Republic of the Philippines

University of Eastern Philippines

College of Business Administration
ACCOUNTANCY DEPARTMENT

MANAGEMENT ADVISORY SERVICES REVIEW Thursday, March 6, 2014

FINAL EXAMINATION 8:00 11:00 am

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING ITEMS. MARK ONLY ONE
ANSWER FOR EACH ITEM ON THE ANSWER SHEET PROVIDED. STRICTLY NO ERASURE ALLOWED.

1 The primary purpose of management advisory services is:

a. To conduct special studies, preparation of recommendations, development of plans and programs, and
provision of advice and assistance in their implementation.
b. To provide services or to fulfil some social need.
c. To improve the clients use of its capabilities and resources to achieve the objectives of the organization.
d. To earn the best rate of return on resources entrusted to its care with safety of investment being taken
into account and consistent with the firms social and legal responsibilities.

2 Return on investment (ROI) is a term often used to express income earned on capital invested in a
business unit. A companys ROI would be increased if
a. Sales increased by the same peso amount as expenses and total assets increased.
b. Sales remained the same and expenses were reduced by the same peso amount that total asset increased.
c. Sales decreased by the same peso amount that expenses increased.
d. Sales and expenses increased by the same percentage that total assets increased.

3 Using the capital asset pricing model (CAPM), the beta of company X's shares is 16, the risk free rate is 5%
and the required return on company X's shares is 162%. Company Y is quoted in the same stock market,
but has a beta of 1.4. What is the required rate of return on company Y's shares?
a 120%
b 130%
c 132%
d 148%

4 Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive
investment projects?
a. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash
flows will be reinvested at the internal rate of return.
b. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes
a reinvestment rate equal to the internal rate of return.
c. The IRR method does not assume reinvestment of the cash flows while the NPV assumes the
reinvestment rate is equal to the discount rate.
d. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method
assumes a reinvestment rate equal to the discount rate.

5 When a firm prepares financial reports by using absorption costing, it may find that
a. Profits will always increase with increase in sales.
b. Profits will always decrease with decreases in sales.
c. Profit may decrease with increased sales even if there is no change in selling price and costs.
d. Decreased output and constant sales result in increased profit.

