Critical thinking Managerial Accounting
Q1. Distinguish between Net Present Value and Internal Rate of Return.Give one pro and one con for each method.[15 marks]
Q2. Describe one advantage and one disadvantage for the following pricing methods:market-based and cost- based[15 marks]
Q3. The Coffee Revolution sells beverages in a variety of coffee flavors.Data for a recent week appear below:
Revenue (1,000 cups sold)
Cost of ingredientsSAR640
Depreciation expense –office3601,500
a.Suppose the company’s policy is to set prices based on a 250% markup above variable cost.Calculate the cost-based price per cup. [15 marks]
b.What is the mark up percentage if the company adopts product cost method and the required rate of return by shareholders is 10% on total assets of SAR 10,000[15 marks]
Q4. The City of Hail is considering the purchase of new road repair equipment costing SAR40,000 to achieve cash savings of SAR8,000 per year in operating costs.The estimated useful life is 10 years, with no terminal value.The city’s minimum expected return is 14%.
a.What is the net present value of this investment?[10 marks]
b.What is the internal rate of return? [10 marks]
d.What is the payback period?[10 marks]
Q5. Part A is used in one of Oraby Corporation’s products. The company’s Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year.
Direct materialsSAR 4.50
Direct laborSAR 1.20
Variable overheadSAR 2.70
Supervisor’s salarySAR 3.00
Depreciation of special equipmentSAR 2.30
Allocated general overheadSAR 1.80
An outside supplier has offered to make the part and sell it to the company for SAR 15.70 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only SAR 5,000 of these allocated general overhead costs would be avoided.
a. Prepare a report that shows the effect on the company’s total net operating income of buying part A from the supplier rather than continuing to make it inside the company. [30 marks]
b. Which alternative should the company choose? [10 marks]
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