Under which ethical standard of conduct does the managerial accountant have the responsibility

to refrain from either actively or passively subverting the attainment of an organization's

legitimate and ethical objectives?
- Integrity
Which cost is most likely to be mixed for a manufacturer?
- Manufacturing Overhead
When the number of units manufactured increases, the most significant change in unit cost will
be reflected as a(n)
- Decrease in the fixed element
When graphed, a typical fixed cost appears as:
- a horizontal line

Which of the following statements is incorrect?

- CPAs provide management advisory services to go around the ethical constraints as

mandated by the Accountancy Law

The following characterize management advisory services except

- It utilizes more junior staff than senior members of the firm

Which of the following is an incorrect statement?

- There is no overlap between financial and managerial accounting.

Management accounting’s role in the control processes is to provide

- managers with relevant information to compare with expectations.

In the cost equation Y = a + bx, b is best described as the:

- Slope of the cost equation

Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs
affect a firm's profit. If both the fixed and variable expenses associated with a product decrease,
what will be the effect on the contribution margin ratio and the break-even point, respectively?

Contribution Margin Ratio Break-even point

- Increase and Decrease

Target income/profit analysis is used to answer which of the following questions?

- What sales volume is needed to earn a specific amount of net operating income?

The contribution margin ratio always increases when the

- variable costs as a percentage of net sales decrease.

CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
Consistent with these assumptions, as volume decreases total

- costs decrease

After the level of volume exceeds the break-even point

- the total contribution margin exceeds the total fixed costs

Cost-volume-profit analysis is a technique available to management to understand better the

interrelationships of several factors that affect a firm's profit. As with many such techniques, the
accountant oversimplifies the real world by making assumptions. Which of the following is not a
major assumption underlying CVP analysis?

- For multi-product situations, the sales mix can vary at different volume levels.

A relatively low margin of safety ratio for a product is usually an indication that the product

- is riskier than higher margin of safety products

An assumption in a CVP analysis is that a change in costs is caused by a change in

- the number of units

Which of the following is a true statement about sales mix?

- Profits may decline with an increase in total peso of sales if the sales mix shifts to sell
more of the lower contribution margin product.

In a multiple-product firm, the product that has the highest contribution margin per unit will

- generate the most profit for each unit sold

A multiproduct company

- could earn a higher-than-expected profit even though the total number of units sold was
less than expected
The break-even point in a cost-volume-profit graph is always found:

- At the volume at which total revenue equals total fixed costs plus total variable costs

H Company has supplied the following data for the business:

Selling price...................... P 10 per unit

Variable expenses.............. P6 per unit

Rent................................... P400 per week

Salaries.............................. P600 per week

Other fixed expenses......... P200 per week

If sales commission P (1.00 per unit) are discontinued in favor of a P300 increase in salaries, the
break-even point in units would:

- Remain the same

H Corporation has supplied the following data for the current year:

Sales per period............................. 1,000 units

Selling price.................................. P 50 per unit

Variable manufacturing cost......... P20 per unit

Selling expenses............................ P10,000 plus 5% of sales

Administration expenses............... P5,000 plus 15% of sales

If next year the unit sales price will increase to P 55, how many units will be the break even
point next year?

- 625 units

H Manufacturing Corp incurs annual fixed costs of P250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of P75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that company can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at P6?

- 3.00
H Corporation produces and sells two products. In the most recent month, Product R had sales of
P20,000 and variable expenses of P7,400. Product X had sales of P39,000 and variable expenses
of P6,170. And the fixed expenses of the entire company were P41,160.

If the sales mix were to shift toward Product R with total sales remaining constant, the overall
break-even point for the entire company:

- would increase

H Corporation expects the following operating results for next year:

Sales...........................................................P400,000

Margin of safety........................................ P100,000

Contribution margin ratio.......................... 75%

Degree of operating leverage.................... 4

What is the expected total fixed expenses to be next year?

- 225,000

Data concerning H Corporation's single product appear below:

Per Unit

Selling price......................P140

Variable expenses.............. 28

Contribution margin.......... P112

The company is currently selling 8,000 units per month. Fixed expenses are P719,000 per month.
The marketing manager believes that a P20,000 increase in the monthly advertising budget
would result in an increase in unit sales and P160 increase in monthly operating income. How
many additional units would have to be sold by the company to achieve the objective?

- 180 units
H Corporation manufactures and sells two products: A and B. The operating results of the
company are as follows:

Product A Product B

Sales in unit 2,000 3,000

Sales price per unit P10 P5

Variable costs per unit 7 3

In addition, the company incurred total fixed costs in the amount of P9,000.