6 The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their place of
business to the downtown area. Likewise it is anticipating that the selling price per unit and the variable
expenses will not change. At present, the sales volume necessary to breakeven is P750,000 but with the
expected increase in fixed costs, the sales volume necessary to breakeven would go up to P975,000. Based
on these projections, what were the total fixed costs before the increase of P78,750?
a. P341,250 c. P183,750
b. P262,500 d. P300,000
7 At 40,000 units of sales, Luna Corporation had an operating loss of P3.00 per unit. When sales were 70,000
units, the company had a profit of P1.20 per unit. The number of units to breakeven is
a. P 35,000 c. P52,500
b. P 45,000 d. P57,647
8 Drive Me, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the
rooms are occupied each day. The companys operating costs are P21 per occupied room per day at this
 occupancy level, assuming a
30-day month. This P21 figure contains both variable and fixed cost elements. During October, the
occupancy dropped to only 45 percent. A total of P792,000 in operating cost was incurred during the
month. What would be the expected operating costs,
assuming that the occupancy rate increases to 60 percent during November?
a. P1,056,000 c. P846,000
b. P 756,000 d. P829,500
9 The Oilfield plant has two categories of overhead: maintenance and inspection. Costs expected for these
categories for the coming year are as follows:
Maintenance P100,000
Inspection 150,000
The plant currently applies overhead using direct labor hours and expected capacity of 50,000 direct labor
hours. The following data have been assembled for use in developing a bid for a proposed job:
Direct materials P1,000
Direct labor P4,000
Machine hours 500
Number of inspections 4
Direct labor hours 800
Total expected machine hours for all jobs during the year is 25,000, and the total expected number of
inspections is 1,500.
Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be
a. P2,400 c. P7,400
b. P3,600 d. P7,750
10 The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is
P50. The company has unused production capacity and has determined that units could be finished and
sold for P65 with an increase in
variable costs of 40%. What is the additional net income per unit to be gained by finishing the unit?
a. P 3 c. P15
b. P10 d. P12
11 ABC Electronics has the following standard costs and other data:
PartBeta Part Zeta
Direct materials P 4.00 P80.00
Direct labor 10.00 47.00
Factory overhead 40.00 20.00
Unit standard cost P54.00 P147.00
Units needed per year 6,000 8,000
Machine hours per unit 4 2
Unit cost if purchased P50 P150.00
In past years, ABC has manufactured all of its required components; however, this year only 30,000 hours
of otherwise idle machine time can be devoted to the production of components. Accordingly, some of the
parts must be purchased from outside suppliers. In producing parts, factory overhead is applied at P10 per
standard machine hour. Fixed capacity costs that will not be affected by any make-or-buy decision
represent 60% of the applied overhead. The 30,000 hours available machine time are to be scheduled so
that ABC realizes maximum potential cost savings. The relevant unit production costs that should be
considered in the decision to schedule machine time are:
a. P54.00 for Beta and P147.00 for Zeta
b. P50.00 for Beta and P150.00 for Zeta
c. P14.00 for Beta and P127.00 for Zeta
d. P30.00 for Beta and P135.00 for Zeta
12 Shyr Company is a chemical manufacturer that supplies various products to industrial users. The company
plans to introduce a new chemical solution called Bysap, for which it needs to develop a standard product
cost. The following labor information is available on the production of Bysap.
The product, which is bottled in 10-liter containers, is primarily a mixture of Byclyn, salex, and
protex.
The finished product is highly unstable, and one 10-liter batch out of six is rejected at final
inspection. Rejected batches have no commercial value and are thrown out.
It takes a worker 35 minutes to process one 10-liter batch of Bysap. Employees work on eight-hour
a day, including one hour per day for rest breaks and cleanup.
What is the standard labor time to produce one 10- liter batch of Bysap?
a. 35 minutes c. 48 minutes
b. 40 minutes d. 45 minutes
13 Information on Divines direct material costs for May is as follows:
Actual quantity of direct materials purchased and used 30,000 lbs.
Actual cost of direct materials P84,000
Unfavorable direct materials usage variance P 3,000
 Standard quantity of direct materials allowed for May production 29,000 lbs
For the month of May, Divines direct materials price variance was:
a. P2,800 favorable c. P6,000 unfavorable
b. P2,800 unfavorable d. P6,000 favorable
14 William Furniture Company uses about 200,000 yards of a particular fabric each year. The fabric costs
P2.50 per yard. The current policy is to order the fabric four times a year. Incremental ordering costs are
about P200 per order, and incremental carrying costs are about P0.75 per yard, much of which represents
