IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 211:

  In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Gunning

  Industries:

  The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.

  The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs include $30 per unit in variable costs and total fixed costs of $40,000 per year.

  The investment in the new machine will require an immediate increase in working capital of $35,000. This cash outflow will be recovered after 5 years.

  Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value.

  Gunning is subject to a 40% corporate income tax rate. Gunning uses the net present value method to analyze investments and will employ the following factors and rates:

  

  Gunning Industries' net cash outflow in a capital budgeting decision is

  A. $190,000
  B. $195,000
  C. $204,525
  D. $225,000
  D. $225,000

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  Explanation

  The machine costs $160,000 and will require $30,000 to install and test. In addition, the company will have to invest in $35,000 of working capital to support the production of the new machine. Thus, the total investment necessary is $225,000.

• Question 212:

  Structural considerations affecting the threat of substitutes include all of the following expect

  A. Relative prices
  B. Brand identity
  C. Cost of switching to substitutes.
  D. Customers' inclination to use a substitute.
  B. Brand identity

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  Explanation

  Substitutes are types of goods and service that serve the same purpose. All products that can replace a good or service should be considered substitutes. For example, bicycles and cars are substitutes for public transportation. Structural considerations determine the effect substitutes have on one another. However, because substitutes are types (not brands) of goods and services that have the same purposes, brand identity is not a structural consideration affecting the threat of substitutes.

• Question 213:

  The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified the four sources of funds given below.

  1. Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

  2. Borrow $110,000 from a bank at 12% interest. A 9% compensating balance would be required.

  3. Issue $110,000 of 6-month commercial paper to net $100,000 (New paper would be issued every 6 months.)

  4. Borrow $125000 from a bank on a discount basis at 20%. No compensating balance would be required.

  Assume a 360-day year in all of your calculations. The cost of Alternative 3. to Frame Supply Company is

  A. 9.1%
  B. 10.0%
  C. 18.2%
  D. 20.0%
  D. 20.0%

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  Explanation

  By issuing commercial paper, the company will receive $100,000 and repay $110,000 every six months. Thus, for the use of $100,000 in funds, the company pays $10,000 in interest each six-month period, or a total of $20,000 per year. The annual percentage rate is therefore 20% ($20,000 ?$100000).

• Question 214:

  In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as

  A. Factory management costs.
  B. General office costs.
  C. Avoidable fixed costs.
  D. Depreciation costs.
  C. Avoidable fixed costs.

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  Explanation

  The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed costs will not be incurred if the "buy" decision is selected.

• Question 215:

  Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.

  

  Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two4hirds fixed. Scott Supply, one of Leland's reliable vendors. has offered to supply Part Number KJ37 at a unit price of $15,000.If Leland purchases the KJ37 units from Scott, the capacity Leland used to manufacture these parts would be idle. Should Leland decide to purchase the parts from Scott, the unit cost of KJ37 would

  A. Increase by $4,800.
  B. Decrease by $6,200.
  C. Decrease by $3,200.
  D. Change by some amount other than those given.
  A. Increase by $4,800.

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  Explanation

  In addition to the $15,000 purchase price, the company would still incur $8,000 per unit of unavoidable (fixed) manufacturing overhead (2/3 of $12,000). The materials handling charge of 20% of the purchase price of components would add another $3,000 per unit ($15,000 x .2). Therefore the unit cost of purchase would be $26,000 )$15,000 +$8,000 + $3,000), which is $4,800 more than the current cost to manufacture.

• Question 216:

  When a company desires to increase the market value per share of common stock, the company will implement

  A. The sale of treasury stock.
  B. A reverse stock split.
  C. The sale of preferred stock.
  D. A stock split.
  B. A reverse stock split.

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  Explanation

  A reverse stock split decreases the number of shares outstanding, thereby increasing the market price per share. A reverse stock split may be desirable when a stock is selling at such a low price that management is concerned that investors will avoid the stock because it has an undesirable image.

• Question 217:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  The accounting rate of return based on the average investment is

  A. 84. 9%
  B. 344%
  C. 40.8%
  D. 12%
  B. 344%

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  Explanation

  The accounting rate of return (the unadjusted rate of return or rate of return on the carrying amount) equals the increase in accounting net income divided by either the initial or the average investment. It ignores the time value of money. The average income over 5 years is $86,000 [($70,000 + $78,000 + $86,000 + $94000 + $102,000) + 5] Dividing the $86,000 average net income by the $250,000 average investment ($500,000 cost + 2) produces an accounting rate of return of 34. 4%.

• Question 218:

  The total sales revenue at which Siberian Ski Company would make the same profit or loss regardless of the ski model it decided to produce is

  A. $880000
  B. $422400
  C. $924000
  D. $686. 400
  B. $422400

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  Explanation

• Question 219:

  Governments restrict trade to

  I-. Help foster new industries.

  II-. Protect declining industries.

  Ill-. Increase tax revenues.

  A. lon'.
  B. land II only.
  C. II and Ill only.
  D. I, II, and Ill.
  D. I, II, and Ill.

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  Explanation

  Governmental impediments to global competition are generally imposed for the announced purpose of protecting local firms and jobs and developing new industries. They also may have the effect of raising revenue. Examples of impediments are tariffs; duties; quotas; domestic content rules; preferences for local firms regarding procurement, taxes, RandD, labor regulations, and other operating rules; and laws (e.g., anti-bribery or tax) enacted by a national government that impede national firms from competing globally. These impediments are most belly when industries are `iewed as crucial

• Question 220:

  A distribution channel

  A. May consist only of a producer and an ultimate customer
  B. Performs sales and goods delivery functions only.
  C. Is chosen after other marketing policies are determined.
  D. Performs functions that involve only forward flows of activities
  A. May consist only of a producer and an ultimate customer

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  Explanation

  Direct marketing (a zero-level channel) is the simplest distribution channel. Because direct marketing emanates all intermediaries, it consists only of a producer and an ultimate customer