IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 881:

  Which one of the following statements about the payback method of investment analysis is correct? The payback method

  A. Does not consider the time value of money.
  B. Considers cash flows after the payback has been reached.
  C. Uses discounted cash flow techniques.
  D. Generally leads to the same decision as other methods for long4erm projects.
  A. Does not consider the time value of money.

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  Explanation

  The payback method calculates the amount of time required to complete the return of the original investment, i.e.1 the time it takes for a new asset to pay for itself. Although the payback method is easy to calculate, it has inherent problems. The time value of money and returns after the payback period are not considered.

• Question 882:

  Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 30 to 35 days; however, there will be no change in uncollectible accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunely cost of a longer collection period is assumed to be negligible, the compass budgeted credit sales for the coming year are $45,000 000, and the required rate of return is 6%. To just changes in collection procedures, the minimum annual reduction of costs (using a 360-day year and ignoring taxes) must be

  A. $375000
  B. $37,500
  C. $125,000
  D. $22,500
  D. $22,500

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  Explanation

  The cost of carrying receivables equals average receivables times the variable cost ratio times the cost of money. Given sales of $45,000,000, regardless of which collection procedures are applied, the average daily sales must be $125,000 ($45,000,000 + 360 days). The increase in the average receivables balance is therefore $625,000 (5 days x $125,000). Given an additional $625,000 of receivables, the compass additional required investment in receivables is $375,000 ($625,000 x 60% variable cost ratio), and the incremental pretax cost of this investment is $22,500 (6% x $375,000). Accordingly, the collection costs must be reduced by a pretax minimum of $22,500 to offset the cost of the increased investment in receivables.

• Question 883:

  The scope of marketing extends to

  A. Synchromarketing to reverse declining demand
  B. Demarketing to reverse negative demand
  C. Mnagemnet of demand
  D. Making consumers aware of existing products that satisfy latent demand
  C. Mnagemnet of demand

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  Explanation

  The scope of marketing may be broadly defined as demand management. It extends to marketing not only goods and services but also experiences, people, events, entities, places, information, properties and ideas. These tasks vary with the nature, volume, components, and timing of demand for what is marketed.

• Question 884:

  An inventory management technique designed to minimize inventory investment by having materials arrive at the time they are needed for use is known as

  A. The economic order quantity model (EOQ).
  B. Materials requirements planning (MRP).
  C. First-in first-out (FIFO).
  D. Just-in-time (JIT).
  D. Just-in-time (JIT).

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  Explanation

  A just-in-time (JIT) inventory management system limits the output of each manufacturing operation to the demand of the next operation. Shipment of raw materials from vendors are scheduled to arrive "just in time" to be used in the production process. Inventory storage is considered a nonvalue-adding activity, and raw materials on hand are thus kept to a minimum.

• Question 885:

  A company is deciding whether to purchase an automated machine to manufacture one of its products. Cash flows from this decision depend on several factors, interactions among those factors, and the probabilities associated with different levels of those factors. The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is

  A. Simulation and sensitivity analysis.
  B. Linear programming.
  C. Correlation analysis.
  D. Differential analysis.
  A. Simulation and sensitivity analysis.

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  Explanation

  Simulation is a technique used to describe the behavior of real-world system overtime. This technique usually employs a computer program to perform the simulation computations. Sensitivity analysis examines how outcomes change as the model parameters change.

• Question 886:

  The internal rate of return on an investment

  A. Usually coincides with the company's hurdle rate.
  B. Disregards discounted cash flows.
  C. May produce different rankings from the net present value method on mutually exclusive projects.
  D. Would tend to be reduced if a company used an accelerated method of depreciation for tax purposes rather than the straight-line method.
  C. May produce different rankings from the net present value method on mutually exclusive projects.