the opportunity cost of the funds tied up in inventory. How much total annual costs are associated with the
current inventory policy?
a. P19,550 c. P38,300
b. P18,750 d. P62,500
15 Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the expectation
that P40,000 per year could be saved in after-tax cash costs if the equipment were acquired. The
equipments estimated useful life is 10 years, with no salvage value, and would be depreciated by the
straight-line method. Tamaraws minimum desired rate of return is 12 percent. Present value of an annuity
of 1 at 12 percent for 10 periods is 5.65. Present value of 1 due in 10 periods at 12 percent is 0.322. The
average accrual accounting rate of return during the first year of assets use is
a. 20.0 percent c. 10.0 percent
b. 10.5 percent d. 40.0 percent
16 Glenda Company expects to generate P10 million internally which could be available for financing part of
its P12 million capital budget for this coming year. Glendas management believes that a debt-equity ratio
of 40 percent is best for the
firm. How much should be paid in dividends if the target debt-equity ratio is to be maintained?
a. P2,800,000 c. P8,571,429
b. P1,428,571 d. P4,000,000
17 The board of directors of Contemporary Company was unhappy with the current return on common equity.
Though the return on sales (profit margin) was impressively good at 12.5 percent, the asset turnover was
only 0.75. The present debt ratio is
0.40. Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
Profit margin should be raised to 15 percent.
The new capital structure will be revised by raising debt component.
The asset turnover will be maintained at 0.75.
The proposed adjustment is estimated to raise return on equity by 50 percent. What debt ratio did Atty.
Tristan propose in order to raise the return on equity (ROE) to 150 percent of the present level?
a. 0.52 c. 0.68
b. 0.61 d. 0.72
18 Panama Insurance Companys management is considering an advertising program that would require an
initial expenditure of P165,500 and bring in additional sales over the next five years. The cost of
advertising is immediately recognized as expense. The projected additional sales revenue in Year 1 is
P75,000, with associated expenses of P25,000. The additional sales revenue and expenses from the
advertising program are projected to increase by 10 percent each year. Panama Insurance Companys tax
rate is 40 percent. The present value of 1 at 10 percent, end of each period:
Periods Present value Factor
1 0.90909
2 0.82645
3 0.75131
4 0.68301
5 0.62092
The net present value of the advertising program would be
a. P37,064 c. P(37,064)
b. P29,136 d. P(29,136)
19 Pidol, Inc. is considering a three-phase research project. The time estimates for completion of Phase 2 of
the project are:
Pessimistic 20 days
Most likely 16 days
Optimistic 10 weeks
Using the program evaluation and review technique (PERT), the expected time for completion of Phase 2
should be
a. 15.67 days c. 16 days
b. 15.33 days d. 20 days
20 Villacorte, Inc. is considering changing its credit terms from 2/15, net 30, to 3/10, net 30. in order to speed
collections. At present, 40 percent of Villacortes customers take the 2 percent discount. Under the new
terms, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the
customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10
days late. The change does not involve a relaxation of credit
 standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However,
the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per
year. Villacortes variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable
is 9 percent, and the firms income tax rate is 40 percent. The incremental carrying cost on receivable is
a. P843.75 c. P8,889
b. P643.75 d. P6,667
21 Mirriam, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current capital
structure is 40% debt and 60% common equity. The director of capital budgeting has determined that the
optimal capital spending for next year is P1,200,000. If Mirriam follows a strict residual dividend policy,
what is the expected dividend payout ratio for next year?
a. 80.0 percent c. 40.0 percent
b. 66.7 percent d. 10.0 percent
22 The manager of Mush Company has developed the following probability distribution of dairy sales of a
highly perishable product. The company restocks the product each morning:
X (Units Sold) P (Sales =X)
200 0.25
240 0.40
255 0.15
260 0.10
275 0.05
300 0.05
If the company desires an 80% service level in satisfying sales demand, what should the initial balance be
for each day?
a. 225 c. 255
b. 245 d. 184
23 1. From the given data you are to compute the unit sales price (adjusted to the nearest full centavo) at
which the Sta. Ana Manufacturing Inc. must sell its only product in 2005 in order to earn a bud geted
operating profit (before taxes of 35%) of P60,000. Sta. Ana Manufacturing Inc.s condensed income
statement for 2004 follows:
Sales (30,000 units) P 450,000
Returns, allowances and discounts 13,500
Net sales P 436,500
Cost of goods sold 306,000
Gross profit P 130,500
Selling expenses 60,000
Administrative expenses 30,000
Operating profit P 40,500

