IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 341:

  The profitability index (present value index)

  A. Represents the ratio of the discounted net cash outflows to cash inflows.

  B. Is the relationship between the net discounted cash inflows less the discounted cash outflows divided by the discounted cash outflows.

  C. Is calculated by dividing the discounted profits by the cash outflows.

  D. Is the ratio of the discounted net cash inflows to discounted cash outflows.

  Correct Answer: D

  The profitability index, also known as the excess present value index, is the ratio of the present value of future net cash inflows to the initial net cash investment (discounted cash outflows). This tool is a variation of the NPV method that facilitates comparison of different-sized investments.

• Question 342:

  If an investment project has a profitability index of 1.15,the

  A. Project's internal rate of return is 15%.

  B. Project's cost of capital is greater than its internal rate of return.

  C. Project's internal rate of return exceeds its net present value.

  D. Net present value of the project is positive.

  Correct Answer: D

  The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the NPV method that facilitates comparison of different-sized investments. A profitability index greater than 1.0 indicates a profitable investment or one that has a positive net present value.

• Question 343:

  The profitability index approach to investment analysis

  A. Fails to consider the timing of project cash flows.

  B. Considers only the project's contribution to net income and does not consider cash flow effects.

  C. Always yields the same accept/reject decisions for independent projects as the net present value method.

  D. Always yields the same accept/reject decisions for mutually exclusive projects as the net present value method.

  Correct Answer: C

  The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the net present value (NPV) method and facilitates the comparison of different-sized investments. Because it is based on the NPV method, the profitability index will yield the same decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of different sizes.

• Question 344:

  Barker, Inc. has no capital rationing constraint and is analyzing many independent investment alternatives. Barker should accept all investment proposals

  A. If debt financing is available for them.

  B. That have positive cash flows.

  C. That provide returns greater than the before-tax cost of debt.

  D. That have a positive net present value.

  Correct Answer: D

  A company should accept any investment proposal, unless some are mutually exclusive, that has a positive net present value or an internal rate of return greater than the company's desired rate of return.

• Question 345:

  Specialty Cakes, Inc. produces two types of cakes, a round cake and a heart-shaped cake. Total fixed costs for the firm are $92,000 Variable costs and sales data for these cakes are presented below How many cakes will be required to reach the breakeven point?

  

  A. 8.000 round cakes and 12.000 heart-shaped cakes

  B. 9.000 round cakes and 11.000 heart-shaped cakes

  C. 10.000 round cakes and 10,000 heart-shaped cakes

  D. 23,000 round cakes and 18.400 heart-shaped cakes

  Correct Answer: A

• Question 346:

  The Sommers Company manufactures a vanity of industrial valves. Current', the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120.000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers' pressure valve; however, a fire in Glascow Industries' valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers' product cost, based on current attainable standards, foi the pressure valve is

  

  Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components

  

  What is the minimum unit price that Sommers could accept without reducing net income?

  A. $14

  B. $14.40

  C. $20

  D. $20.40

  Correct Answer: B

  The minimum unit price without reducing net income must cover variable costs plus the additional fixed cost. Therefore, the three variable costs of $5.00 for direct materials, $6.00 for direct labor, and $3.00 for variable overhead are added to the additional fixed cost per unit $40 ($48,000 + 120,000). The total is $14.40.

• Question 347:

  The Sommers Company manufactures a van ely of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment, Management has been approached by Glascow Industries Ltd of Scotland with an offer to buy 120.000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers' pressure valve however, a fire in Glascow industries valve plant has shut down its manufacturing operations. Glascow needs the 120.000 valves over the next 4 months to meet commitments to its regular customers, the company is prepared to pay $19 each for the valves, FOB shipping point. Sommers' product cost, based on current attainable standards, for the pressure valve is

  

  Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour This overhead rate is made up of the following components

  

  What is the incremental profit (loss) before tax associated with the Glascow order?

  A. ($168,000)

  B. ($120,000)

  C. $552,000

  D. $600000

  Correct Answer: C

  The incremental revenue is found by taking the $19 per unit price and multiplying it by the 120,000 units ordered. Then. the variable costs per unit are multiplied by 120.000 to get a $600,000 cost for materials ($5 x 120.000), a $720,000 cost for labor ($6 x 120,000), and a $360,000 cost for overhead ($3 x 120,000). The variable costs are added to the additional fixed overhead cost of $48,000 (4 months x $12,000) to get a total incremental cost of $1,728,000. Then, the total cost is subtracted from the revenue to get an incremental profit before tax of $552,000 ($2,280,000 -- $1,728,000).

• Question 348:

  The Summers Company manufactures a vanity of industrial valves. Current', the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glasgow Industries Ltd. of Scotland

  with an offer to buy 120.000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Summers' pressure valve; however, a fire in Glascow Industries' valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves. FOB shipping point. Summers' product cost, based on current attainable standards. for the pressure valve is

  

  Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour This overhead rate is made up of the following components

  

  How many additional direct Labor hours would be required each month to fill the Glascow order?

  A. 10,000

  B. 15,000

  C. 30,000

  D. 120,000

  Correct Answer: B

  The manufacturing overhead rate is $18 per standard direct labor hour and the standard product cost includes $9 of manufacturing overhead per pressure valve. Accordingly, the standard direct labor hour per finished valve is 112 hour ($9 / $18). Therefore, 30,000 units per month would require 15,000 direct labor hours.

• Question 349:

  Bakker Industries sells three products (Products 611 613. and 615) that it manufactures in a factory consisting of one department Both labor and machine time are applied to the products Bakker's management is planning its production schedule for the next several months. There are labor shortages in the community. Some of the machines will be out of service for extensive overtraining. Available machine and labor time for each of the next 6 months is listed below It Bakker's strategy is to maximize total profits, what is the total contribution?

  

  A. $113.150

  B. $193,500

  C. $215,300

  D. $280.800

  Correct Answer: B

• Question 350:

  Bakker Industries seals three products (Products 611, 613, and 615) that it manufactures in a factory consisting of one department Both labor and machine time are applied to the products. Bakker's management is planning its production schedule for the next several months There are labor shortages in the community. Some of the machines will be out of service for extensive overhauling Available machine and labor time for each of me next 6 months is listed below If Bakker's strategy is to maximize dollar profits, how many units of product 615 will be produced?

  

  A. 400 units

  B. 500 units.

  C. 800 units

  D. 1.000 units.

  Correct Answer: C

  When a company has a scarce resource machine hour capacity, the company should maximize contribution per machine hour to maximize overall profits. Because product 615 has the lowest contribution per machine hour of the three products, product 615 will be produced using the remaining hours after product 613 and product 611 have been produced to equal demand. There fore the 400 hours needed to produce product 613 and the 1,000 hours needed to produce product 611 are subtracted from the 3.000 available machine hours. This leaves a total of 1,600 machine hours for product 615, which equates to 800 units being produced.