How many units of B would the company have needed to sell to produce a profit of P12,000?

- 5,250 units

These are available for H Corporation's single product:

Per Unit

Selling price......................P200

Variable expenses..............40

Contribution margin..........P160

Fixed expenses are P531,000 per month. The company is currently selling 4,000 units per month.
The marketing manager would like to cut the selling price by P14 and increase the advertising
budget by P35,000 per month. The marketing manager predicts that these two changes would
increase monthly sales by 500 units. What should be the overall effect on the company's monthly
net operating income of this change?

- decrease of P18,000

The following is H Company's contribution format income statement last month:

Sales (12,000 units) ...........P600,000

Variable expenses..............375,000

Contribution margin..........225,000

Fixed expenses..................150,000
Net operating income........P 75,000

How many units may unit sales decrease without incurring a loss?

- 4,000 units

Next year, H Co, a single product company, expects to sell 9,000 jars of miracle glaze. The Co is
budgeting the following operating results for next year:

Sales..................................P450,000

Variable expenses..............135,000

Contribution margin..........315,000

Fixed expenses..................252,000

Net operating income........P 63,000

What would be total sales have to be next year in order to increase its projected net operating
income by 25%?

- 472,500

The A Co fixed cost and expenses are P30,000. Estimated sales during an economic down-turn
amount to P24,000 for 800 units, while the break-even point was determined to be 2,500 units.

In view of the present situation, the company plans to stop operations temporarily. If this will
materialize, fixed cost and expenses are expected to go down by P15,000. However, inasmuch as
the plant facilities will be idle, additional cost of maintenance and security of P1,600 and P2,000,
respectively, have to be incurred. If actual sales were P30,000 (constant prices and costs), which
would be greater, loss from continuing operation or loss during a shutdown?

- Shutdown, P 600

A Company manufactures electric carpentry tools. The production department had met all
production requirements for the current month and has an opportunity to produce additional units
of product with its excess capacity. Unit selling prices and unit costs for three different drill
models are as follows:

Basic Model Deluxe Model Advanced Model

Selling price P58 P65 P80

Direct material 16 20 19

Direct labor

(P10 per hour) 10 15 20

Variable overhead 8 12 16

Fixed overhead

(P 5.00 per MH) 16 5 15

Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is applied
on the basis of machine hours. There is sufficient demand for the additional production of any
model in the production line. If it has excess machine capacity but a limited amount of labor
time, which product or products should A Company devote its excess production?

- Basic Model only

Due to the ongoing pandemic, the A Corp. incurred significant losses by the end of the third
quarter of the current year. Management is seriously considering a temporary shutdown of
activities this coming fourth quarter to avoid further losses with the hope that things will be
better at the start of next year.

Monthly fixed overhead and fixed selling general expenses were determined to be P120,000 and
P 60,000 respectively. Average monthly sales prior to these difficult months were 12,000 units,
however for the entire fourth quarter, it was projected to a very low level of only 3,000 units.
The company’s sole product sells at P140.00, with variable costs to produce and sell of P
80.00. If the company will decide to stop operations temporarily, only 60% of the fixed
overhead will continue and 30% of the fixed selling and administrative costs will be saved.

Additional maintenance shutdown costs of P 20,000 monthly will also be incurred.

- 138,000

A Corp. produces three products: X, Y, and Z. A machine is used to produce the contribution
margins, sales demands, and time on the machine (in minutes) are as follows:

Product Demand CM/unit Time required/unit

X 120 P20 5

Y 80 36 10

Z 100 50 15
There are 2000 minutes available on the machine during the week. How many units should be
produced and sold to maximize the weekly contribution? How much is the net avoidable costs in
this temporary shutdown problem?

- 120 units of X, 80 units of Y, and 40 units of Z.

A Company makes four products in a single facility. Data concerning these products appear
below:

Product A Product B Product C Product D

Selling price per unit P38.50 P33.80 P37.70 P38.60

Variable manufacturing cost per unit P22.10 P19.50 P23.20 P25.70

Variable selling cost per unit P3.00 P2.90 P3.50 P1.10

Milling machine minutes per unit 3.20 3.00 2.50 3.00

Monthly demand in units 2,000 1,000 3,000 1,000

The milling machines are potentially the constraint in the production facility. A total of 17,000
minutes is available per month on these machines.

The company has made the best use of the existing milling machine capacity and is willing to
pay for extra milling minutes for the opportunity cost coming from the least profitable product
line. Up to how much should the company be willing to pay for one additional minute of milling
machine time? (Round off to the nearest whole cent.)

