 under alternative A and P216,000
51. The amount of fixed overhead controllable variance is under alternative B, and costs are P190,000 for A and P204,000
A. P2,000 U C. P42,500 U for B, then using the basic approach in incremental analysis,
B. P2,000 F D. P42,500 F incremental revenues, costs, and net income, in comparing B to
A are respectively
52. The amount of fixed overhead volume variance is A. P6,000, P(14,000), P(8,000) C. P6,000,
A. P12,000 F C. P21,000 F P14,000, P8,00
B. P12,000 U D. P21,000 U B. P(6,000), P14,000, P8,000 D. P(6,000),
P(14,000), P(8,000)
53. The amount variable overhead volume variance is
A. Zero C. P12,000 F 58. For the year ended April 30, 2003, Leba Company incurred direct
B. P9,000 U D. P2,250 U costs of P800,000 based on a particular course of action. Had a
different course of action been taken, direct costs would have
Absorption Costing & Variable Costing been P650,000. In addition, Leba’s fixed costs during the fiscal
54. Which of the following statements is true for a firm that uses year were P110,000.
variable (direct) costing? The incremental (decremental) costs was:
A. The cost of a unit of product changes because of changes in A. P40,000 C. P(40,000)
the number of units manufactured. B. P150,000 D. P(150,000)
B. Profits fluctuate with sales
C. An idle facility variation is calculated 59. Wallace Company produces 15,000 pounds of Product A and
D. Product costs include “direct” (variable) administrative costs. 30,000 pound of Product B each week by incurring a common
variable costs of P400,000. These two products can be sold as
55. At its present level of operations, a small manufacturing firm has is or processed further. Further processing of either product
total variable costs equal to 75% of sales and total fixed costs does not delay the production of subsequent batches of the joint
equal to 15% of sales. Based on variable costing, if sales product. Data gathering there two products are as follows:
change by P1.00, income will change by Product A Product B
A. P0.25 C. P0.75 Selling price per pound without further P 12.00 P 9.00
B. P0.12 D. P0.10 Processing
Selling price per pound with further P 15.00 P 11.00
Processing
Total separate weekly variable costs of P50,000 P45,000
Further processing
To maximize Wallace Company’s manufacturing contribution
margin, the total separate variable costs of further processing
that should be incurred each week are
A. P45,000 C. P95,000
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
B. P200 units D. 0 units

May 9, 2004 Page 8 of 23

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

61. Geary Manufacturing has assembled the following data A. P14 C. P16
pertaining to two popular products. B. P15 D. P18
Blender Electric
mixer 64. Yardley Co. has considerable excess manufacturing capacity. A
Direct materials P 6 P 11 special job order’s cost sheet includes the following applied
Direct labor 4 9 manufacturing overhead costs:
Factory overhead @ P16 per 16 32 Variable costs P56,250
hour Fixed costs 45,000
Cost if purchased from an 20 38 The fixed costs include a normal P6,800 allocation for in-house
outside supplier design costs, although no in-house design will be done. Instead,
Annual demand (units) 20,000 28,000 the special job will require the use of external designers costing
Past experience has shown that the fixed manufacturing P13,750. What is the minimum acceptable price of the job?
overhead component included in the cost per machine hour A. P63,050 C. P101,250
averages P10. Geary has a policy of filling all sales orders, even B. P70,000 D. P108,200
if it means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing 65. MC Industries manufactures a product with the following costs
desires to follow an optimal strategy, it should per unit at the expected production of 30,000 units:
A. produce 25,000 electric mixers, and purchase all other units Direct materials P 4
as needed Direct labor 12
B. produce 20,000 blenders and 15,000 electric mixers, and Variable manufacturing overhead 6
purchase all other units as needed Fixed manufacturing overhead 8
C. produce 20,000 blenders and purchase all other units as The company has the capacity to produce 40,000 units. The
needed product regularly sells for P40. A wholesaler has offered to pay
D. purchase all units as needed P32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the
62. The Hingis Corporation manufactures two products: X and Y. effect on operating income would be
Contribution margin per unit is determined as follows: A. a P20,000 increase C. a
Product X Product Y P4,000 increase
B. a P16,000 decrease D. P0
Revenue P 130 P80
Variable costs 70 38
66. Gata Co. plans to discontinue a department with a P48,000
Contribution P 60 P42
contribution to overhead, and allocated overhead of P96,000, of
margin
which P42,000 cannot be eliminated. What would be the effect
Total demand for X is 16,000 units and for Y is 8,000 units. of this discontinuance on Gata’s pretax profit?
Machine hours is a scarce resource. 42,000 machine hours are A. increase of P48,000 C. increase of
available during the year. Product X requires 6 machine hours P6,000
per unit while product Y requires 3 machine hours per unit. B. decrease of P48,000 D. increase of
How many units of X and Y should Hingis Corporation produce? P6,000
A. B. C. D.
Product X 16,000 8,000 7,000 3,000 67. Pili Company plans to discontinue a segment with a P32,000
Product Y -0- 4,000 -0- 8,000 segment margin. Common expenses allocated to the segment
amounted to P45,000, of which P20,000 cannot be eliminated if
63. Wagner sells product A at a price of P21 per unit. Wagner’s cost the segment were closed. The effect of closing down the
per unit based on the full capacity of 200,000 units is as follows: segment on Pili Company’s before tax profit would be
Direct materials A. P12,000 decrease C. P12,000
Direct labor increase
Overhead (2/3 of which is fixed) B. P 7,000 decrease D. P 7,000
increase
A special order offering to buy 20,000 units was received from a
foreign distributor. The only selling costs that would be incurred 68. Division B earns a contribution margin of P200,000 and has a
on this order would be P3 per unit for shipping. Wagner has divisional margin of P70,000. If Division B is closed, all of the
sufficient existing capacity to manufacture the additional units direct divisional expenses and P110,000 of common expenses
To achieve an increase in operating income of P40,000. Wagner can be eliminated. These facts indicate that closing the division
should charge a selling price of will cause the firm’s operating income to

