IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 1031:

  The technique used to evaluate all possible capital projects of different dollar amounts and then rank them according to their desirability is the

  A. Profitability index method.
  B. Net present value method.
  C. Payback method.
  D. Discounted cash flow method.
  A. Profitability index method.

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  Explanation

  The profitability index is the ratio of the present value of future net cash inflows to the initial cash investment; that is, the figures are those used to calculate the net present value (NPV), but the numbers are divided rather than subtracted. This variation of the NPV method facilitates comparison of different-sized investments. It provides an optimal ranking in the absence of capital rationing.

• Question 1032:

  A company that sells its single product for $40 per unit uses cost-volume-profit analysis in its planning. The company's after4ax net income for the past year was $1,188,000 after applying an effective tax rate of 40%. The projected costs for manufacturing and selling its single product in the coming year are in the next column.

  

  The company has learned that a new direct material is available that will increase the quality of its product. The new material will increase the direct material costs by $3 per unit. The company will increase the selling price of the product to $50 per unit and increase its marketing costs by $1 .575,000 to advertise the higher-quality product. The number of units the company has to sell in order to earn a 10% before-tax return on sales would be

  A. 337,500 units.
  B. 346875 units.
  C. 425,000 units.
  D. 478,125 units.
  D. 478,125 units.

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  Explanation

• Question 1033:

  The costs described in situations Ill and V are

  A. Prime costs.
  B. Sunk costs.
  C. Discretionary costs.
  D. Imputed costs.
  B. Sunk costs.

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  Explanation

  A sunk cost is a cost that cannot be avoided because the expenditure has already occurred or an irrevocable decision has been made to incur the cost. Sunk costs are irrelevant to management decision making because they cannot vary with the option selected. Both situations Ill and V represent sunk costs because the costs have already been incurred. Management accountants are frequently asked to analyze various decision situations, including the following:

  I. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. Ill. Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.

  IV.

  The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

  V.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.

• Question 1034:

  Quality control of services should be managed by

  A. Separating the performance of services from their consumptions
  B. Emphasizing customer attraction rather than satisfaction
  C. Standardizing the firm's services
  D. Adopting selective hiring practices and allowing those employees to use judgment in performing services
  C. Standardizing the firm's services

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  Explanation

  Services vary greatly in quality. Accordingly, quality control must be managed effectively by selective hiring, strong training programs, standardizing the firm's services, and researching customer satisfaction

• Question 1035:

  Networking capital is the difference between

  A. Current assets and current liabilities.
  B. Fixed assets and fixed liabilities.
  C. Total assets and total liabilities.
  D. Shareholders' investment and cash.
  A. Current assets and current liabilities.

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  Explanation

  Net working capital is defined by accountants as the difference between current assets and current liabilities. Working capital is a measure of short-term solvency.

• Question 1036:

  A firm produces two joint products (A and B) from one unit of raw material, which costs $1,000. Product A can be sold for $700 and product B can be sold for $500 at the split-off point. Alternatively, both A and/or B can be processed further and sold for $900 and $1 ,200, respectively. The additional processing costs are $100 for A and $750 for B. Should the firm process products A and B beyond the split-off point?

  A. Both A and B should be processed further.
  B. Only B should be processed further.
  C. Only A should be processed further.
  D. Neither product should be processed further.
  C. Only A should be processed further.

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  Explanation

  The incremental costs ($100) for A are less than the incremental revenue ($200). However, the incremental costs of B ($750) exceed the incremental revenue ($700). Consequently, the firm should process A further and sell B at the split-off point.

• Question 1037:

  Delphi Company has developed a new project hat will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacily to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented as follows. Delphi is subject to a40% income tax rate.

  

  The maximum after-tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is

  A. $30,000
  B. $50,000
  C. $110,000
  D. $66,000
  A. $30,000

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  Explanation

• Question 1038:

  Which of the following is true regarding the calculation of a firms cost of capital?

  A. The cost of capital of a firm is the weighted-average cost of its various financing components
  B. All costs should be expressed as pre-tax costs
  C. The time value of money should be excluded from the calculations.
  D. The cost of capital is the cost of equity.
  A. The cost of capital of a firm is the weighted-average cost of its various financing components

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  Explanation

  The cost of capital of a firm is the current, weighted-average, after-tax cost of the firm's various financing components. Historical costs are irrelevant. Rogers. Inc. operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The board of directors recently approved a large-scale remodeling of the restaurant, and the company is now considering two financing alternatives. The first alternative would consist of o Bonds that would have a 9% coupon rate and reissued at their base amount would net $19.2 million after a 4% flotation cost Preferred stock with a stated rate of 6% that would yield $4. 8 million after a 4% flotation cost Common stock that would yield $24 million after a 5% flotation cost o The second alternative would consist of a public offering of bonds that would have an 11% market rate and would net $48 million alter flotation costs. Rogers' current capital structure, which is considered optimal, consists of 40% long-term debt, 10% preferred stock, and 50% common stock. The current market value of the common stock is $30 per share, and the common stock dividend during the past 12 months was $3 per share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%. Rogers is subject to an effective income tax rate of 40%

• Question 1039:

  Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26,000, to determine which product will be more profitable. The results of the study follow.

  

  *Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset. The expected value of Gleason's operating profit directly traceable to the sale of frozen desserts is

  A. $198,250
  B. $150,250
  C. $120,250
  D. Some amount other than those given.
  C. $120,250

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  Explanation

  The expected volume for sales of frozen desserts is 305,000 [(250000 x .30) + (300000 x

  40) + (350,000 x .20) + (400 .000 x .10)]. At $1 .80 each1 the total revenue from 305,000 units would be $549,000. Variable costs would total $1.15 each ($40 + $35 + $40), or $350750 for 305. 000 units. Fixed costs total $78,000 ($48,000 +

  $30000). Thus, operating profit would be $120,250 ($549,000 --$350,750-- $78,000).

• Question 1040:

  Controllable costs

  A. Arise from periodic appropriation decisions and have no well-specified function relating inputs to outputs.
  B. Are primarily subject to the influence of a given manager of a given responsibility center for a given time span.
  C. Arise from having property, plant, and equipment, and a functioning organization.
  D. Result specifically from a clear-cut measured relationship between inputs and outputs.
  B. Are primarily subject to the influence of a given manager of a given responsibility center for a given time span.

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  Explanation

  Controllable costs can be changed by action taken at the appropriate management (responsibility) level. All costs are controllable, but they are controlled at different management levels; e.g., the decision to build another plant is made at a higher level of management than the decision to buy office supplies.