- P 3.80

A Company has 15,000 units in inventory that had a production cost of P3 per unit. These units
cannot be sold through normal channels due to a significant technology change. These units
could be reworked at a total cost of P23,000 and sold for P28,000. Another alternative is to sell
the units to a junk dealer for P8,500. The relevant cost for A to consider in making its decision is

- P23,000 for reworking the units

A Company makes three products: incy, sony, and lou. The following data are available:

INCY SONY LOU

Unit sales price P 9.00 P 6.00 P5.00

Variable cost 3.00 1.50 1.00

Number of machine hours to produce 3 3 4

A is experiencing a bottleneck in one of its machine hours processes that affects each product
line.

What price for Lou would equate its profitability to that of Sony?

- 7.00

A Company uses the variable cost concept of applying the cost-plus approach to product pricing.
The costs and expenses of producing and selling 75,000 units of Product M are as follows:

Variable costs/unit:

Direct materials Php 7.00

Direct labor 3.50

Factory overhead 1.50

Selling and administrative expenses 3.00

Total Php 15.00

Fixed costs in total:

Factory overhead Php 45,000

Selling and administrative expenses 20,000

Considering that A desires a profit equal to a 18% rate of return on invested assets of
Php1,440,000.

If the company will shift to cost plus pricing based on absorption costs, what is the percentage of
mark-up to be applied by A?

- 53%
A, Inc., which manufactures various lines of computer equipment, is planning to introduce a new
line of laptops. Current plans call for the production and sale of 1,000 units, with estimated
production costs as follows:

Variable costs:

Manufacturing P450,000

Selling and administrative 100,000

Total variable costs P 550,000

Fixed costs:

Manufacturing P300,000

Selling and administrative 180,000

Total fixed costs 480,000

Total costs P1,030,000

The average amount of capital invested in the laptop product line is P900,000 and A's target
return on investment is 18%.

If A uses cost-plus pricing based on absorption cost, the markup percentage the company must
use would be:

- 58.93%

A Mfg. Corp. has 300 units of obsolete inventory costing P20 per unit. Variable and fixed
operating expenses are P4 per unit and P10,000 per annum, respectively. The company has the
option to (a) sell the goods to a jobber for P 5.00 each (b) recycle them at a cost of P5 per unit
and subsequently sell them for P10 each. Using relevant method and if the goods can be sold to a
jobber for P6.00 per unit, how much must be the opportunity cost of choosing the better
alternative?

- P 1,500

The most profitable use of a resource that has limited capacity and is needed in the production of
more than one product is a function of which of the following?

I. The number of units of each product the company can sell.

II. The contribution margin of each product.

III. The amount of resource-use required for each unit of each product.

- I, II and III

There are a number of limiting factors or constraints that determine the quantity and nature of
output that a producer is able to achieve within a given time period. Which of the following
is/are not expected to relax a constraint?

I. Outsourcing all or part of the bottleneck operation

II. Working overtime at the bottleneck operation

III. Retraining employees and shifting them from the bottleneck

- III only

A. Corporation manufactures five different products. All five of these products must pass
through a stamping machine in its fabrication department. The company has the capacity to
manufacture demand for its product. A would make the most profit if it produces the product
that:

- generates the highest contribution margin per unit

The total demand for product A is relevant to a decision about___

I. the best use of a resource that is in limited supply and is used in the production of Product A
and one other of the company's products.

II. whether to sell Product A, a joint product, at split-off or process it further into another salable
product.

III. replacing Product A with another product.

- I, II and III

Consider the following, which of these is/are TRUE?

I. When a company has a production constraint, total contribution margin will be maximized by
emphasizing the products with the highest contribution margin per unit of the constrained
resource.

II. Eliminating nonproductive time is particularly important in a bottleneck operation.

III. One way to increase the effective utilization of a bottleneck is to reduce the number of
defective units.

- I, II and III

Target costing makes reference to the competitive market and is fundamentally customer-
focused. Which of the following features is typically absent in target costing?

- An approach that begins with the determination of a product or service's cost.

Which of these is/are incorrect about obsolete inventories?

- When inventory items become obsolete, the reality is that their realizable value is
significantly higher than their cost.

A company that is operating at full capacity should emphasize those products and services that
have the:

- highest contribution margin per unit of scarce resource.

Which of the following is/are false about a temporary shutdown?