May 9, 2004 Page 9 of 23

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

A. increase by P90,000 C. increase by required to manufacture the headlights. The design engineer
P40,000 estimates that each headlight requires P400 of direct materials
B. decrease by P90,000 D. decrease by and P300 of direct labor. Peluso’s plant overhead rate is 200
P40,000 percent of direct labor costs, and 40 percent of the overhead is
fixed cost. A decision by Peluso Company to manufacture the
69. Consider the following portion of a segmented income statement headlights will result in a gain (loss) for each headlight of
for the year just ended. Assume that the fixed expenses of A. P(200) C. P40
Division X include P30,000 of direct expenses and that the B. P160 D. P280
discontinuance of the department will not affect the sales of the
other departments nor reduce the common expenses: Questions 72 thru 74 are based on the following information:
Net sales Leland Manufacturing uses 10 units of Part Number KJ37 each month
Variable manufacturing costs in the production of radar equipment. The unit cost to manufacture
Gross profit one unit of KJ37 is presented below.
Fixed expenses (direct and allocated) Direct materials P1,000
Loss from operations Materials handling (20% of direct material cost) 200
What would be the effect on the firm’s operating income if Direct labor 8,000
Division X were discontinued? Manufacturing overhead (150% of direct labor) 12,000
A. increase of P10,000 C. decrease of Material handling represents the direct variable costs of the Receiving
P100,000 department that are applied to direct materials and purchased
B. decrease of P40,000 D. decrease of components on the basis of their cost. This is a separate charge in
P10,000 addition to manufacturing overhead. Leland’s annual manufacturing
overhead budget is one-third variable and two-thirds fixed. Scott
70. Condensed monthly operating income data for Cosmo Inc. for Supply, one of Leland’s reliable vendors, has offered to supply Part
November 2000 is presented below. Additional information No. KJ137 at a unit price of P15,000.
regarding Cosmo’s operation follows the statement.
Total Hall Store Town 72. If Leland purchases the KJ37 units from Scott, the capacity
Store Leland used to manufacture these parts would be idle. Should
Sales P200,000 P80,000 P120,000 Leland decide to purchase the parts from Scott, the unit cost of
Less Variable costs 116,000 32,000 84,000 KJ37 would
Contribution margin P 84,000 P48,000 P 36,000 A. increase by P4,800 C. decrease by
Less direct fixed 60,000 20,000 40,000 P3,200
expense B. decrease by P6,200 D. increase by
Store segment P 24,000 P28,000 P ( 4,000) P1,800
margin
Less common fixed 10,000 4,000 6,000
expenses
Operating income P 14,000 P24,000 P (10,000)
One-fourth of each store’s direct fixed expenses would continue
through December 31, 2001, if either store were closed.
Management estimates that closing the Town Store would result
in a ten percent decrease in Hall Store. Hall Store would not
affect Town Store sales. The operating results for November
2000 are representative of all months.
A decision of Cosmo, Inc. to close the Town Store would result in
a monthly increase (decrease) in Cosmo’s operating income
during 2001 of
A. P4,000 C. (P800)
B. (P10,800) D. (P6,000)

71. Peluso Company, a manufacturer of snowmobiles, is operating at

70 percent of plant capacity. Peluso’s plant manager is
considering making the headlights now being purchased for
P1,100 each, a price that is not expected to change in the near
future. The Peluso plant has the equipment and labor force

May 9, 2004 Page 10 of 23

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

73. Assume Leland Manufacturing is able to rent all idle capacity for reflected above. The peso sales that the division needs in order
P25,000 per month. If Leland decided to purchase the 10 units to reach the 30 percent ROI target is
from Scott Supply, Leland’s monthly cost for KJ37 would A. P19,829,032 C. P57,590,322
A. increase P48,000 C. decrease B. P44,373,871 D. P59,510,000
P7,000
B. increase P23,000 D. decrease 78. Ace Division of Card, Inc. expects the following result for 2004:
P57,000 Unit sales 70,000
Unit selling price P 10
74. Assume that Leland does not wish to commit to a rental Unit variable cost P 4
agreement but could use idle capacity to manufacture another Total fixed costs P 300,000
product that would contribute P52,000 per month. If Leland Total investment P 500,000
elects to manufacture KJ37 in order to maintain quality control, The minimum required ROI is 15 percent, and divisions are
Leland’s opportunity cost is evaluated on residual income. A foreign customer has
A. P18,000 C. P4,000 approached Houston’s manager with an offer to buy 10,000 units
B. (P20,000) D. (P48,000) at P7 each. Houston Division has capacity of 75,000 units and
the foreign customer will not accept fewer than 10,000 units.
Responsibility Accounting & Transfer Pricing Accepting the order would increase fixed costs by P10,000 and
75. A management decision may be beneficial for a given profit investment by P40,000.
center, but not for the entire company. From the overall company At the price of P7 offered by foreign customer, what is the
viewpoint, this decision would lead to maximum number of units in regular sales that Houston could
A. goal congruence C. sacrifice and still maintain its expected residual income?
suboptimization A. 2,333 C. 2,667
B. centralization D. maximization B. 3,333 D. 3,667