The budget committee has estimated the following changes in income and costs for 2005:
o 30% increase in number of units sales.
o 20% increase in material unit cost.
o 13% increase in direct labor cost per unit.
o 10% increase in production overhead cost per unit.
o 14% increase in selling expenses, arising from increased volume as well as from a higher price level,
7% increase in administrative expenses, reflecting anticipated higher wage and supply price levels. Any
changes in administrative expenses caused solely by increased sales volume are considered immaterial for
the purpose of this budget. As inventory quantities remain fairly constant, the committee considered that,
for budget purposes, any change in inventory valuation can be ignored. The composition of the cost of a
unit of finished product during 2004 for materials, direct labor, and production overhead, respectively, was
in the ratio of 3 to 2 to No changes in production methods or credit policies were contemplated for 2005.
a. P16.01
b. P15.53
c. P 16.44
d. P 14.92

24 2. During your examination of the financial statements of San Pablo Industries, the president requested
your assistance in the evaluation of the following financial management problem in his home
appliances division which he summarizes for you as follows:

A. The divisions current margin ratio is 5% of annual sales of P1, 200,000. An investment of P400, 000
is needed to finance these sales. The Companys basis for measuring divisional success is Return on
Investment (ROI).

B. Management is considering the following two alternative plans submitted by employees for
improving operations in the home appliances division:
 Antonio believes that sales volume can be doubled by greater promotional effort, but his
method would lower the margin rate to 4% of sales and require an additional investment of
P100,000.
Guadalupe favors eliminating some unprofitable appliances and improving efficiency by adding
P200,000 in capital equipment, his method would decrease sales volume by 10% but improve
the margin ratio to 7%.

The projected sales price for a new product, Santto, (which is still in the development stage of the
product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the first-year
cost to be P60. On this type of product, the company requires a P12 per unit profit. What is the target
cost of Santto?

a. P60
b. P30
c. P38
d. P42

25 St. Christophers Motors, Inc. is considering a new product for the coming year, an electric motor which it
can purchase from a reliable vendor for P21.00 per unit. The alternative is to manufacture the motor
internally. St. Christophers Motors, Inc. has excess capacity to manufacture the 30,000 motors needed in
the coming year except for manufacturing space and special machinery. The machinery can be leased for
P45,000 annually. Finished goods warehouse space adjoining the main manufacturing facility, leased for
P39,000 annually, may be converted and used to manufacture the motors. Additional off-site space can be
leased at an annual cost of P54,000 to replace the finished goods warehouse. The estimated unit costs for
manufacturing the motors internally, exclusive of the leasing costs itemized above, are:
Direct material P 8.00
Direct labor 4.00
Variable manufacturing overhead 3.00
Allocated fixed manufacturing 5.00
overhead
Total manufacturing cost per unit P20.00
A cost-benefit analysis would show that St. Christophers Motors, Inc. would save
a. P54,000 by purchasing the motors from the outside vendor.
b. P69,000 by purchasing the motors from the outside vendor.
c. P81,000 by making the motors internally.
d. P96,000 by making the motors internally.

26 3. Given the following information about St. Vincent, compute for its economic value added:
Earnings before interest and taxes P20,000 Tax rate 40%
Interest-bearing liabilities P50,000 Cost of equity capital 14%
Debt to equity 1:1
Additional information:
o St. Vincent pays 10% annual interest to its creditors.
o There are no current liabilities held significant by St. Vincent.
a. P 8,000.00 b. P 2,000.00 c. P 5600.00 d. P 0

27 In the context of budget preparation the term goal congruence is

a The alignment of budgets with objectives using feed-forward control
b The setting of a budget which does not include budget bias
c The alignment of corporate objectives with the personal objectives of a manager
d The use of aspiration levels to set efficiency targets.

28 MNP plc produces three products from a single raw material that is limited in supply. Product details for
period 6 are as follows:
Products M N P
Maximum demand 1,000 2,400 2,800
Optimum planned production 720 - 2,800

Unit Contribution (Pesos) 4.50 4.80 2.95

Raw materials cost per unit 1.25 1.50 0.75
(P0.50 per kg)
The planned production optimizes the use of the 6,000 kgs of raw material that is available from MNP plcs
normal supplier at the price of P050 per kg. However, a new supplier has been found that is prepared to
supply a further 1,000 kgs of the material. What is the maximum price that MNP plc should be prepared to
 pay for the additional 1,000 kgs of the material?
A P2,100 B P2,240 C P2,300 D P2,465
29 4. Which of the following are required to determine the breakeven sales value in a multi product
manufacturing environment?
(i) individual product gross contribution to sales ratios;
(ii) the general fixed cost;
(iii) the product-specific fixed cost;
(iv) the product mix ratio;
(v) the method of apportionment of general fixed costs.
a. (i), (ii), (iii) and (iv) only.
b. (i), (iii) and (iv) only.
c. (i), (ii) and (iv) only.
d. All of them
30 The cost of purchasing a machine is P100,000 payable immediately. Its disposal value is expected to be
P10,000 in five years' time. The same asset can be leased for a period of five years with rentals of P25,000
payable annually in advance. The asset is returned to the lessor at the end of the lease period. What is the
net present value (to the nearest P10) to the lessor company if it purchases the machine then leases it to
the user on the above terms if it applies an annual discount rate of 10%? (Ignore tax.)
a. P990 b. P10,460 c. minus P1,960 d. minus P11,440.