I. A shutdown point can apply to all of the operations a business participates in or just a portion
of its operations.

II. The shutdown point does not consider unavoidable fixed costs as relevant in its analysis.

III. At the shutdown point, there is no economic benefit to continuing production.

IV. Contribution margin of continuing operation is avoidable cost of a temporary shutdown.

- IV only

A Company uses cost-plus pricing and has calculated total variable manufacturing cost, total
absorption manufacturing cost, total variable costs, and total cost for one of its products. Which
of these costs would be the smallest?

- Total variable manufacturing cost

T Division of the A Company has the following statistics for its most recent operations:
Sales P 4,000,000
Assets available for use (Book Value) P2,000,000
T Division's return on investment 25%
T Division's residual income 200,000
Return on investment (entire A Company) 20%

If the asset turnover of the T Division will decrease to 1.5 times, the ROI will
- decrease by 25%

The W Division of S Corporation produces "bales" of steel wire that are used in various
commercial applications. The bales sell for an average of P20 each and The W Division has the
capacity to produce 10,000 bales per month. The P Division of S Corporation uses approximately
2,000 bales of steel wire each month in its production of various appliances. The operating
information for the W Division at its present level of operations (8,000 bales per month) follows:

Sales (all external) P160,000

Variable costs per bale:
Production P5
Selling P2
G&A P3
Fixed costs per bale (based on a 10,000-unit capacity):
Production P2
Selling P3
G&A P4
The P Division currently pays P15 per bale for wire obtained from its external supplier.
If P Division agrees to pay the W Division P16 for 2,000 bales this month, what would be the
change in corporate total profits?
- P 10,000 Increase

Division A makes a part that it sells to customers outside of the company. Data concerning this
part appear below:
Selling price to outside customers P40
Variable cost per unit........... P30
Total fixed costs................ P10,000
Capacity in units................ 20,000
Division B of the same company would like to use the part manufactured by Division A in one of
its products. Division B currently purchases a similar part made by an outside company for P38
per unit and would substitute the part made by Division A. Division B requires 5,000 units of the
part each period. Division A is already selling all of the units it can produce to outside
customers. If Division A sells to Division B rather than to outside customers, the variable cost
per unit would be P1 lower. What is the lowest acceptable transfer price from the standpoint of
the selling division?
- P 39

T Division of the A Company has the following statistics for its most recent operations:
Sales P 4,000,000
Assets available for use (Book Value) P2,000,000
T Division's return on investment 25%
T Division's residual income 200,000
Return on investment (entire A Company) 20%
If the asset turnover of the T Division will decrease to 1.5 times, the ROI will
- decrease by 25%

The W Division of S Corporation produces "bales" of steel wire that are used in various
commercial applications. The bales sell for an average of P20 each and The W Division has the
capacity to produce 10,000 bales per month. The P Division of S Corporation uses approximately
2,000 bales of steel wire each month in its production of various appliances. The operating
information for the W Division at its present level of operations (8,000 bales per month) follows:

Sales (all external) P160,000

Variable costs per bale:
Production P5
Selling P2
G&A P3
Fixed costs per bale (based on a 10,000-unit capacity):

Production P2
Selling P3
G&A P4

The P Division currently pays P15 per bale for wire obtained from its external supplier.
If P Division agrees to pay the W Division P16 for 2,000 bales this month, what would be the
change in corporate total profits?
- P 10,000 Increase

Division A makes a part that it sells to customers outside of the company. Data concerning this
part appear below:
Selling price to outside customers P40
Variable cost per unit........... P30
Total fixed costs................ P10,000
Capacity in units................ 20,000
Division B of the same company would like to use the part manufactured by Division A in one of
its products. Division B currently purchases a similar part made by an outside company for P38
per unit and would substitute the part made by Division A. Division B requires 5,000 units of the
part each period. Division A is already selling all of the units it can produce to outside
customers. If Division A sells to Division B rather than to outside customers, the variable cost
per unit would be P1 lower. What is the lowest acceptable transfer price from the standpoint of
the selling division?
- P 39
The S Division of A Products Company is considering an investment in a new project. The
project has an estimated cost of P1,000,000. If A Products Company has a minimum rate of
return of 12%, this project will generate P150,000 of residual income and a profit margin of
15%. How much will be the number of sales?
- P 1,800,000
A Co. has established a target rate of return of 16% for all divisions. For the most recent year,
Division D generated sales of P10,000,000 and expenses of P7,500,000. Total assets at the
beginning of the year were P5,000,000 and total assets at the end of the year were P7,000,000 or
an average of P 6,000,000 for the year. If the company is striving to increase the ROI to fifty
percent (assume no effect on costs), the number of sales should
- Increase by 5%

The D Division of A Company had the following financial data for the year:

Assets available for use P1,000,000 Book Value

P1,500,000 Market Value
Residual income P100,000
Return on investment 15%
What was the minimum rate of return of A Company?
- 5%

The following information is given for A Division of F Corporation.