76. Company L had its operating asset turnover increased by 50% 79. Family Company has two division, Ma and Pa. Information for
and the operating income margin increased by 50%. Company U each division is as follows:
had its operating asset turnover increased by 30% and the Ma Pa
operating income margin decreased by 30%. What changes are Net earnings for division P20,000 P65,000
expected for ROI of Company L and Company U, respectively? Asset base for division P50,000 P300,000
A. B. C. D. Target rate of return 15% 18%
Company 50% 125% 225% 125% Operating income margin 10% 20%
L increase increase increase increase Weighted average cost of 12% 12%
Company 9% 9% no no capital
U decrease decrease change change What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000 C. P12,500,
77. The manager of the Queen Division of Pusoy Company expects P11,000
the following results in 2004 (pesos in millions): B. P14,000, P29,000 D. P20,000,
Sales P29,000
Variable costs (60%)
Contribution margin
Fixed costs
Profit
Investment:
Plant equipment
Working capital

ROI P7.84/P34.39
The division has a target ROI of 30 percent, and the manager
has asked you to determine how much sales volume the division
would need to reach that. He states that the sales mix is
relatively constant so variable costs should be close to 60
percent of sales, fixed cost and plant and equipment should
remain constant, and working capital (cash, receivables, and
inventories) should vary closely with sales in the percentage

May 9, 2004 Page 11 of 23

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

80. An appropriate transfer price between two divisions of the Star 83. To avoid waste and maximize efficiency when transferring
Corporation can be determined from the following data: products among divisions in a competitive economy, a large
Fabrication Division diversified corporation should base transfer prices on:
Market price of subassembly A. Full cost C. variable
Variable cost of subassembly costs
Excess capacity (in units) B. replacement cost D. market price
Assembling Division
Number of units needed Product Pricing Decision
What is the natural bargaining range for the two divisions? 84. Garden Corp. had the following information:
A. Between P20 and P50 C. Any Revenues P500,000
amount less than P50 Cost of goods sold:
B. Between P50 and P70 D. P50 is Direct materials P100,000
the only acceptable price Direct labor 75,000
Overhead 125,000
81. Pacific Company has three plants: one located in Malaysia, one 300,000
in India and another plant located in the Philippines. Both plants Gross profit P200,000
manufactures a component used in a finished product Selling and admin expenses 75,000
manufactured in the Philippine plant. Currently, both plants are Operating income P125,000
operating at 70 percent capacity. In Malaysia the income tax rate What are the mark up based on:
is 42% while in India the tax rate 35%; in the Philippines, the A. B. C. D.
corporate income tax rate is 40%. Cost of 66.7% 166.7% 66.7% 166.7%
The market price of the component, in peso equivalent, is P100 goods sold
and the foreign plant’s costs to manufacture the component are Prime costs 185.7% 42.9% 42.9% 185.7%
as follows: Direct 400.0% 500.0% 400.0% 500.0%
Direct materials materials
Direct labor
Variable overhead Master Budget
Fixed overhead 85. The method of budgeting which adds one month’s budget to the
Which transfer price would be in the best interest of the overall end of the plan when the current month’s budget is dropped from
corporation? the plan refers to
A. B. C. D. A. Long-term budget C. Incremental
Malaysia P35 P 35 P100 P100 budget
India P35 P100 P100 P 35 B. Operations budget D. Continuous
budget
82. The Engine Division provides motors for the Auto Division of a
company. The standard unit costs for Engine Division are as 86. Jakarta Corporation plans to sell 200,000 units of Batik products
follows: in October and anticipates a growth in sales of 5 percent per
Direct materials month. The target ending inventory in units of the product is 80%
Direct labor of the next month’s estimated sales. There are 150,000 units in
Variable Overhead inventory as of the end of September. The production
Fixed Overhead requirement in units of Batik for the quarter ending December 31
Market price would be
What is the best transfer price to avoid transfer price problems? A. 670,560 C. 665,720
A. P45,500 C. P35,000 B. 691,525 D. 675,925
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

