Advanced Management Accounting
Please include thorough explanation and thorough calculations for each answer chosen.
1) The differential approach is often considered superior to the total project approach to capital budgeting:
a) because it can more easily accommodate multiple investment opportunities
b) because it is faster when analyzing fewer than three alternatives
c) for all large investment decisions
d) because it uses net cash flows instead of gross cash flows
e) because it is easier to select the components for the model
This information is for questions 2 and 3:
Surfworld sells surfboards for $360. It has costs currently assigned to it of $280. A competitor is bringing a new surfboard to market that will sell for $300. Surfworld's management believes it must lower the price to $300 to compete in the market for surfboards. Marketing forecasts that the new price will cause sales to increase by 10 percent, even with the new competitor in the market. Surfworld's sales are currently 100,000 surfboards per year.
2) What is the target cost if the company wants to maintain the same income level, and marketing is correct?
a) $401.20
b) $280.00
c) $246.67
d) $227.27
e) $225.00
3) What is the change in operating income if marketing is correct and only the sales price is changed?
a) $(5,999,000)
b) $(5,800,000)
c) $(2,200,000)
d) $600,000
e) $2,200,000
4) Oreo Company budgeted the following costs for the production of its one and only product, erasers, for the next fiscal year:
|
Direct Materials
|
$187,500
|
|
Direct Labour
|
130,000
|
|
Factory overhead:
Variable
Fixed
|
140,000
107,500
|
|
Selling and administrative:
Variable
Fixed
|
60,000
80,000
|
|
Total costs
|
$705,000
|
Oreo has a target profit of $150,000
The target rate of return for setting prices as a perentage of prime costs would be
a) 169%
b) 122%
c) 96%
d) 87%
e) 54%