A
Sales P600,000
Var. cost of goods sold 200,000
Fixed manufacturing costs 50,000
Variable selling 30,000
Fixed admin. (50% allocated) 20,000
Fixed selling (20% allocated) 50,000
Assets at cost 800,000
Accumulated depreciation 200,000
Using the principles of responsibility accounting, the ROI of A Division is near to?
- 34%
Product A, which is produced by the Parts Division of B Corporation, sells for P14.25 on the
outside market. The costs to make Product A as recorded by the company's cost accounting
system are:

Direct materials.................P7.25
Direct labor.....................2.25
Variable manufacturing overhead.1.50
Fixed manufacturing overhead....2.50

The Assembly Division of B Corporation requires a part much like Product A to make one of its
products. The Assembly Division can buy 1,000 units of this part from an outside supplier for
P14.15. However, the Assembly Division could use Product A instead of this part purchased
from an outside supplier. The Parts division has sufficient capacity to produce Product A. If the
transfer of 1,000 units will materialize using the minimum transfer price, what is the overall
effect of this transfer on corporate profits?
- Increase of P 3,150

Assume that A Division has a product that can be sold either to outside customers on an
intermediate market or to F Division of the same company for use in its production process. The
managers of the division are evaluated based on their divisional profits.
A Division:
Capacity in units: 200,000
Number of units being sold on the intermediate market: 150,000
Selling price per unit on the intermediate market: P90
Variables costs per unit P70
(Including P3 of avoidable selling expense for internal sales)
Fixed costs per unit (based on capacity) 13

F Division:
Number of units needed for production: 70,000
Purchase price per unit now being paid to an outside supplier: P86
If the divisions will agree to the transfer of 70,000 units, the appropriate transfer price is nearest
to:
- P73
A Co. operates two Divisions: Usual and Special. The results of operations for last year follow.

Usual Special Total

Units P10,000 P3,700 P13,700
Sales P240,000 P740,000 P980,000
Cost of goods sold P180,000 P481,000 P661,000
Gross margin P60,000 P259,000 P319,000
Selling expenses P60,000 P134,000 P194,000
Oper. Income P0 P125,000 P125,000

Fixed manufacturing costs included in cost of goods sold amount to P3 per unit for Usual and
P20 per unit for Special. Variable selling expenses are P4 per unit for Usual and P20 per unit for
Special; remaining selling amounts are fixed.
A Co wants to close the Usual Division. If the plan will materialize, company-wide fixed
manufacturing costs would fall by 20% because there is no alternative use of the facilities. What
would be the impact on operating income if Usual is dropped?
- 29,200 decrease

Which of the following is/are false?

I. In computing a transfer price, the maximum price should be no higher than the highest market
price at which the buying segment can obtain the good or service externally.
II. Sub-optimization occurs when a manager of a cost center focuses on the goals of the cost
center rather than on the goals of the organization as a whole.
III. The style of management where there is transfer of authority, responsibility, and decision-
making rights from the top to the bottom of an organization is referred to as decentralization
- I only
Transfer pricing occurs when goods or services are exchanged between divisions of the same
company. It is primarily applied in
- decentralized organizations

Controllable costs are costs that

- are likely to respond to the amount of attention devoted to them by a specified manager.

The objective of responsibility accounting is to assist in the planning and control of a company's
responsibility centers. Which of the following is critically important for a responsibility
accounting system to be effective?
- Each manager should know the criteria used for evaluating his or her performance.

In a decentralized company in which divisions may buy goods from one another, the transfer
pricing system should be designed primarily to
- aid in the appraisal and motivation of managerial performance.

The general rule in establishing transfer prices consistent with economic decision making is the
- differential cost-plus opportunity cost if goods are transferred internally.

Return on investment (ROI) is a performance measure used to evaluate the efficiency or

profitability of an investment or compare the efficiency of a number of different investments.
Assuming that sales and net income remain the same, a company’s return on investment will
- Decrease if the invested capital-employed turnover rate decreases

A company may consider using variable costs in transfer pricing when there is
- excess capacity because fixed costs would stay the same

Which of these is/are TRUE?

I. When using a market-based transfer price, a decision must be made which market price to use.
II. When using a market-based transfer price, a decision must be made how price disputes will be
handled.
III. When using a negotiated transfer price, a determination must be made if comparable
substitutes are available externally.
- I and III only

Which of the following is a consistently desirable characteristic in a transfer pricing system?