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  Explanation

  Investment projects may be mutually exclusive under conditions of capital rationing (limited capital). In other words, scarcity of resources will prevent an entity from undertaking all available profitable activities. Under the PR method, an interest rate is computed such that the present value of the expected future cash flows equals the cost of the investment (NPV = 0). The IRR method assumes that the cash flows will be reinvested at the IRR. The NPV is the excess of the present value of the estimated net cash inflows over the net cost of the investment. The cost of capital must be specified in the NPV method. An assumption of the NPV method is that cash flows from the investment will be reinvested at the particular project's cost of capital. Because of the difference in the assumptions regarding the reinvestment of cash flows, the two methods will occasionally give different answers regarding the ranking of mutually exclusive projects. Moreover, the IRR method may rank several small, short-lived projects ahead of a large project with a lower rate of return but with a longer life span. However, the large project might return more dollars to the company because of the larger amount invested and the longer time span over which earnings will accrue. When faced with capital rationing, an investor will want to invest in projects that generate the most dollars in relation to the limited resources available and the size and returns from the possible investments. Thus, the NPV method should be used because it determines the aggregate present value for each feasible combination of projects.

• Question 887:

  Pontotoc Industries manufactures a product that is used as a subcomponent by other manufacturers. It has the following price and cost structure:

  

  Pontotoc received a special, one-time order for 1,000 of the above parts. Assuming Pontotoc has excess capacity, the minimum unit price for this special, one-time order is in excess of

  A. $180
  B. $120
  C. $100
  D. $160
  C. $100

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  Explanation

  In a special order situation, a company with excess capacity has a $0 opportunity cost of filling the special order. Accordingly, it should be willing to sell the product at a price that exceeds its incremental costs The incremental (relevant) costs for Pontotoc equal the variable costs of SIOC (S40 direct materials + S30 direct labor + $24 variable overhead + $6 variable selling costs). Thus, if the selling price is in excess of $100, the company should be willing to accept the order.

• Question 888:

  Future value is best described as

  A. The sum of dollars-in discounted to time zero.
  B. The sum of dollars-out discounted to time zero.
  C. The value of a dollar-in at a future time adjusted for any compounding effect
  D. The value of a dollar-in at a future time adjusted for any compounding effect and the value of a dollar-out at a future time adjusted for any compounding effect.
  D. The value of a dollar-in at a future time adjusted for any compounding effect and the value of a dollar-out at a future time adjusted for any compounding effect.

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  Explanation

  The future value of a dollar is its value at a time in the future given its present value. The future value of a dollar is affected both by the discount rate and the time at witch the dollar is received. Hence, both dollars-En and dollars-out in the future maybe adjusted for the discount rate and any compounding that may occur.

• Question 889:

  Laurel Corporation has its own cafeteria with the following annual costs: The overhead is 40% fixed. Of the fixed overhead, $25,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and Laurel will continue to pay his/her salary, the maximum cost Laurel will be willing to pay an outside firm to service the cafeteria is

  

  A. $285,000
  B. $175,000
  C. $219,000
  D. $241,000
  D. $241,000

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  Explanation

  Given that overhead is 40% fixed, $66,000 ($1 10,000 x 60%) is variable, and $44,000 is fixed. Of the latter amount, $25,000 is attributable to the supervisor's salary. The $19,000 remainder is allocated from total company overhead and is unavoidable. Assuming the company will continue to pay the supervisor's salary if an outside firm services the cafeteria, the total fixed overhead is not an avoidable (incremental) cost. Thus, the total avoidable cost of the cafeteria's operation is $241 ,000 ($100,000 food + $75,000 labor + $66,000 VOH). This amount is the savings from hiring an outside firm. Accordingly, it is also the maximum that Laurel should be willing to pay the outside firm.

• Question 890:

  Which of the following is not an example of a real option in a capital budgeting decision?

  A. Abandonment.
  B. Follow-up investment.
  C. Option to wait and learn.
  D. Risk-adjusted discount rates.
  D. Risk-adjusted discount rates.

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  Explanation

  Real options include such factors as the ability to abandon the project early. the opportunity for follow-up investments or ability' to create new products, the ability' to base additional cash outflows on a wait-and-learn opportunity', or the option to change capacity' during the project. Risk-adjusted discount rates are not real options but are a form of sensitivity' analysis.