Questions 87 & 88 concern Paradise Company, which budgets on Collection pattern is: 40% percent in the month of sale, 45% in
annual basis for its fiscal year. The following beginning and ending the month following the sale, and 10% two months following the
inventory levels (in units) are planned for the fiscal year of July 1, sale. The remaining 5% is expected to be uncollectible. The
2000 through June 30, 2001. company’s total budgeted collection from April to June amounts
July 1, 2000 June 30, 2001 to
Raw material* 40,000 50,000 A. P1,090,000 C. P1,468,500
Work-in-process 10,000 10,000 B. P1,325,500 D. P1,397,500
Finished goods 80,000 50,000
*Two (2) units of raw material are needed to produce each unit of 91. Beta Co. has the following sales forecasts for the selected three-
finished product. month period in 2004
April P120,000
87. If Paradise Company plans to sell 480,000 units during the 200- May 70,000
2001 fiscal year, the number of units it would have to June 80,000
manufacture during the year would be Seventy percent of sales are collected in the month of the sale,
A. 440,000 C. 510,000 and the remainder are collected in the following month.
B. 480,000 D. 450,000 Accounts receivable balance (April 1, 2004) P100,000
Cash balance (April 1, 2004) 50,000
88. If 500,000 finished units were to be manufactured during the Minimum cash balance is P50,000. Cash can be borrowed in
2000-2001 fiscal year by Paradise Company, the units of raw P10,000 increments from the local bank (assume no interest
material needed to be purchased would be charges).
A. 1,000,000 units C. 1,020,000 What is the cash balance at the end of April, assuming that cash
units is received only from customers and that P200,000 out during
B. 1,010,000 units D. 990,000 units April?
A. P34,000 C. P54,000
89. The Pentagon Co. expects sales of P4,400,000 in June, B. P50,000 D. P55,000
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 Capital Budgeting
month, and 45% are collected in the second month. The 92. Which of the following would decrease the net present value of a
remainder are written off to bad debt in the third month after sale. project?
What are the expected cash inflow for August and expected A. A decrease in the income tax rate
receivable balance on August 31? B. A decrease in the initial investment
A. B. C. D. C. An increase in the useful life of the project
D. An increase in the discount rate
Cash P5,050,000 P4,084,000 P1,830,000 P5,071,000
Inflow
93. A weakness of the internal rate of return method for screening
Aug 31 P7,140,000 P6,093,500 P7,232,000 P6,279,000
investment projects is that it:
AR
A. does not consider the time value of money
Balance
B. implicitly assumes that the company is able to reinvest cash
flows from the project at the company’s discount rate
90. Dolyar, Inc. prepared the following sales budget: C. implicitly assumes that the company is able to reinvest cash
Month Cash Sales Credit Sales flows from the project at the internal rate of return
February P 80,000 P340,000 D. fails to consider the timing of cash flows
March 100,000 400,000
April 90,000 370,000
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

94. Sensitivity analysis, if used with capital projects, 99. Barf is considering a 10-year capital investment project with
A. Is used extensively when cash flows are known with forecasted revenues of P40,000 per year and forecasted cash
certainty operating expenses of P29,000 per year. The initial cost of the
B. Measures the change in the discounted cash flows when equipment of the project is P23,000 and Barfield expects to sell
using the discounted payback method rather than the net the equipment for P9,000 at the end of the tenth year. The
present value method. equipment will be depreciated over 7 years. The project requires
C. Is a “what-if” technique that asks how a given outcome will a working capital investment of P7,000 at its inception and
change if the original estimates of the capital budgeting another P5,000 at the end of year 5. Using a 40% marginal tax
model are changed. rate, the expected net cash flow from the project in the tenth year
D. Is a technique used to rank capital expenditure requests. is
A. P32,000 C. P20,000
95. If Sol Company expects to get a one-year loan to help cover the B. P24,000 D. P11,000
initial financing of capital project, the analysis of the project
should 100.Brand is considering, an investment in a new cheese-cutting
A. offset the loan against any investment in inventory or machine to replace its existing cheese cutter. Information on the
receivable required by the project existing machine and the replacement machine follow:
B. show the loan as an increase in the investment Cost of the new machine P40,000
C. show the loan as a cash outflow in the second year of the Net annual savings in operating costs 9,000
project’s life Salvage value now of the old machine 6,000
D. ignore the loan Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000
96. Royal Industries is replacing a grinder purchased 5 years ago for Estimated life of the new machine 8 years
P15,000 with a new one costing P25,000 cash. The original What is the expected payback period for the new machine?
grinder is being depreciated on a straight-line basis over 15 years A. 4.44 years C. 8.50 years
to a zero salvage value. Royal will sell this old equipment for B. 2.67 years D. 3.78 years
P6,000 cash. The new equipment will be depreciated on a
straight-line basis over 10 years to a zero salvage value. 101.Cause Company is planning to invest in a machine with a useful
Assuming a 40% marginal tax rate, Royal’s net cash investment life of five years and no salvage value. The machine is expected
at the time of purchase is the old grinder is sold and the new one to produce cash flow from operations, net of income taxes, of
purchased is P20,000 in each of the five years. Cause’s expected rate of
A. P19,000 C. P17,400 return is 10%. Information on present value and future amount
B. P15,000 D. P25,000 factors is as follows:
1 2 3 4 5
97. Flow Industries is analyzing a capital investment proposal for Present value .909 .826 .751 .683 .621
new machinery to produce a new product over the next 10 years. of P1 at
At the end of the 10 years, the machinery must be disposed of 10%
with a net zero book value but with a scrap salvage value of Present value
P20,000. It will require some P30,0000 to remove the machinery. of an .909 1.736 2.487 3.170 3.791
The applicable tax rate is 35%. The appropriate “end of life” annuity
cash flow based on the foregoing information is of P1 at
A. inflow of P30,000 C. outflow of 10%
P10,000 Future 1.100 1.210 1.33 1.464 1.611
B. outflow of P6,500 D. outflow of amount
P17,000 of P1 at
10%
98. Sarah Company is planning to purchase a new machine for Future
P600,000. Depreciation for tax purposes will be P100,000 amount 1.000 2.100 3.310 4.641 6.105
annually for six years. The new machine is expected to produce of an
cash flow from operations, net of income taxes, of P150,000 a annuity
year in each of the next six years. The accounting (book value) of P1 at
rate of return on the initial investment is expected to be 10%
A. 8.3% C. 16.7% How much will the machine cost?
B. 12.0% D. 25.0% A. P32,220 C. P75,820
B. P62,100 D. P122,100

