Faculty of Commerce / / Prof: Salem A. Helles
Accounting Department / Date: Wed. 30 /5 / 2012
Final Exam
Student Name………………………… / Student No……………………………
Answer Questions Six and Seven on Question Paper.
Question One:(6 Marks)
GazaFish Company is a wholesale distributor of salmon. The company services grocery stores in the Gaza area. Small but steady growth in sales has been achieved by Gaza Fish over the past few years, while salmon prices have been increasing. The company is formulating its plans for the coming fiscal year. Presented next are the data used to project the current year's after- tax net income of $ 128, 250.
Average selling price per pound / $ 5.00Average variable costs per pound: -
Cost of salmon / $2.50
Shipping expenses / 0.50
Total / $3.00
Annual fixed costs:-
Selling / $210,000
Administrative / 356,250
Total / $566,250
Expected annual sales volume (390,000 pounds) / $1,950,000
Tax rate / 40%
Fishing companies have announced that they will increase prices of their products by an average of 40% in the coming year, owing mainly to increases in cost of salmon. Gaza Fishcompany expects that all other costs will remain at the same rates or levels as in the current year.
- What is Gaza Fish company'sbreakeven point in pounds of salmon for the current year?
- What selling price per pound must GazaFish Company charge to cover the 15% increase in the cost of salmon and still maintain the current contribution margin ratio?
- What volume of sales in dollars must the Gaza Fish company achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of salmon remains at $ 5 per pound and the cost of salmon increases 40%?
Question Two: (6 Marks)
The Jerusalem Chemical Company produced three joint products at a joint cost of $117,000. These products were processed further and sold as follows.
Chemical Product / Sales / Additional Processing CostA / $230,000 / $190,000
B / 330,000 / 300,000
C / 175,000 / 100,000
The company has had an opportunity to sell at split off directly to other processors. Ifthat alternative had been selected sales would have been A, $54,000; B, $28,000; and C, $54,000.The company expects to operate at the same level of production and sales in the forthcoming year. Consider all the available information, and assume that all costs incurred after split off are variable.
- Could the company increase operating income by altering its processing decisions? If so, what would be the expected overall operating income?
- Which products should be processed further and which should be sold at split off?
Question Three:(6 Marks)
LG has adopted the following policies regarding merchandise purchases and inventory. At the end of any month, the inventory should be $15,000 plus 90% of the cost of goods to be sold during the following month .The cost of merchandise sold averages 60% of sales. Purchase terms are generally net 30 day A given month's purchases are paid as follows: 20% during that month and 80% during the following month.
Purchases in May had been $150,000 and the inventory on May 31 was higher than planned at $210,000 the manager was upset because the inventory was too high. Sales are expected to be June, $300,000 July, $290,000; August ,$340,000 and September, $400,000.
- Compute the amount by which the inventory on May 31 exceeded the company's policies.
- Prepare budget schedules for June, July and August for purchases and for disbursements for purchases.
Question Four:(6 Marks)
Multimedia Technology does business in three different business segments: (1) Entertainment, (2) Publishing, and (3) Commercial Finance. Results for a recent year were (in thousands):
Revenues / Operating income / Total AssetsEntertainment / $ 1,272 / $223 / $ 1,120
Publishing / $ 705 / $122 / $ 1,308
Commercial Finance / $ 1,235 / $244 / $ 924
- Compute the following for each business segment: Return on sales, Capital turnover, andReturn on Investment (ROI).
- Comment on the differences in ROI among the business segments, Include reasons for the differences.
- Compute the EVA for each business segment, while cost of capital 15%.
Question Five:(6 Marks)
Air Products and Chemicals Company is considering building a new lights –out facility and has gathered the following information:
Purchase price $ 600,000
Salvage value $ 100,000
Desired payback period 3 years
Minimum rate of return 15%
The cash flow estimates are as follows:
Year / Cash inflows / Cashoutflows / NetCash inflows / Projected Net Income
1 / $ 500,000 / $260,000 / $240,000 / $115,000
2 / 450,000 / 240,000 / 210,000 / 85,000
3 / 400,000 / 220,000 / 180,000 / 55,000
4 / 350,000 / 200,00 / 150,000 / 25,000
Total / $1,700,000 / $920,000 / $780,000 / $280,000
Required:
- Analyze the company's investment in the new facility using (a) thenet present value method, (b) the payback period method, and (c) the accounting rate of return method.
- Summarize your findings from requirement 1, and recommend a course of action.
Question Six:(20 Mark)
Each multiple- choice question has four suggested answers, (A), (B), (C) and (D). Which choice is best, either (A) or (B) or (C) or (D).
1-What is a weakness of the cash paybackperiod?
a-It uses accrual-based accounting numbers.
b-It ignores the time value of money.
c-It ignores the cash inflows after payback period.
d-Both (b) and (c) are true.
2-SA industries is considering two capital budgeting projects. Project A requires an initial investment of $48,000. It is expected to produce net annual cash flows of $7,000. Project B requires an intial investment of $75,000 and is expected to produce net annual cash flow of $12,000. Using the cash payback period to evaluate the two projects, SA should accept:
a-Project A because it has a shorter cash payback period.
b-Project B because it has a shorter cash payback period.
c-Project A because it requires a smaller initial investment.
d-Project B because it produces a larger net annual cash flow.
3-A positive net present value means that the:
a-Project's rate of return is less than the discount rate.
b-Project's rate of return exceeds the required rate of return.
c-Project's rate of return equals the required rate of return.
d-Project is unacceptable.
4-The following information is available for a potential capital investment.
Initial investment$80,000
Salvage value10,000
Net annual cash flow14,820
Net present value18,112
Useful life10 years
The potential investment's profitability index is:
a-5.40
b-1.19
c-1.23
d-1.40
5-A project should be accepted if its internal rate of return exceeds:
a-Zero.
b-The rate of return on a government bond.
c-The company's required rate of return.
d-The rate the company pays on borrowed funds.
6-The following information is available for a potential capital investment.
Initial investment $60,000
Net annual cash flow15,400
Net present value3,143
Useful life 5 years
The potential investment's internal rate of return is approximately:
a-5%
b-10%
c-4%
d-9%
7-The following information is available for a potential capital investment.
Initial investment $120,000
Net annual cash flow27,500
Salvage value20,000
Useful life8 years
The potential investment's accounting rate of return is approximately:
a-21%
b-15%
c-30%
d-39%
8-A manager of an investment center can improve ROI by:
a-Increasing average operating assets.
b-Reducing sales.
c-Increasing variable costs.
d-Reducing variable and/or controllable fixed costs.
9-The format of a cash budget is:
a-Beginning cash balance + Cash receipts + cash from financing – Cash disbursements = Ending cash balance.
b-Beginning cash balance + cash receipts – Cash disbursements +/- Financing = Ending cash balance.
c-Beginning cash balance + Net income – Cash dividends = Ending cash balance.
d-Beginning cash balance + Cash revenues – Cash expenses = Ending cash balance.
10-The budget for a merchandiser differs from a budget for a manufacturer because:
a-A merchandise purchases budget replaces the production budget.
b-The manufacturing budgets are not applicable.
c-None of the above.
d-Both (a) and (b) above.
QuestionSeven: (10 Marks)
Answer as required in each of the following points:
1)Dual transfer pricing
......
2)If NPV = 0, the project is desirable, because
......
3)All types of companies have the same...... .budgets.
4)A...... budget is a plan that is revised monthly or quarterly, dropping one period and adding another.
5)Three ways to improve Return on Investment:
......
Good Luck