AMIS 7716
Sample Exam 2
Name (Print):____________________________________________
Signature: _______________________________________
DO NOT OPEN THE EXAM UNTIL GIVEN INSTRUCTION TO DO SO!
1. You are reminded that the Code of Student Conduct upheld by The Ohio State University
and Fisher College requires you to do your own work and not give or receive assistance
on this exam.
2. The exam consists of three question types as follows:
Section
Type of
Question
Long Problem
Points Total
1
Question
#’s
1
25
Partial
Credit
yes
1
2
Long Problem
25
yes
2
1 thru 5
Short Problems
25
no
3
1 thru 5
Multiple Choice
Problems
25
no
Total
100
Points Earned
3. You will have 90 minutes to complete this exam.
Budget your time - attempt all questions!
4. When you are done, please hand back the entire question packet.
5. Please be organized and legible in your answers to receive full credit for your work.
6. Check the exam question packet for completeness.
7. The exam is closed-book and no supplemental materials are allowed;
pencil, eraser, and calculator [only the basic functions (+, -, *, /) may be
used] are the only resources which you may use. Scratch paper is not
allowed. A timepiece may be used.
8. Do not ask questions during the exam; assume that all questions are valid
and give the answer that you reason is best.
AMIS 7716
Sample Exam 2
Long (Computational) Problem 1 (25 points)
Hope Hospital plans to use activity-based costing to assign hospital indirect costs to the care of
patients. The hospital has identified the following activities and activity rates for the hospital
indirect costs:
Activity
Activity Rate
Room and Meals
Radiology
Pharmacy
Chemistry Lab
Operating Room
$150 per day
$95 per image
$28 per physician order
$85 per test
$550 per operating room hour
The records of two representative patients were analyzed using the activity rates. The activity
information associated with the two patients is as follows:
Number of Days
Number of images
Number of physician orders
Number of tests
Number of operating room hours
Patient M
Patient T
7 days
4 images
5 orders
6 tests
4.5 hours
3 days
2 images
1 order
2 tests
1 hour
a. Determine the activity cost associated with each patient.
b. Why is the total activity cost different for the two patients?
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AMIS 7716
Sample Exam 2
Long (Computational) Problem 2 (25 points)
The following monthly data in contribution format are available for the MN Company and its
only product, Product SD:
Total Per Unit
Sales ..............................................................................................................
$83,700
$279
Variable expenses..........................................................................................
32,700
109
Contribution margin ......................................................................................
51,000
$170
Fixed expenses ..............................................................................................
40,000
Net operating income ....................................................................................
$11,000
The company produced and sold 300 units during the month and had no beginning or
ending inventories.
Required: (Show all calculations)
a. What is the total contribution margin at the breakeven point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in
Product SD. This change would reduce variable expenses by $18 per unit. The company's
sales manager predicts that this would reduce the overall quality of the product and thus
would result in a decline in sales to a level of 250 units per month. Should this change be
made?
c. Assume that MN Company is currently selling 300 units of Product SD. Management
wants to automate a portion of the production process for Product SD. The new equipment
would reduce direct labor costs by $20 per unit but would result in a monthly rental cost
for the new robotic equipment of $10,000. Management believes that the new equipment
will increase the reliability of Product SD thus resulting in an increase in monthly sales of
12%. Should these changes be made?
3
AMIS 7716
Sample Exam 2
Section 2 – Short Problems (5 points each)
1. Kendall Company has sales of 1,000 units at $60 a unit. Variable expenses are 30% of the
selling price. If total fixed expenses are $30,000, the degree of operating leverage is:
Answer: _____________
2. Frank Company operates a cafeteria for its employees. The number of meals served each week
over the last seven weeks, along with the total costs of operating the cafeteria, are given
below:
Week Meals served Cafeteria costs
1
1,500
$4,800
2
1,600
$5,080
3
1,800
$5,280
4
1,450
$4,900
5
1,200
$4,000
6
1,650
$5,100
7
1,900
$5,400
Assume that the cafeteria expects to serve 1,850 meals during Week 8. Using the high-low
method, the expected total cost of the cafeteria would be:
Answer: _____________
3. Extron, Inc. has only variable costs and fixed costs in its cost structure. A review of the
company's records disclosed that when 100,000 units were produced, fixed manufacturing
costs amounted to $200,000 and the total cost per unit manufactured totaled $5. On the basis
of this information, how much total cost would the firm anticipate at an activity level of
97,000 units?
Answer: _____________
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AMIS 7716
Sample Exam 2
4. Yellow, Inc. sells a single product for $10. Variable costs are $4 per unit and fixed costs total
$120,000 at a volume level of 10,000 units. What dollar sales level would Yellow have to
achieve to earn a target net profit of $240,000?