May 9, 2004 Page 14 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

102.Janet Company has a payback goal of 3 years on new payment?
equipment acquisitions. A new sorter is being evaluated that A. P360 C. P640
costs P450,000 and has a 5-year life. Straight-line depreciation B. P453 D. P726
will be used; no salvage value is anticipated. Janet is subject to
a 40% income tax rate. To meet the company’s payback goal, 106.Which of the following is closes to the present value of cost if
the sorter must generate reductions in annual cash operating leasing the asset?
costs of A. P3,694 C. P3,849
A. P60,000 C. P150,000 B. P3,779 D. P3,992
B. P100,000 D. P190,000
107.Which of the following is closest to the PV of cost of purchasing
103.Moorman Products Company is considering a new product that the new asset with a term loan?
will sell for P100 and have a variable cost of P60. Expected A. P3,777 C. P4,058
volume is 20,000 units. New equipment costing P1,500 and B. P3,952 D. P4,153
having a five-year useful life and no salvage value is needed, and
will be depreciated using the straight-line method. The machine Questions 108 through 110 are based on the following information:
has cash operating costs of P20,000 per year. The firm is in the Logo Co. is planning to buy a coin-operated machine costing
40 percent tax bracket and has cost of capital of 12 percent. The P40,000. For book and tax purposes, this machine will be
present value of 1, end of five periods is 0.56743; present value depreciated P8,000 each year for five years. Logo estimates that this
of annuity of 1 for 5 periods is 3.60478. machine will yield an annual cash inflow, net of depreciation and
How many units per year the firm must sell for the investment to income taxes, of P12,000. Logo’s desired rate of return on its
earn 12 percent internal rate of return? investments is 12%. At the following discount rates, the NPVs of the
A. 12,838 C. 8,225 investment in this machine are:
B. 10,403 D. 7,625 Discount rate NPV
12% +P3,258
104.Highpoint, Inc., is considering investing in automated equipment 14% + 1,197
with a ten-year useful life. Managers at Highpoint have 16% - 708
estimated the cash flows associated with the tangible costs and 18% - 2,474
benefits of automation, but have been unable to estimate the
cash flows associated with the intangible benefits. Using the 108.Logo’s accounting rate of return on its initial investment in this
company’s 10% discount rate, the net present value of the cash machine is expected to be
flows associated with just the tangible costs and benefits is a A. 30% C. 12%
negative P184,350. How large would the annual net cash inflows B. 15% D. 10%
from the intangible benefits have to be to make this a financially
acceptable investment? 109.Logo’s expected payback period for its investment in this
A. P18,435 C. P35,000 machine is
B. P30,000 D. P37,236 A. 2.0 years C. 3.3 years
B. 3.0 years D. 5.0 years
Questions 105 thru 107 are based on the following information.
A firm must choose between leasing a new asset of purchasing it with 110.Logo’s expected IRR on its investment in this machine is
funds from a term loan. Under the purchase option, the firm will pay A. 3.3% C. 12.0%
five equal principal payments of P1,000 each and 6% interest on the B. 10.0% D. 15.3%
unpaid balance. Principal and interest are due at the end of each
year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1,400 with payments due at the
beginning of each year. The corporate tax rate is 35% and the
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

111.Lawton Co. is expanding its manufacturing plant, which requires

an investment of P4,000,000 in new equipment and plant
modifications. Lawton’s sales are expected to increase by
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 the
estimated total investment for this expansion?
A. P3,400,000 C. P4,600,000
B. P4,300,000 D. P4,000,000

112.Par Co. is reviewing the following data relating to an energy

saving investment proposal:
Investment
Residual value at the end of 5 years
Present value of an annuity of 1 at 12% for 5 years
Present value of 1 due in 5 years at 12%
What would be the annual savings needed to make the
investment realize a 12% yield?
A. P8,189 C. P12,306
B. P11,111 D. P13,889