31
Which of the following statement is False?

a. CPAs provide management services to go around the ethical constraints as mandated by the
accountancy act.

b. Businesses hire management consultants to help define specific problems and develop solutions.

c. Included in the practice of consulting is the provision of confidential service in which the identity of
the client is concealed.
d. CPAs performing management services may be considered to be in the practice of management
consulting
32 These statements relate to MAS practice standards:
1. A practitioner is to notify the client of any reservation he has regarding anticipated benefits.
2. Throughout the engagement, there ought to be a systematic critical review of accomplishments and
work should be done within the framework of the code of ethics and other professional standards.
3. During the engagement, should there be significant changes between cost and anticipated benefits,
the client should be informed.
4. Before the engagements, the practitioner must make arrangements with, and inform the client on
significant matters related to the engagement, in writing.
Of these statements, which pertains to the practice standard on client benefit?
a. Statements 1 and 3 only
b. All statements
c. Statement 1 only
d. Statements 1, 3 and 4 only
33 Which of the following is not an activity covered by feasibility study?
a. Activity based accounting of the endeavor leading to a conclusion
b. Collection of data
c. Evaluation and analysis of data collected
d. Formulation of recommendation

34 How is an Accounting Information System (AIS) distinguished from a management Information System
(MIS)?
a. An AIS maybe either manual or computer-based and MIS is computer-based.
b. An AIS is a subsystem within an MIS.
c. An AIS is controlled oriented and MIS is used exclusively for planning.
d. An AIS deals with financial information and MIS handles all other information.

35 The activities in a management systems control can be grouped into four

1. Measurement of actual performance
2. Deciding and implementing corrective actions
3. Determining standard of performance
4. Comparing actual performance versus standards and analyzing results.
The above steps must done in this sequence
a. 4, 3, 2, 1
 b. 3, 1, 4, 2
c. 1, 3, 4, 2
d. 3, 4, 1, 2
36 How are the following activities classified using ABC system?
1. Security
2. Product inspections
3. Insurance on the plant
4. Materials handling
5. Modifications made by engineering to the product design of several products
6. Machine-related overhead
7. Set-ups
8. Providing space and utilities
9. Moving of inventory
Unit Level Batch Level Product Level Facility Level
A. 4,6,8 2,4,7 1,3 10
B. 2,6 4,5 1,7 3,10
C. 6 2,4,7,10 5 1,3,8
D. 2 1,6,7 10 3,4,5,8
37 STA Companys standard fixed overhead cost is P3 per direct labor hour based on budgeted fixed costs of
P300,000. The standard allows 2 direct labor hours per unit. During 2001, STA produced 55,000 units
of product, incurred P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
labor. What are the fixed overhead variances?
A. B. C. D.
Fixed OH spending (budget) P15,000 P33,000 P15,000 P33,000 U
variance U U U
Fixed OH Volume variance P30,000 P30,000 P18,000 P18,000 F
F F F

38 Wallace Company produces 15,000 pounds of Product A and 30,000 pound of Product B each week by
incurring a common variable costs of P400,000. These two products can be sold as is or processed
further. Further processing of either product does not delay the production of subsequent batches of
the joint product. Data gathering there two products are as follows:
Product Product B
A
Selling price per pound without further P 12.00 P 9.00
Processing
Selling price per pound with further Processing P 15.00 P 11.00
Total separate weekly variable costs of Further P50,000 P45,000
processing
To maximize Wallace Companys manufacturing contribution margin, the total separate variable costs
of further processing that should be incurred each week are
A. P45,000 C. P95,000
B. P50,000 D. P0

