Fall 2006 Exam 3 - Solutions

Fall 2006 Exam 3 - Solutions - Managerial Accounting Acct...

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Managerial Accounting Acct 2301 Exam 3 NOTE: Rounding error within $5 is acceptable on all time-value-of-money problems. Name: 1. Annie Boutiques has an average rate of return of 12%. Details of a proposed investment include the following: Sales Revenue $20,000 Expenses 14,000 Cost of Asset 30,000 Which of the following statements is(are) correct? ROI = 6,000 / 30,000 = 20% RI = 6,000 – (30,000 * 12%) = $2,400 a. The investment should be accepted because it will yield an ROI that is higher that the average ROI. b. Acceptance of the investment opportunity will decrease the company wide ROI. c. The investment should be rejected because the investment opportunity will not yield any additional residual income. d. Acceptance of the investment opportunity will yield residual income of $2,400. e. More than one answer is correct. 2. The management of Tarallo Industries obtained the following information about the performance of a major investment project. Revenues $200,000 Cost of Investment 300,000 Margin 24% Assuming Tarallo has a desired rate of return of 14%, the project’s residual income was a. $42,000 RI = OI – (OA * Desired ROI) b. $28,000 OI = 24% * 200,000 = 48,000 c. $ 6,000 $48,000 – ($300,000 * .14) = $6,000 d. $72,000 e. None of the above 3. Which of the following would increase residual income? a. Decrease in revenues b. Increase in expenses c. Increase in the required ROI d. Increase in investment e. None of the above 4. Lawless Company reported the following information for 2005: Sales $1,574,000 Operating Assets $ 750,000
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Desired ROI 9% Residual Income $ 22,500 The company’s net income for 2005 was a. $74,160 RI = OI – (OA * Desired ROI) b. $67,500 $22,500 = OI – ($750,000 * 9%) c. $95,000 OI = $90,000 d. $363,750 e. None of the above 5. The Home Run batting cages chain has invested in ice cream stands for its various locations. The investment cost the company $100,000. The company expects to sell 10,000 ice cream servings per year. Variable materials, preparation and marketing costs are expected to be $0.50 per serving. Fixed costs are expected to be $3,000 per year. If the company wants an ROI of 12%, how much should they charge for each serving of ice cream? a. $2.00 OI = 12% * $100,000 = $12,000 b. $4.00 Sales – VC – FC = Net Income c. $1.25 10,000X – (.5*10,000) – 3,000 = 12,000 d. $0.50 10,000X = $20,000 X = $2 e. There is not enough information available. 6. Havenbrook Inc. is considering purchasing a new machine for $125,000. The machine is expected to yield a return of 15%. The company expects expenses to increase $8,000 from the new machine. Based on this information, how much does the company anticipate sales increasing from the new machine? a.
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Fall 2006 Exam 3 - Solutions - Managerial Accounting Acct...

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