113.Investor’s Inc. uses a 12% hurdle rate for all capital expenditures
and has done the following analysis for four projects for the
upcoming year.
Project 1 Project 2 Project 3 Project 4
Initial cash P200,000 P298,000 P248,000 P272,000
outlay
Annual net
cash
inflows
Year 1 P 65,000 P100,000 P 80,000 P 95,000
Year 2 70,000 135,000 95,000 125,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net ( 3,798) 4,276 14,064 14,662
present
value
Profitability 98% 101% 106% 105%
index
Internal 11% 13% 14% 15%
rate of
return
Which project(s) should Investors, Inc. select during the
upcoming year under each budgeted amount of funds?
No Budget P600,000 P300,000Available
Restriction Available Funds Funds
A. Projects 2, 3 & Projects 3 & 4 Project 3
4
B. Projects 1, 2 & Projects 2, 3 & Projects 3 & 4
3 4
C. Projects 1, 3 & Projects 2 & 3 Project 2
4
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 Gunning’s working
In order to increase production capacity, Gunning Industries is capital investment for the new production machine would be
considering replacing an existing production machine with a new A. P(7,959) C. P(13,265)
technologically improved machine effective January 1, 2002. The B. P(10,080) D. P(35,000)
following information is being considered by Gunning Industries:
 The new machine would be purchased for P160,000 in cash. Financial Statement Analysis
Shipping installation, and testing would cost an additional 118. Sales (in millions) for a three year period are: Year 1 P4, Year 2
P30,000. P4.6, and Year 3 P5.0. Using Year 1 as the base year the
 The new machine is expected to increase annual sales by 20,000 percentage increase in sales in Years 2 and 3 are, respectively
units at a sales price of P40 per unit. Incremental operating A. 115% and 125% C. 115% and
costs include P30 per unit in variable costs and total fixed costs 130%
of P40,000 per year. B. 115% and 109% D. 87% and
 The investment in the new machine will require an immediate 80%
increase in working capital of P35,000. This cash outflow will be
recovered at the end or year 5. 119. A company has total sales of P300,000 with a gross profit ratio of
 Gunning uses straight-line depreciation for financial reporting and 35%. Inventory at the beginning of the period was P50,000 and
tax reporting purposes. at the end of the period was P70,000. Net income is P40,000.
 The new machine has an estimated useful life of 5 years and Inventory turnover is
zero salvage value A. 5 times C. 1.75 times
 Gunning is subject to a 40% corporate income tax rate. B. 3.25 times D. 0.67 times
Gunning uses the net present value method to analyze investments
and will employ the following factors and rates: 120.The times interest earned ratio of McHoggan Company is
Period PV of 1 at 10% PV of an ordinary annuity of 1 4.5times. The interest expense for the year was P20,000 and the
at 10% company’s tax rate is 40%. The company’s net income is:
1 .909 .909 A. P22,000 C. P42,000
2 .826 1.736 B. P54,000 D. P66,000
3 .751 2.487
4 .683 3.170 121.If the North Division of Alliance Products Company had an
5 .621 3.791 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 A. 23.8% C. 42.0%
decision is B. 420.0% D. 4.2%
A. P190,000 C. P204,525
B. P195,000 D. P225,000 122.Selected data from Sheridan Corporation’s year-end financial
statements are presented below. The difference between
115.Gunning Industries’ discounted annual depreciation tax shield for average and ending inventory is immaterial.
the year 2002 is Current ratio 2.0
A. P13,817 C. P20,725 Quick ratio 1.5
B. P16,762 D. P22,800 Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
116.The acquisition of the new production machine by Gunning will Gross profit margin 40%
contribute a discounted net-of-tax contribution margin of Sheridan’s net sales for the year were
A. P242,624 C. P363,936 A. P800,000 C. P1,200,000
B. P303,280 D. P454,920 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 uncollectible expense is expected to be 15% and collection costs
units. The current year’s master budget was based on the will be 5%. The company’s manufacturing and selling expenses
production and sales of 700,000 units during the current year. are 70% of sales, and its effective tax rate is 40%. If Lyman
Actual production for the current year was 720,000 units, while should accept this opportunity, the company’s after tax profits
actual sales amounted to only 600,000 units. The units are sold would increase by
for P20 each and the contribution margin ratio is 30%. The peso A. P6,000 C. P10,200
amount that best qualifies the Marketing Department’s failure to B. P10,000 D. P14,400
achieve budgeted performance for the current year is:
A. P720,000 unfavorable C. P2,400,000 128.The following information regarding a change in credit policy was
unfavorable assembled by the Willis Company. The company has a required
B. P600,000 unfavorable D. P2,000,000 rate of return of 10% and a variable cost ratio of 60%.
unfavorable Old Credit Policy New Credit Policy
Sales P3,600,000 P3,960,000
124.The gross profit of Rea Company for each of the years ended as Average Collection 30 days 36 days
indicated follow: period
2001 2000 The pretax cost of carrying the additional investment in
Sales P792,000 P800,000 receivable, using 360-day year would be
Cost of goods 463,000 480,000 A. P5,760 C. P8,160
sold B. P9,600 D. P960
Gross profit P328,000 P320,000
Assuming that 2001 selling price was 10% lower, what would be 129.The sales director of Lloyd Company suggested that certain
the decrease in gross profit due to change in the selling price? credit terms be modified. He estimates the following effects:
A. P8,000 C. P79,200  Sales will increase by at least 20%
B. P72,000 D. P88,000  Accounts receivable turnover will be reduced to 8 times from
the present turnover of 10 times
125.Garfield Company, which sells a single product, provided the  Bad debts, now at 1% of sales will increase to 1.5%
following data from its income statements for the years 2001 and Sales before the proposed changes is at P900,000. Variable cost
2000: ratio is 55% and the desired rate of return is 20%. Fixed
2001 2000 expenses amount to P150,000.
Sales (150,000 units in 2001; P750,000 P720,000 Should the company allow revision of its credit terms?
180,000 units in 2000) A. Yes, because income will increase by P64,800
Cost of goods sold 525,000 575,000 B. Yes, because losses will be reduced by P73,800
Gross profit P225,000 P145,000 C. No, because income will be reduced by P13,000
In an analysis of variation in gross profit between the two years, D. No, because losses will be increased by P28,000
what would be the effects of changes in sales price and sales
volume, respectively? 130.A spindle manufacturer uses about 200 cases of raw wood per
A. P150,000 F; P120,000 U C. P180,000 F; month. It pays a broker P50.00 to locate a supplier and handle
P150,000 U the ordering and delivery arrangements. Storage and handling
B. P150,000 U; P120,000 F D. P180,000 U; costs are P0.02 per case per month. If each case costs P0.78
P150,000 F the most economical order quantity (rounded to the next whole
number) is
Working Capital Management A. 884 cases C. 1,133 cases
126.Gear Inc., has a total annual cash requirement of P9,075,000 B. 625 cases D. 1,000 cases
which are to be paid uniformly. 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.
What is the optimal cash conversion size?
A. P60,000 C. P55,000
B. P45,000 D. P72,500

