MGTB03 Final Exam Review Questions
Ibrahim Asafi, the general manager of the Coronado Company, is
contemplating replacing the existing assembly-line equipment in the
Assembly Department with automated assembly equipment. Production
output and revenues will be unaffected by the replacement decision.
Transactions related to the capital investment are cash transactions that would
Existing Assembly New Automated
Original cost $1,100,000 $1,200,000
Useful life 11 years 5 years
Current age 6 years 0 years
Useful life remaining 5 years 5 years
Accumulated amortization $600,000 $0
Book value $500,000 Not acquired yet
Current disposal price (in cash) $200,000 Not acquired yet
Terminal disposal price (in cash, in 5 years) $0 $0
Average working capital needed $120,000 $70,000
Current annual Assembly Department costs are as follow:
Direct materials $600,000
Direct manufacturing labour 400,000
Maintenance and repairs 150,000
Other operating costs 50,000
Supervision (allocated as 10% of direct manufacturing labour costs) 40,000
Allocated rent (based on space used) 40,000
Allocate corporate overhead (based on direct manufacturing labour 120,000
1 Additional Information
a. Coronado uses straight-line amortization calculated on the difference
between the initial equipment investment and the terminal disposal price of the
b. The new equipment will produce output more swiftly. Therefore, the average
working capital investment, if the new equipment is purchased, will decrease.
c. Of the total direct materials costs, $120,000 is waste and scrap. The new
equipment is expected to reduce scrap costs to $20,000
d. The new equipment is expected to reduce direct manufacturing labour costs
by $150,000 each year.
e. Maintenance and repairs on the old equipment have been excessive. If the
new equipment is acquired, maintenance and repair costs are expected to
decrease to $100,000.
f. Coronado collects all supervision costs for all manufacturing departments in
the plant into one cost pool. These costs are ten allocated to departments on the
basis of direct manufacturing labour costs. The Assembly Department has only
one supervisor currently. The supervisor will continue in her current position if
the new equipment is purchased.
g. The new equipment will reduce the space required for assembly operation by
20%, reducing allocated rent by $8,000. The Coronado Company has no
alternative uses for this extra space.
h. Corporate overhead costs are allocated to each department at 30% of direct
manufacturing labour costs of each department.
Coronado estimates a required rate of return of 12% for this project.
1. On the basis of the net present value method, should Asafi replace the
existing assembly equipment?
2. Suppose that next year is the last year Coronado will offer the attractive
bonus plan currently in place. Asafi’s bonus hinges on short-run accrual
accounting income for that year. Will Asafi be inclined to replace the Assembly
Department equipment? Provide quantitative support for our answer.
2 Chapter 10
The following data apply to questions 1 and 2.
Zeta Company budgets on an annual basis. The following beginning
and ending inventory levels (in units) are planned for the fiscal year
of July 1, 2007, through June 30, 2008.
July 1, 2007 June 30, 2008
Raw material 1 40,000 10,000
Work in process 8,000 8,000
Finished goods 30,000 5,000
1 Three (3) units of raw material are needed to produce each unit of
1. If Zeta Company plans to sell 500,000 units during the 2007-2008
fiscal year, the number of units it would have to manufacture
(production budget) during the year would be:
a. 475,000 b. 480,000 c. 500,000 d. 505,000
2. If 450,000 finished units were to be manufactured during the 2007-
2008 fiscal year by Zeta Company, the units of raw material
needed (purchase budget) would be:
a. 1,320,000 b. 1,330,000 c. 1,350,000 d. 1.360,000
3 The following data apply to questions 3–4.
Information pertaining to Omega Company’s sales revenue forecast
is presented in the following table:
February March April
Cash sales $160,000 $150,000 $120,000
Credit sales 300,000 400,000 280,000
Total sales $460,000 $550,000 $400,000
Omega’s Management estimates that five percent of credit sales are
not collectible. Of the credit sales that are collectible, 60 percent are
collected in the month of sale and the remainder in the month
following the sale. Cost of purchases of inventory each month are 70
percent of the next month's projected total sales. All purchases of
inventory are on account; 25 percent are paid in the month of
purchase, and the remainder is paid in the month following the
3. Omega's budgeted total cash receipts in April would be:
a) $328,000. b) $431,600. c) $437,000. d)
4. Omega’s budgeted total cash payments in March for inventory
purchases would be:
b) $280,000. b) $306,250. c) $358,750. d)