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1. Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

Variable costs:
Direct materials	$40
Direct labour	20
Manufacturing overhead	25
Sales commission	15
Fixed costs:
Manufacturing overhead	100
Marketing costs	20
Total costs	220
Markup (10%)	22
Estimated selling price	$242

What is the full cost of the product per unit?

a.

$155

b.

$66

c.

$198

d.

$220

e.

$60

1. Gerry's Generator Supply is approached by Mr. Gladstone, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Gerry's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

Direct materials	$850
Direct manufacturing labour	75
Variable manufacturing support	150
Fixed manufacturing support	75
Total manufacturing costs	1,150
Markup (20%)	230
Estimated selling price	$1,380

1. If Mr. Gladstone wanted a long-term commitment for supplying this product, what price would most likely be quoted to him?

a.

$1,200

b.

$1,380

c.

$1,075

d.

$1,000

e.

$1,400

1. Albernie Ltd. purchased a CCA Class 8 (CCA rate of 20%) item of equipment for $80,000. The equipment was the only item in the Class 8 capital cost allowance pool. The equipment is expected to generate savings in the amount of $40,000 per year. The company uses straight-line depreciation and estimates a 3-year useful life with $20,000 salvage value for the new equipment. The tax rate is 35%, and Albernie has a required rate of return of 9.0%. What is present value of the salvage value that Albernie Ltd. is expecting from the equipment?

a.

$14,169

b.

$11,574

c.

$15,897

d.

$15,444

e.

$20,000

1. ABC Associates is in the process of evaluating its new client services for the business consulting division. Estate Planning, a new service, incurred $600,000 in development costs and employee training. The direct costs of providing this service, which is all labour, averages $100 per hour. Other costs for this service are estimated at $2,000,000 per year. The current program for estate planning is expected to last for two years. At that time, a new law will be in place which will require new operating guidelines for tax consulting. Customer service expenses average $400 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages $140 per hour. What is the ABC Associates' life-cycle budgeted revenue?

a.

$22,400,000

b.

$5,600,000

c.

$28,500,000

d.

$8,000,000

e.

$11,200,000

1. Investment A requires a net investment of $600,000. The required rate of return is 10 percent for the three-year annuity. What are the annual cash inflows if the net present value equals 0?

a.

$249,791

b.

$184,842

c.

$360,000

d.

$271,316

e.

$241,269

1. Red Zone Corporation recently purchased a new machine for $339,013.20. The new equipment has a useful life of 10 years. Net cash flows will be $60,000 per year, end of year payments. What is the internal rate of return?

a.

16 percent

b.

14 percent

c.

18 percent

d.

10 percent

e.

12 percent

1. Zoro Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. Income taxes are not considered. What is the net present value of the investment?

a.

$500,000

b.

$326,750

c.

$119,799

d.

$69,799

e.

$1,019,550

1. Eliminating non-value added activities by reducing their cost drivers, is referred to as

a.

value-added activity base pricing.

b.

price engineering.

c.

value-added pricing.

d.

value engineering.

e.

cost incurrence costing.

1. Patton Company budgeted the following costs for the production of its one and only product, bells, for the next fiscal year:

Direct materials	$215,000
Direct labour	115,000
Factory overhead:
Variable	80,000
Fixed	280,000
Selling and administrative:
Variable	85,000
Fixed	70,000
Total costs	$845,000

Patton has a target profit of $750,000. If total invested capital is $3,000,000, what is the company's target rate of return on investment?

a.

15%

b.

25%

c.

35%

d.

20%

e.

30%

1. The initial investment in working capital is usually recovered

a.

in year 1.

b.

when the project is terminated.

c.

as soon as the RRR is achieved.

d.

in year 0.

e.

in equal portions, with the recovery of the initial investment, based on the matching of revenues and all costs.

1. Which of the following is TRUE, concerning NPV?

a.

When the NPV is positive, the project recovers the initial investment and earns a return greater than the RRR.

b.

The IRR is less than the RRR when the NPV is positive, after using the RRR as the discount rate.

c.

When the NPV is negative, the sum of the cash flows from the project must also be negative.

d.

When the NPV is positive, the sum of the cash flows from the project equal the initial investment.

e.

The project just recovers the initial investment, discounted by the hurdle rate.

1. Five Star Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $30,000. The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project. The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000. The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 for each additional year of use. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. What is the net present value (rounded to the nearest thousand) of the investment, assuming the required rate of return is 10 percent? Would Five Star Cleaners want to purchase the new machine?

a.

$127,000; yes

b.

$(67,000); no

c.

$112,000; yes

d.

$52,000; yes

e.

$(52,000); no

1. Saly's Computer Monitors Inc. currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Saly's sales are currently 10,000 monitors per year. What is the target cost if operating income is 25% of sales?

a.

$202.50

b.

$210.00

c.

$168.75

d.

$41.25

e.

$189.00

1. London Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $90,000. The new machine will cost $650,000, and an additional cash investment in working capital of $20,000 will be required. The new machine will reduce the average amount of time required to take x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $60,000 in additional cash inflows during the year of acquisition and $230,000 for each additional year of use. The new machine has a five-year life and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?

a.

$(33,910); no

b.

$50,700; yes

c.

$33,910; yes

d.

$(33,910); yes

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