ACCT202 - T eng Final Exanm Fall 2017 10. An overly optimistic sales budget may

Question

ACCT202 - T eng Final Exanm Fall 2017 10. An overly optimistic sales budget may result in A) increases in selling prices late in the year B) insufficient inventories. C) increased sales during the year. D) excessive inventories. Use the following to answer question l1 The Selling Division's unit sales price is $25 and its unit variable cost is $1S. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units. 11. What is the Selling Division's opportunity cost per unit from selling 2,000 units to the Purchasing Division? A) S10 B) $25 C) $4 D) So 12. A purchases budget is used instead of a production budget by A) merchandising companies B) service enterprises. C) not-for-profit organizations. D) manufacturing companies. 13. Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 cach year. The cash payback on this investment is A) 15 years. B) 10 years. C) 7.5 yeas. D) 6 years. Use the following to answer question 14. A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. Page 3

Explanation / Answer

Answer t o Question No. 10

Option C i.e. Excessive Inventories.

Sales Budget shows the Expected No. of units to be sold and the Sales revenue to be generated from Sales of these budgeted units sold.

A overly optimistic Sales budget will project a higher no. of units to be sold, which might result in excess inventory due to lesser units sold than the budgeted Unit Sales.

Answer t o Question No. 11

Option A i.e. $10

The Opportunity Cost if 2,000 Units are sold to Purchasing Division is $10, which is excess of Selling Price over Variable Cost per unit.

Answer t o Question No. 12

Option A i.e. Merchandising Companies.

Purchases Budget shows the Number of Units to be purchased to meet the Budgeted Sales after keeping the minimum units in hands. Whereas, Production Budget shows the number of units to be produced to meet the Budgeted Sales after keeping the minimum inventory in hands.

Manufacturing Companies uses Production Budget to derive Units to be produced to meet the requirement, while Merchandising Company prepares Purchases Budget to calculate units to be purchased to meet the Budgeted Sales requirement.

Answer t o Question No. 13

Option C i.e. 7.5 years

Payback period = Initial Investment / Annual Cash Inflow
Annual Cash Inflow = Net Income + Depreciation
Depreciation = (Cost – Salvage Value) / Useful Life
Depreciation = (90,000 – 0) / 10
Depreciation = $9,000

Annual Cash Inflow = $3,000 + $9,000 = $12,000

Payback period = 90,000 / 12,000
Payback period = 7.5 years

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