- system should reflect goal congruence

The following information relates to the A Co:

Interest rate on debt capital: 8%
Cost of equity capital: 12%
Book value of debt capital P 65 million
Market value of debt capital: P50 million
Book value of equity capital P 75 million
Market value of equity capital: P80 million
Income tax rate: 30%
On the basis of this information, weighted-average cost of capital is:
- 9.5%

A company is considering a machine that will cost P50,000, and that can be sold after 3 years for
P10,000. P12,000 must be invested in inventories and receivables; these funds will be recovered
when the operation is closed at the end of Year 3. The facility will produce sales revenues of
P50,000 per year for 3 years and variable operating costs (excluding depreciation) will be 40
percent of sales. No fixed costs will be incurred. The machine will have depreciation expenses
of P40,000, P5,000, and P5,000 in Years 1, 2, and 3, respectively. The company has a 40 percent
tax rate. How much would be cash flow net of tax at the end of year 2?
- 20,000

A Company is considering the purchase of a machine that promises to reduce operating costs by
equal amounts every year of its 6-year useful life. The machine will cost P840,000 and has no
salvage value. The machine has an after-tax cash flow of P 252,555. A Company is subject to
40% income tax rate.
The approximate annual cash flow before tax is closest to:
- 327,592

In December of the previous year, A Co company paid P 1.20 cash dividend on its common
stock. Company stock sells at P 45, with estimated 10% floatation costs on new issues.
Dividends are expected to grow at eight percent. The Company’s long-term debt is 1/3 of total
assets and the net of tax cost of debt is 9 percent. Tax rate is 35%. What is cost of retained
earnings for A Co?
- 10.88%

A Co plans to purchase P1.5 million of equipment for its production process. The equipment
will have a P300,000 salvage value and will be depreciated over a six-year service life by the
straight-line method. The company is subject to a 40% income tax rate.
The company's accountant is about to perform an analysis of cash flows, assuming a 12% after-
tax hurdle rate. Determine the cash flow that would be reflected in the analysis in year 6,
assuming that A sells the equipment for only P250,000 because of a recent change in market
conditions.
- 270,000

A Company is considering replacing a machine with a book value of P200,000, a remaining

useful life of 4 years, and annual straight-line depreciation of P50,000. The existing machine has
a current market value of P175,000. The replacement machine would cost P320,000, have a 4-
year life, and save P100,000 per year in cash operating costs. The replacement machine would be
depreciated using the straight-line method. The analysis prepared by the finance officer reflected
an after-tax cash inflow of P 73,400. What is the prevailing income tax rate?
- 38%

A Company has the opportunity to introduce a new product. A expects the product to sell for
P75 with variable cost per unit of P50. The annual fixed costs, excluding the amount of
depreciation is P4,500,000. The company expects to sell 300,000 units. To produce the new
product line, the company needs to purchase a new machine that costs P6,000,000. The new
machine is expected to last for four years with a very negligible salvage value. The company has
a policy of depreciating its machine for both book and tax purposes for four years. The company
has a marginal cost of capital of 13.75 percent and is subject to tax rate of 40 percent. If the
machine will be acquired, how much would be the annual tax savings from fixed costs for A Co?
- 2,400,000
In December of the previous year, A Co company paid P 1.20 cash dividend on its common
stock. Company stock sells at P 45, with estimated 10% floatation costs on new issues.
Dividends are expected to grow at eight percent. The Company’s long-term debt is 1/3 of total
assets and the net of tax cost of debt is 9 percent. Tax rate is 35%. A Company's WACC is
nearest to
- 10.25%
A Co plans to purchase P1.5 million of equipment for its production process. The equipment
will have a P300,000 salvage value and will be depreciated over a six-year service life by the
straight-line method. The company is subject to a 40% income tax rate.
The company's accountant is about to perform an analysis of cash flows, assuming a 12% after-
tax hurdle rate. Determine the cash flow for this analysis at the end of year 2.
- 80,000
A Co is considering an investment in a computer that is capable of producing various images that
are useful in the production of commercial art. The computer would cost P20,000 and have an
expected life of eight years. The computer is expected to generate additional annual net cash
receipts (before-tax) of P6,000 per year. The computer will be depreciated according to the
straight-line method and the firm's marginal tax rate is 25 percent. How much is after tax cash
flows from this asset?
- 5,125
The X company sells crushed stone to government contractors as well as to small business
owners involved in construction business. The company needs to replace an old equipment with
a new one. The new equipment can increase production as well as improve the quality of crushed
stone. The information about annual incremental revenues and costs associated with the new
equipment is given below:

Sales P450,000
Variable Costs P270,000
Contribution Margin P180,000

Fixed costs
Salaries P 80,000
Maintenance 10,000
Depreciation 30,000 P120,000
Net Operating Income P60,000

The new equipment would cost P300,000 and the old equipment can be sold to a small company
for its salvage value of P15,000. The salvage value of the new asset is estimated to be P 100,000
at the end of year 1 and to decrease by P 25,000 each year. The PB bailout period is near to
- 2.6 years

The X Corporation is considering the acquisition of a new machine. The machine can be
purchased for P90,000; it will cost P6,000 to transport to X's plant and P9,000 to install. It is
estimated that the machine will last 10 years, and it is expected to have an estimated salvage
value of P5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year
with a selling price of P500 and combined material and labor costs of P450 per unit. BIR
regulations permit machines of this type to be depreciated using the straight-line method over 5
years with no estimated salvage value. X has a marginal tax rate of thirty percent. What is the net
cash flow for the tenth year of the project that X Corporation should use in a capital budgeting
analysis?
- 73,500

Assume that X Co is considering investing in a project with the following characteristics:

Initial investment P500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Salvage value of investment 50,000
Cost of capital 10%
Present value of P1 received after 5 years discounted at 10% .621
Present value of an ordinary annuity of P1 for 5 years at 10% 3.791
Marginal tax rate 30%
Investment life 5 years
Assume that all cash flows come at the end of the year.
What is total net of tax cash flows in year 5 if the asset will be sold for P 40,000?
- 178,000
X Co has a cost of capital of 15% and is considering the acquisition of a new machine which
costs P450,000 and has a useful life of 5 years. X projects that earnings and cash flow will
increase as follows:

Net After-Ta
Year Earnings Cash Flow
---- -------- ---------
1 P100,000 P160,000
2 100,000 140,00
3 100,000 100,00
4 100,000 100,000
5 200,000 100,000

15% Interest Rate Factors

--------------------------------
Present Present Value of
Period Value of P1 an Annuity of P
------ ----------- ----------------
1 0.87 0.87
2 0.76 1.63
3 0.66 2.29
4 0.57 2.86
5 0.50 3.36
What is the payback period of this investment?
- 3.5 years
What is the bailout payback period of this investment?
- 2.7 years
The X Company acquired an equipment to reduce costs in one of its plants in in Cebu City.
Relevant data relating to the equipment follow:

Purchase cost of the equipment P432,000

Annual cost savings of the new equipment: 90,000
Life of the equipment 12 years
Additional Working capital required P 80,000
What is the accounting rate of return based on average investment?
- 18.2%

X Corporation recently purchased a P1,200,000 asset that has a three-year service life and no
salvage value. The company is subject to a 30% income tax rate and employs a 12% after-tax
hurdle rate in capital investment decisions. Management is studying whether to depreciate the
asset by using the straight-line method or the BIR approved accelerated method, with the
following rates in effect: year 1, 33%; year 2, 45%; year 3, 15%; and year 4, 7%.
How much is the difference in tax savings between the two methods of depreciation in year 4?
- 25,200

X Company is considering an investment in a new plant which will entail an immediate capital
expenditure of P4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to
zero salvage value. Operating income (before depreciation and taxes) is expected to be P800,000
per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that
there are no taxes. Assume that the asset can be sold for P100,000 at the end of ten years and that
additional working capital of P 200,000 is needed to support its operation. The accounting) rate
of return base on average investment is near to
- 18%

Your company is considering a machine that will cost P1,000 and can be sold after 3 years for
P100. To operate the machine, P200 must be invested in inventories; these funds will be
recovered when the machine is retired at the end of Year 3. The machine will produce sales
revenues of P900 per year for 3 years and variable operating costs (excluding depreciation) will
be 50 percent of sales. The machine will have depreciation expenses of P500, P300, and P200 in
Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income
from other assets to enable it to get a tax refund from this project if the project’s income is
negative, and a 10 percent cost of capital.
How much is total net of tax cash flows, including terminal values at the end of year 3?
- 610
(Ignore income taxes in this problem.) The X Corporation is investigating purchasing equipment
that would increase sales revenues by P269,000 per year and cash operating expenses by
P156,000 per year. The equipment will have a 6-year life with no salvage value. If the simple
rate of return is 25%, how much the net investment?
- 256,000
(Ignore income taxes in this problem.) X Corporation is considering the purchase of a machine
that would cost P130,000 and would last for 6 years. At the end of 6 years, the machine would
have a salvage value of P18,000. By reducing labor and other operating costs, the machine would
provide annual cost savings of P44,000. The company requires a minimum pretax return of 19%
on all investment projects.
The net present value of the proposed project is closest to
- 26,376
The profitability index of the proposed project is closest to
- 1.2

Assume that X Co is considering investing in a project with the following characteristics:

Initial investment P500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Salvage value of investment 50,000
Cost of capital 10%
Present value of P1 received after 5 years discounted at 10% .621
Present value of an ordinary annuity of P1 for 5 years at 10% 3.791
Marginal tax rate 30%
Investment life 5 years
Assume that all cash flows come at the end of the year.