39 Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity. Pelusos

plant manager is considering making the headlights now being purchased for P1,100 each, a price that
is not expected to change in the near future. The Peluso plant has the equipment and labor force
required to manufacture the headlights. The design engineer estimates that each headlight requires
P400 of direct materials and P300 of direct labor. Pelusos plant overhead rate is 200 percent of direct
labor costs, and 40 percent of the overhead is fixed cost. A decision by Peluso Company to manufacture
the headlights will result in a gain (loss) for each headlight of
A. P(200) C. P40
B. P160 D. P280

40 Company L had its operating asset turnover increased by 50% and the operating income margin increased
by 50%. Company U had its operating asset turnover increased by 30% and the operating income
margin decreased by 30%. What changes are expected for ROI of Company L and Company U,
respectively?
A. B. C. D.
Company L 50% increase 125% 225% 125%
increase increase increase
Company U 9% decrease 9% decrease no change no change
41 Jakarta Corporation plans to sell 200,000 units of Batik products in October and anticipates a growth in
sales of 5 percent per month. The target ending inventory in units of the product is 80% of the next
months estimated sales. There are 150,000 units in inventory as of the end of September. The
production requirement in units of Batik for the quarter ending December 31 would be
A. 670,560 C. 665,720
B. 691,525 D. 675,925

42 If Sol Company expects to get a one-year loan to help cover the initial financing of capital project, the
analysis of the project should
A. offset the loan against any investment in inventory or receivable required by the project
B. show the loan as an increase in the investment
C. show the loan as a cash outflow in the second year of the projects life
D. ignore the loan

43 Jade Corporation has a practical production capacity of a million units. The current years master budget
was based on the production and sales of 700,000 units during the current year. Actual production for
the current year was 720,000 units, while actual sales amounted to only 600,000 units. The units are
sold for P20 each and the contribution margin ratio is 30%. The peso amount that best qualifies the
Marketing Departments failure to achieve budgeted performance for the current year is:
A. P720,000 unfavorable C. P2,400,000 unfavorable
B. P600,000 unfavorable D. P2,000,000 unfavorable

44 A construction contractor has been invited to submit a bid on a large and complicated construction project.
The preparation of the bid proposal will cost about P20,000. Management feels that if the company
bids low enough to result in a net profit of P50,000, there would be a 60% chance of getting the job. If
the company bids high enough to result in a P100,000 net profit, the chance of getting the contract
would be only 20%. What should the company do?
A. Bid only high enough to allow for P50,000 profit because the expected value of the payoff is
P22,000.
B. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is P4,000
C. Bid high enough to allow for a P100,000 profit because the expected value of the payoff is P20,000.
D. Make no bid
45 Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large, complex projects
by determining the critical path from a single time estimate for each event in a project. The critical
path:
A. Is the shortest path from the first event to the last event for a project.
B. Is an activity within the path that requires the most number of time.
C. Is the earliest time to complete the project.
D. Is the maximum amount of time an activity may be delayed without delaying the total project
beyond its target time
46 Following is a table for two separate product lines, X and Y:
Probability X Profit Y Profit
20% P5,000 P 500
70% 3,000 4,000
10% 6,000 8,000
The product line to obtain maximum utility for a risk-averse decision maker is
A. X because it has the highest expected profit.
B. Y because it has the highest dispersion
C. Y because it has the highest expected profit
D. X because it has the lowest dispersion
47 Williams Co. is interested in measuring its overall cost of capital and has gathered the following data.
Under the terms described below, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling P1,000, 8%, 20-year bonds with annual interest payments. In
selling the issue, an average premium of P30 per bond would be received, and the firm must pay
flotation costs of P30 per bond. The after-tax cost of funds is estimated to be 4.8%.
Williams can sell 8% preferred stock at P105 per share. The cost of issuing and selling the
preferred stock is expected to be P5 per share.
Williams common stock is currently selling for P100 per share. The firm expects to pay cash
dividends of P7 per share next year, and the dividends are expected to remain constant. The stock
will have to be underpriced by P3 per share, and flotation costs are expected to amount to P5 per
share.
Williams expects to have available P100,000 of retained earnings in the coming year; once these
retained earnings are exhausted, the firm will use new common stock as the form of common stock
equity financing.
 Williams preferred capital structure is
Long-term debt 30%
Preferred stock 20%
Common stock 50%
What are the corresponding weighted-average cost of capital under each financing needs?

