Soft Mattress Inc. produces a queen and a king size soft bed Answer

Use the following information to answer question 1:
Soft Mattress Inc. produces a queen and a king size soft bed.
Selected data follows:
Queen King
Sales price \$525 \$635
Direct material \$350 \$365
Direct labor \$75 \$85
Stuffing hours 1 3

1. Only two employees are trained to stuff mattresses. They
can work a maximum of 4,000 stuffing hours per year.
What is the contribution margin per limited resource for
each type of bed?
A. Queen \$75, King \$150
B. Queen \$150, King \$75
C. Queen \$75, King \$50
D. Queen \$50, King \$75
Use the following information to answer question 2:
Project A Project B
Initial investment \$(2,000) \$(4,000)
PV of cash inflows \$2,600 \$3,400
Net present value \$600 \$(600)

2. Based upon profitability index, which project(s) would be acceptable?
A. A only C. Both A and B
B. B only D. Neither A nor B
Use the following information to answer question 3:
Sales price \$6.00 per unit
Variable costs \$2.25 per unit
Fixed costs \$10,000
Units sold 20,000

3. What is the break-even point in sales dollars?
A. \$12,000 C. \$17,500
B. \$16,000 D. \$18,460
Use the following information to answer question 4:
Volume Cost
1 unit \$15
10 units \$150
100 units \$1,500

4. What type of cost is given?
A. Fixed C. Step
B. Variable D. Mixed

5. If the contribution margin ratio is 65% and fixed costs are \$15,000, what would
sales have to be for a before-tax net income of \$50,000? (Round your answer to
the nearest dollar.)
A. \$100,000 C. \$42,250
B. \$65,000 D. \$23,077
Use the following information to answer question 6:
Investment A Investment B
Initial cost \$180,000 \$270,000
Estimated useful life 3 years 3 years
Estimated annual savings in
cash operating costs \$75,000 \$120,000
Minimum desired rate of return 10% 12%
PV factor 2.4869 2.4018

6. Based on net present value, profitability index, and internal rate of return, which
investment(s) would be preferable?
A. A C. Both A and B
B. B D. Neither A nor B

7. Which of the following statements best describes a comparison of net present value
(NPV) and internal rate of return (IRR)?
A. NPV can be adjusted for risk, but IRR can’t.
B. NPV is more useful than IRR when asset lives are equal and cash flows follow
similar patterns.
C. IRR should be modified using the profitability index to allow better comparison of
different-sized investments, while NPV doesn’t have to be modified.
D. Both NPV and IRR can be used for screening decisions.

8. Management of a bookbinder is considering whether the hard cardboard for binding
should be made internally or purchased from a supplier for \$2.35 per book. The
current internal production costs for the cardboard average \$2.50 of variable costs
and \$10,000 of fixed costs for the 20,000 books bound annually. What would you
recommend management do, and what is the effect on net income?
A. Make, increase NI by \$3,000 C. Buy, increase NI by \$3,000
B. Make, increase NI by \$13,000 D. Buy, increase NI by \$13,000
Use the following information to answer question 9:
Project A Project B
Investment \$40,000 \$50,000
Annuals \$7,000 \$5,000

9. If a company has a policy of accepting projects with a payback period of seven years
or less, which project(s) would be acceptable?
A. A only C. Both A and B
B. B only D. Neither A nor B

10. Taco Stand has monthly fixed costs of \$750 and variable costs of \$0.50 per taco. What
is Taco Stand’s total cost if 1,000 tacos are made?
A. \$500 C. \$1,000
B. \$750 D. \$1,250
Answer questions 11 and 12 from the following information:
Variable selling & admin. costs \$2.00 per unit
Direct materials \$7.50 per unit
Direct labor \$1.25 per unit
Fixed selling & admin. costs \$50,000
Units sold 25,000

11. What is the product cost per unit under variable costing?
A. \$11 C. \$14
B. \$13 D. \$16

12. What is the product cost per unit under absorption costing?
A. \$11 C. \$14
B. \$13 D. \$16

13. The cost equation y = \$0 + \$1.75x represents which type of cost?
A. Variable C. Step
B. Fixed D. Mixed
Use the following information to answer question 14:
FanCo needs 20,000 fan switches annually to complete their fans. They’ve learned of a
supplier who will sell them the exact switch that’s needed for assembly at a unit price
of \$0.875. Current production costs for the switches are
Direct material \$5,000
Direct labor \$10,000
If the switches are purchased rather than made, one-half of the fixed overhead costs
can be eliminated.

14. What are the total relevant costs in this make-or-buy decision?
A. \$15,000 C. \$18,000
B. \$17,500 D. \$18,500

Use the following results from a regression analysis of production costs to answer
question 18:
Multiple R .71196
R Square .50688
Standard Error 1.43764
Analysis of Variance
DF Sum of Squares Mean Square
Regression 1 418.52992 418.52992
Residual 197 407.16375 2.06682
F = 202.49935 Signif F = 0.0000
Variables in the Equation
Variable Coefficients Standard t Stat P-value
error
X variable 1 7.93958 .055794 14.230 0.0000
Intercept 204.070 261513 –.780 0.4361

18. What are total fixed costs, rounded to the nearest penny?
A. \$204.07 C. \$1,587.92
B. \$793.96 D. \$1,791.99

19. Hotdogs, Inc. sells hot dogs for \$2 each. The variable costs per hot dog are \$1, and
the fixed overhead costs are \$0.35. A summer camp wants to place a one-time order
for 100 hot dogs at a price of \$1.25 each. What is the minimum price Hotdogs should
charge for this special order?
A. \$1.00 C. \$1.35
B. \$1.25 D. \$1.60
Use the following information from a pants manufacturer to answer questions 20 and 21:
January 10,500 pairs \$40,250
February 10,675 pairs \$41,000
March 11,500 pairs \$44,250
April 12,500 pairs \$45,250
May 11,000 pairs \$43,750

20. Using the high/low method, what is the variable cost per unit?
A. \$2.50 C. \$3.62
B. \$2.75 D. \$3.83
21. Using the high/low method, what is the fixed cost?
A. \$30,250 C. \$15,250
B. \$29,750 D. \$14,000
Use the following information to create a contribution margin income statement and
Sales 150,000 units
Sales price \$2.00 per unit
Variable costs \$0.50 per unit
Fixed costs \$80,000
22. What is the operating leverage? (Round your answer to two decimals.)
A. 0.50 C. 1.55
B. 1.50 D. 1.67

23. The cost of producing whole kernel corn is \$0.20 per can, and the can sells for \$0.40.
Additional processing costs to produce creamed corn are \$0.06 per can, and each can
sells for \$0.45. If the corn is processed further and 1,000 cans are sold as creamed
corn rather than whole kernel corn, what is the effect on net income?
A. \$450 increase C. \$50 increase
B. \$60 decrease D. \$10 decrease

24. Which of the following will increase contribution margin?
A. Decreasing sales price C. Decreasing variable cost
B. Decreasing fixed cost D. Increasing variable cost

25. If a manager is considering a project that will increase sales revenue by \$120 without
affecting expenses, what would the after-tax revenue be, given a 30% tax rate?
A. \$36 C. \$120
B. \$84 D. \$150

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