127.Lyman Company has the opportunity to increase annual sales

P100,000 by selling to a new riskier group of customers. The

May 9, 2004 Page 18 of 23

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

131.Expected annual usage of a particular raw material is 2,000,000 136.For 2003, Bee Company increased earnings before interest and
units and the standard order size is 10,000 units. The invoice taxes by 17%. During the same period, net income after tax
cost of each unit is P500, and the cost to place one purchase increased by 42%. The degree of financial leverage that existed
order is P80. The estimated annual order costs is during 2003 is
A. P16,000 C. P32,000 A. 1.70 C. 2.47
B. P100,000 D. P50,000 B. 4.20 D. 5.90

132.The Handy Company has the following information available 137.Mars Company plans to issue some P100 preferred stock with an
concerning one of its inventory items: 11 percent dividend. The stock is selling on the market for P97,
Cost of placing an order and Mars must pay flotation costs of 5 percent of the market
Unit of carrying cost per year price. The company is under the 40 percent corporate tax rate.
Annual unit demand The cost of preferred stock for Mars Company is
Safety stock A. 7.16 percent C. 11.34 percent
Average daily demand B. 6.80 percent D. 11.94 percent
Normal lead time in days
The reorder point for the inventory item is 138.ABC Corp. stock’s beta is .50. If the market return is 16%, and
A. 250 C. 350 the risk-free rate is 6%, what is the required rate of return on ABC
B. 600 D. 300 stock?
A. 11% C. 13%
133.The G Corporation purchases 60,000 headbands per year. The B. 12% D. 14%
average purchase lead time is 20 working days. Maximum lead
time is 27 working days. The corporation works 240 days per 139.The following data are related to WXY stock:
year. The appropriate safety stock level and the reorder point for Required return on WXY common 15 percent
the company are: Beta coefficient 1.5
A. B. C. D. Risk-free rate 9.0 percent
Safety 1,750 1,750 1,167 1,167 The required market return is
Stock A. 13.0 percent C. 18.0 percent
Reorder 6,750 5,250 6,750 5,250 B. 25.0 percent D. 16.0 percent
Point
140.The Taurus Company’s last dividend was P3.00; its growth rate is
134.Bye Company borrows from a bank a certain loan at a stated 6 percent and the stock now sells for P36. New stock can be
discount rate of 12 percent per annum. The bank requires 10 sold to net the firm P32.40 per share.
percent of loan as compensating balance in its new checking What is the Taurus Company’s cost of retained earnings?
account. The loan is payable at the end of 6 months. The A. 14.83 percent C. 15.81
effective interest rate of this loan is percent
A. 28.21 percent C. 27.27 B. 15.26 percent D. 9.69 percent
percent
B. 14.29 percent D. 15.38 141.The Leonard Company’s last dividend was P3.00; its growth rate
percent is 6 percent and the stock now sells for P36. New stock can be
sold to net the firm P32.40 per share.
135.The Manunuba Company was recently quoted terms on a A. 14.83 percent C. 15.81
commercial bank loan of 7% interest with 20% compensating percent
balance. The term of the loan is one year. The effective cost of B. 15.26 percent D. 9.69 percent
borrowing (rounded to the nearest hundredth) for each interest
arrangements are: 142.Williams Co. is interested in measuring its overall cost of capital
A. B. C. D. and has gathered the following data. Under the terms described
below, the company can sell unlimited amounts of all
Discounted 9.59% 8.75% 7.53% 7.53%
instruments.
interest
 Williams can raise cash by selling P1,000, 8%, 20-year
Payable upon 8.75% 9.59% 8.75% 9.59%
bonds with annual interest payments. In selling the issue, an
maturity
average premium of P30 per bond would be received, and
the firm must pay flotation costs of P30 per bond. The after-
Cost of Capital & Risk tax cost of funds is estimated to be 4.8%.

May 9, 2004 Page 19 of 23

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

 Williams can sell 8% preferred stock at P105 per share. The 144.Using the dividend growth model, what is the expected cost of
cost of issuing and selling the preferred stock is expected to retained earnings for Larry Technics, Inc.?
be P5 per share. A. 10.44 percent C. 16.30
 Williams’ common stock is currently selling for P100 per percent
share. The firm expects to pay cash dividends of P7 per B. 9.30 percent D. 17.44
share next year, and the dividends are expected to remain percent
constant. The stock will have to be underpriced by P3 per
share, and flotation costs are expected to amount to P5 per Quantitative Methods
share. 145.Reina, Inc. has a target total labor cost of P3,600 for the first four
 Williams expects to have available P100,000 of retained batches of a product. Labor is paid P10 an hour. If Soft expects
earnings in the coming year; once these retained earnings an 80% learning curve, how many hours should the first batch
are exhausted, the firm will use new common stock as the take?
form of common stock equity financing. A. 360 hours C. 140.63 hours
 Williams’ preferred capital structure is B. 57.6 hours D. 230.4 hours
Long-term debt
Preferred stock 146.A company is designing a new regional distribution warehouse.
Common stock To minimize delays in loading and unloading trucks, an adequate
What are the corresponding weighted-average cost of capital number of loading docks must be built. The most relevant
under each financing needs? technique to assist in determining the proper number docks is
A. B. C. D. A. Cost-volume-profit analysis C. PERT/CPM
P200,000 6.5% 6.8% 4.5% 7.3% analysis
P1,000,000 6.8% 4.8% 6.5% 9.1% B. Linear programming D. Queuing
theory
Questions 143 & 144 are based on the following information.
The earnings, dividends, and stock price of Larry Technics, Inc. are 147.Following is a table for two separate product lines, X and Y:
expected to grow at 7 percent per year after this year. Larry’s Probability X Profit Y Profit
common stock sells for P23 per share, its last dividend was P2.00 20% P5,000 P 500
and the company pay P2.14 at the end of the current year. Larry 70% 3,000 4,000
should pay P2.50 flotation cost. 10% 6,000 8,000
The product line to obtain maximum utility for a risk-averse
143. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the decision maker is
average return on the market is 12 percent, what will be the firm’s A. X because it has the highest expected profit.
cost of equity using the CAPM approach? B. Y because it has the highest dispersion
A. 16.05 percent C. 15.00 C. Y because it has the highest expected profit
percent D. X because it has the lowest dispersion
B. 14.27 percent D. 14.00
percent 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
stores are sold through Dough’s thrift store for P1. Dough
assigns the following probabilities to selling additional boxes:
Additional sales Probability
60 .6
100 .4