A. B. C. D.
P200,000 6.5% 6.8% 4.5% 7.3%
P1,000,000 6.8% 4.8% 6.5% 9.1%
48 A spindle manufacturer uses about 200 cases of raw wood per month. It pays a broker P50.00 to locate a
supplier and handle the ordering and delivery arrangements. Storage and handling costs are P0.02 per
case per month. If each case costs P0.78 the most economical order quantity (rounded to the next
whole number) is
A. 884 cases C. 1,133 cases
B. 625 cases D. 1,000 cases

49 The cost of statistical quality control in a product quality cost system is categorized as a (n)?
a. Internal failure cost
b. Training cost
c. prevention cost
d. Appraisal cost
50 Several survey point out that most managers use full product costs, including unit fixed costs and unit
variable costs, in developing cost-based pricing. Which one of the following is least associated with cost-
based pricing?
a. price stability
b. price justification
c. target pricing
d. fixed cost recovery
51 Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products with
a desired modification. Seacraft is now in the process of manufacturing this product but with a slightly
different modification for another customer. These unique products are labor intensive and both will have
long production runs. Which one of the following methods should Seacraft use to estimate the cost of the
new competitive bid?
a. expected value analysis
b. learning curve analysis
c. regression analysis
d. continuous probability simulation
52 Investment managers develop portfolios of different investments to combine, offset, and thereby reduce
overall risk. Not all risks can be eliminated by development of a portfolio. Risks that cannot be eliminated
through a portfolio are called:
a. non-market risks
b. unsystematic risks
c. firm-specific risks
d. systematic risks
53 The imputed interest rate used in the residual income approach for performance measurement and
evaluation can best be characterized as the:
a. historical weighted average cost of capital for the company.
b. average return on investment that has been earned by the company over a particular time period.
c. average return on assets employed over a particular time period.
d. average prime lending rate for the year being evaluated.
54 Which of the following is NOT a typical characteristic of a just-in-time (JIT) production environment?
a. lot size equal to one
b. insignificant setup times and cost
c. push-through system
d. balanced and level workloads
55 Capital budgeting decisions include all but which of the following?
a. selecting among long-term investment alternatives
b. financing short-term working capital needs
c. making investments that produce returns over a long period of time
d. financing large expeditures
56 Which one of the following is most relevant to a manufacturing equipment replacement decision?
a. original cost of the old equipment
b. disposal price of the old equipment
c. gain or loss on the disposal of the old equipment
 d. a lump-sum write-off amount from the disposal of the old equipment
57 Price variances and efficiency variances can be key to the performance measurement within a company in
evaluating the performance within a company, a material efficiency variance can be caused by all of the
following, except the:
a. actions of the purchasing department
b. design of the product
c. skill level of the labor force
d. sales volume of the product
58 Which of the following forecasting methods relies mostly on judgment?
a. time series models
b. econometric models
c. Delphi
d. regression
For numbers 59 and 60. The Cum Corp. Produces a variety of cleaning compounds and solutions for both
industrial and household use. While most of its products are processed independently, a few are related. Gritt
337 is a coarse cleaning powder with many industrial uses. It costs P1.60 a pound to make and has selling price
of P2 a pound. A small portion of the annul production of this product is retained for further processing in the
Mixing Dept. where it is combined with several other ingredients to form a paste which is marketed as a silver
polish selling for P4 a jar. This further processing requires pound of Gritt 337 per jar. Other ingredients, labor
and variable overhead associated with this further processing cost P2.50 per jar. Variable selling costs amount
to P0.30 per jar. If the decision were made to cease production of the silver polish, P5,600 of fixed Mixing
Department costs could be avoided.
59 Assuming that there is excess capacity in the production of additional GRitt 337, the minimum number of
jars of silver polish that would have to be sold to justify further processing of Gritt 337 is
a. 5,600 jars
b. 4,667 jars
c. 7,000 jars
d. 8,000 jars
60 Assuming the corporation can sell all the Gritt 337 that it can produce, the minimum number of jars of
silver polish that would have to be sold to justify further processing of Gritt 337 is
a. 5,600 jars
b. 4,667 jars
c. 7,000 jars
d. 8,000 jars
61 This principle imposes the obligation on all professional accountants to be fair, intellectually honest and
free of conflicts and interests.
a. integrity
b. objectivity
c. maturity
d. impendence in mental attitude
62 Lifelong Company has been asked to evaluate the profitability of a product that it manufactured and sold
from year 7 through year 10. The product had a one-year warranty from date of sale. The following
information appears in the financial records:
Research, development, and design cost, years 5 and 6 P 5,000,000
Manufacturing and distribution costs, year 7 to 10 7,000,000
Warranty costs, years 7 to 10 200,000
Warranty costs, year 11 100,000
The life-cycle cost for this product is
a. P10,000,000
b.P12,000,000
c. P12,200,000
d.P12,300,000
63 Jacob Corporation is a wholesaler that sells a single product. Management has provided the following cost
data for two levels of monthly sales volume. The company sells the product for P103.40 per unit.
Sales volume 5,0000 6,000
Cost of sales P315,500 P 378,600
Selling, general and admin costs P162,500 P177,600
The best estimate of the total contribution margin when 5,300 units are sold is
a. P56,710
b. P133,560
c. P41,340
d. P213,590
64 Big Tool Company has a production capacity of 1,500 units per month, but current production is only 1,250
units. The manufacturing costs are P60 per unit and marketing costs are P16 per unit. Small Hall offers to
purchase 250 units at P76 each for the next five months. Should Big accept the one-time-only special order
 if only absorption costing data are available?
a. yes, good customer relations are essential .
b. no, the company will only break-even.
c. no, since only the employees will benefit.
d. yes, since operating profits will most likely increase.