Answer: _____________
5. Hotaling Corporation is analyzing a capital expenditure that will involve a cash outlay of
$97,360. Estimated cash flows are expected to be $20,000 annually for seven years. The
present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are
5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is:
Answer: ________________
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AMIS 7716
Sample Exam 2
Section 3 - Multiple Choice Questions (5 points each)
Identify the letter of your choice that best completes the statement or answers the question.
1.
Pepper Industries has three product lines, A, B, and C. The following information is
available:
Sales
Variable costs
Contribution margin
Fixed costs:
Avoidable
Unavoidable
Operating income
A
--$60,000
36,000
$24,000
B
--$90,000
48,000
$42,000
C
--$24,000
15,000
$9,000
9,000
6,000
$9,000
18,000
9,000
$15,000
6,000
5,400
$(2,400)
Assuming product line C is discontinued and the space formerly used to produce product C
is rented for $12,000 per year, operating income will
a.
b.
c.
d.
increase $6,600.
increase $9,000.
increase $12,000.
increase $14,400.
2. Dukes Company is considering the acquisition of a machine that costs $750,000. The machine
is expected to have a useful life of 6 years, a negligible residual (salvage) value, an annual cash
flow of $300,000, and annual operating income of $175,000. What is the estimated cash
payback period for the machine?
a.
b.
c.
d.
3 years
4.3 years
2.5 years
5 years
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AMIS 7716
Sample Exam 2
3. Variable costs as a percentage of sales for Leamon Inc. are 65%, current sales are $500,000,
and fixed costs are $150,000. How much will operating income change if sales increase by
$80,000?
a.
b.
c.
d.
$28,000 increase
$28,000 decrease
$70,000 decrease
$80,000 increase
4. When the level of activity increases within the relevant range, how does each of the following
change?
a. Choice A
b. Choice B
c. Choice C
d. Choice D
5. Stratford Company purchased a machine with an estimated useful life of seven years. The
machine will generate cash inflows of $90,000 each year over the next seven years. If the
machine has no salvage value at the end of seven years, and assuming the company's discount
rate is 10%, what is the purchase price of the machine if the net present value of the
investment is $170,000?
a. $221,950
b. $170,000
c. $268,120
d. $438,120
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AMIS 7716
Sample Exam 2
Sample Exam 2 Solutions
Computational Problem 1
a.
Patient M
Activity
Room and meals ..
Radiology .............
Pharmacy..............
Chemistry lab .......
Operating room ....
Total cost ..............
b.
Activity Usage
 Activity Rate
7 days  $150/day
4 images  $95/image
5 orders  $28/order
6 tests  $85/test
4.5 OR hrs.  $550/hr.
Patient T
Patient M
Activity
=
Cost
= $1,050
=
380
=
140
=
510
= 2,475
$4,555
Activity Usage
 Activity Rate
Patient T
Activity
=
Cost
3 days  $150/day
=$
2 images  $95/image =
1 order  $28/order
=
2 tests  $85/test
=
1 OR hr.  $550/hr.
=
450
190
28
170
550
$1,388
Patient M apparently had a more serious condition than did patient T. Patient
M required more operating room hours, more tests and images, and more
days to recover than did patient T. Thus, the activity cost to patient M is
more than three times that of patient T.
Computational Problem 2
a. The total contribution margin would be $40,000 since it is equal to the fixed expenses
at the break-even point.
b. The $18 decrease in variable costs will cause the contribution margin per unit to
increase from $170 to $188.
Expected total contribution margin:
250 units x $188 per unit ............................................................................
$47,000
Present total contribution margin:
300 units x $170 per unit ............................................................................
51,000
Decrease in total contribution margin ............................................................
$(4,000)
The less costly components should not be used in the manufacture of Product SD. Net
operating income will decrease by $4,000.
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AMIS 7716
Sample Exam 2
c. The use of the automated process would affect both fixed and variable costs. Fixed expenses
will increase by $10,000 from $40,000 to $50,000. Variable costs will decrease by $20
from $109 to $89, and the unit contribution margin will increase from $170 to $190.
Expected total contribution margin:
300 units x 112% x $190 per unit ...............................................................
$63,840
Present total contribution margin:
300 units x $170 per unit ............................................................................
51,000
Increase in total contribution margin .............................................................
12,840
Change in fixed expenses:
Less monthly equipment rental ......................................................................
10,000
Increase in net operating income ...................................................................
$ 2,840
The changes should be made.
Short Problems
1. 3.50
2. $5,300
3. $491,000
4. $600,000
5. 10%
Multiple Choice
1. b
2. c
3. a
4. d
5. c
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