May 9, 2004 Page 20 of 23

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

What is the expected value of Dough’s decision to buy 100 152.Clara Building Corporation uses the critical path method to
additional boxes of muffins? monitor construction jobs. The company is currently 2 weeks
A. P28 C. P52 behind schedule on Job 181, which is subject to a P10,500-per-
B. P40 D. P68 week completion penalty. Path A-B-C-F-G-H-I has normal
completion time of 20 weeks, and critical path A-D-E-F-G-H-I has
149.A beverage stand can sell either soft drinks or coffee on any a normal completion time of 22 weeks. The following activities
given day. If the stand sells soft drinks and the weather is hot, it can be crashed:
will make P2,500; if the weather is cold, the profit will be P1,000. Activities Cost to Crash 1 Cost to Crash 2
If the stand sells coffee and the weather is hot, it will make Week Weeks
P1,900; if the weather is cold, the profit will be P2,000. The BC P 8,000 P15,000
probability of cold weather on a given day at this time is 60%. DE 10,000 19,600
The expected payoff for either selling coffee or soft drinks and the EF 8,800 19,500
expected payoff if the vendor has perfect information are Clara desires to reduce the normal completion time of Job 181
A. B. C. D. and, at the same time, report the highest possible income for the
Coffee P1,360 P1,960 P2,200 P3,900 year. Clara should crash
Soft drinks P1,600 P1,600 P1,900 P1,900 A. BC 1 week and EF 1 week C. EF 2 weeks
Perfect P3,000 P2,200 P1,360 P1,960 B. BC 2 weeks D. DE 1 week
Information. and EF 1week

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. Management feels that
if the company bids low enough to result in a net profit of
P50,000, there would be a 60% chance of getting the job. If the
company bids high enough to result in a P100,000 net profit, the
chance of getting the contract would be only 20%. What should
the company do?
A. Bid only high enough to allow for P50,000 profit because the
expected value of the payoff is P22,000.
B. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P4,000
C. Bid high enough to allow for a P100,000 profit because the
expected value of the payoff is P20,000.
D. Make no bid.
Information Systems
153.A major advantage of obtaining a package of applications
programs from a software vendor is
A. the likelihood of reducing the time span from planning to
implementation
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance the programs will be written in a high-level
language

151.Critical Path Method (CPM) is a technique for analyzing,

planning, and scheduling large, complex projects by determining
the critical path from a single time estimate for each event in a
project. The critical path:
A. Is the shortest path from the first event to the last event for a
project.
B. Is an activity within the path that requires the most number of
time.
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

Answer Key
1. B 11. D 21. C 31. A 41. B
2. B 12. A 22. B 32. B 42. A
3. B 13. A 23. A 33. B 43. B
4. B 14. D 24. B 34. A 44. A
5. A 15. B 25. A 35. A 45. B
6. B 16. C 26. C 36. C 46. B
7. C 17. A 27. A 37. A 47. B
8. C 18. D 28. D 38. D 48. C
9. A 19. A 29. D 39. B 49. A
10. A 20. B 30. A 40. A 50. B

51. A 61. A 71. C 81. B 91. C

52. B 62. A 72. A 82. A 92. D
53. A 63. C 73. B 83. D 93. C
54. B 64. B 74. C 84. A 94. C
55. A 65. B 75. C 85. D 95. D
56. B 66. C 76. B 86. C 96. C
57. A 67. B 77. C 87. D 97. B
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
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
P50 million of 7 percent series
P75 million of 5 percent series
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 company’s
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. Gasco’s 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
2. Andres Company has a single product called Kad. The company
normally produces and sells 60,000 Kads each year at a selling
price of P32 per unit. The company’s unit costs at this level of
activity are given below:
Direct materials
Direct Labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expenses
Fixed selling expenses
May 9, 2004
Pre-week Quizzer
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 supplier’s 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?
5. An outside manufacturer has offered to produce Kads for
Andres Company and to ship them directly to Andres’
customers. If Andres accepts this offer, the facilities that it
uses to produce Kads would be idle; however, fixed
5.00 (P300,000overhead
total) costs would be reduced by 75% to their present
value. Since the outside manufacturer would pay for all the
3.50 (P210,000costs
total)of shipping, the variable selling costs would be only
two-thirds of their present amount. What the unit cost figure
that is relevant for comparison to whatever quoted price is
received from the outside manufacturer?
Page 23 of 23