65 At the end of 200A, Gabbuat Companys total assets was P500,000. In 200B, it earned net income of
P30,000, and paid dividends of P10,000. What is the companys internal growth rate?
a. 1%
b. 4%
c. 5%
d. 9%
66 Each organization plans and budgets its operations for slightly different reasons. Which one of the
following is not a significant reason for planning?
a. checking progress toward the objectives of the organization
b. ensuring profitable operations
c. forcing managers to consider expected future trends and conditions
d. providing basis for controlling operations
67 During the recessionary phase of a business cycle
a. the purchasing power of money is likely to decline rapidly
b. the natural rate of unemployment will increase dramatically
c. potential national income will exceed actual national income
d. actual national income will exceed potential national income
68 The appropriate method for the disposition of underapplied or overapplied factory overhead:
a. is to cost of goods sold only.
b. is to finished goods inventory only.
c. is apportioned to cost of goods sold and finished goods inventory.
d. depends on the significance of the amount.
69 Capital investments require balancing risk and return. Managers have a responsibility to ensure that the
investments that they make in their own firms increase shareholder value. Managers have met that
responsibility if the return on the capital investment:
a. exceeds the rate of return associated with the firms beta factor.
b. is less than the rate of return associated with the firms beta factor.
c. is greater than the prime rate of return.
d. is less than the prime rate of return.
70 The optimal capitalization for an organization usually can be determined by the:
a. maximum degree of financial leverage.
b. maximum degree of total leverage.
c. lower total weighted-average cost of capital.
d. intersection of the marginal cost of capital and the marginal efficiency of investment.