Questions Set 82: Solution

Solution

To guide cost allocation decisions, the cause-and-effect criterion:

may allocate corporate salaries to divisions based on profits
is used less frequently than the other criteria
is the primary criterion used in activity-based costing
is a difficult criterion on which to obtain agreement

Which cost-allocation criterion is superior when making an economic decision?

the fairness or equity criterion
the ability to bear criterion
the cause-and-effect criterion
All of these answers are correct.

The MOST likely reason for NOT allocating corporate costs to divisions include that:

divisions receive no benefits from corporate costs
these costs are not controllable by division managers
these costs are incurred to support division activities, not corporate activities
division resources are already used to attain corporate goals

Identifying homogeneous cost pools: (Points: 3)

requires judgment and should be reevaluated on a regular basis
should include the input of management
should include a cost-benefit analysis
All of these answers are correct

The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division used $14,000,000 and the Electric Lamp Division used $6,000,000 for expansion. Interest costs on the bond totaled $1,500,000 for the year. Which corporate costs should be allocated to divisions? (Points: 3)

Variable Costs
Fixed Costs
Neither fixed nor variable costs
Both fixed and variable costs

All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT: (Points: 3)

payback method
future-value cash-flow method
discounted cash-flow method
accrual accounting rate-of-return method

Assume your goal in life is to retire with one million dollars. How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life? (Points: 3)

$376,476
$120,102
$27,184
$14,565

The definition of an annuity is: (Points: 3)

similar to the definition of a life insurance policy
a series of equal cash flows at intervals
an investment product whose funds are invested in the stock market
Both 1 and 2 are correct

An important advantage of the net present value method of capital budgeting over the internal rate-of-return method is: (Points: 3)

the net present value method is expressed as a percentage
the net present values of individual projects can be added to determine the effects of accepting a combination of projects
There is no advantage
Both 1 and 2 are correct

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. (Points: 3)

$119,550; yes
$326,750; no
$1,019,550; yes
$69,550; no

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