The discounted total cash flow from working capital is

- 3,790 outflow

X Co with an 18% cost of capital is considering the following projects (on January 1, year 1)
Jan 1, (Year 1) Dec 31, (Year 5)
Cash Outflow Cash Inflow Project Internal
(000's Omitted) (000's Omitted) Rate of Return
----------------- ------------------- ----------------
Project A P3,500 P7,400 ?
Project B 4,000 9,950 ?
Cash inflow from the projects will be received at the end of the 5th year.
Present Value of P1 Due at the End of "N" Periods
--------------------------------------------------
N 12% 14% 15% 16% 18% 20% 22%
- ----- ----- ----- ----- ----- ----- -----
4 .6355 .5921 .5718 .5523 .5158 .4823 .4230
5 .5674 .5194 .4972 .4761 .4371 .4019 .3411
6 .5066 .4556 .4323 .4104 .3704 .3349 .2751

The internal rate of return of Project A is near to

- 16%
Using the net-present-value (NPV) method, project A's net present value is
- (265,460)
X Company has gathered the following data on a proposed investment project:

Investment required in equipment......P240,000

Annual cash inflows..........................P50,000
Salvage value...................................P0
Life of the investment........................8 years
Required rate of return......................10%
The internal rate of return is
- 13%

X Co plans to replace one of its machines with a new efficient one. The old machine has a net
book value of P120,000 with remaining economic life of 4 years. This old machine can be sold
for P80,000. If the new machine were acquired, the cash operating expenses will be reduced
from P240,000 to P160,000 for each of the four years, the expected economic life of the new
machine. The new machine will cost X a cash payment to the dealer of P300,000. The company
is subject to forty percent tax and for this kind of investment, a marginal cost of capital of 9
percent. The present value of annuity of 1 and the present value of 1 for 4 periods using 9
percent are 3.23972 and 0.70843, respectively.
The present value of all future net cash flows will be
- 213,822

X Company's financial staff has been requested to review a proposed investment in new capital
equipment. Applicable financial data is presented below. There will be no salvage value at the
end of the investment's life and, due to realistic depreciation practices, it is estimated that the
salvage value and net book value are equal at the end of each year. All cash flows are assumed to
take place at the end of each year. For investment proposals, X uses a 12% after-tax target rate of
return.
 Investment Proposal
Purchase Cost Annual Net Annual
Year and Book Value After-Tax Cash Flows Net Income
---- -------------- -------------------- ----------
0 P250,000 P 0 P 0
1 168,000 120,000 35,000
2 100,000 108,000 39,000
3 50,000 96,000 43,000
4 18,000 84,000 47,000
5 0 72,000 51,000
Discounted Factors for a 12% Rate of Return
Present Value of a
Present Value of P1.00 Annuity of P1.00
Received at the End Received at the
Year of Each Period End of Each Period
---- ---------------------- -------------------
1 .89 .89
2 .80 1.69
3 .71 2.40
4 .64 3.04
5 .57 3.61
6 .51 4.12

The discounted payback period is

- 2.83 years
Considering the cost of capital, the average annual cash inflows at which X would recover the
amount of investment (indifference cash flows) is
- 38,321
X company is considering a machine that will cost P50,000 at Time 0 and that can be sold after 3
years for P10,000. P12,000 must be invested at Time 0 in inventories and receivables; these
funds will be recovered when the operation is closed at the end of Year 3. The facility will
produce sales revenues of P50,000 per year for 3 years and variable operating costs (excluding
depreciation) will be 40 percent of sales. No fixed costs will be incurred. Operating cash inflows
will begin 1 year from today (at t = 1). BIR allows the machine to have depreciation expenses of
P40,000, P5,000, and P5,000 in Years 1, 2, and 3, respectively. The company has a 40 percent
tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if
the project’s income is negative, and a 15 percent cost of capital.
What is the discounted net of tax cash flows of year 3?
- 25,000