Cost Accounting Midterm

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ADM 3346A
COST ACCOUNTING
Solution

Fall 2010
Midterm Examination

STUDENT NAME: _________________________________________________ STUDENT NUMBER: ________________________________________________

90 minutes
INSTRUCTIONS
1.
2.
3.
4.

Books and notes are not permitted, except language dictionaries. Non programmable calculators are permitted.
Put all answers in the question booklet
Questions concerning possible errors in the exam only will be answered.

Questions

Max Points

Question 1

/10

Question 2

/6

Question 3

/4

Question 4

/6

Question 5

/6

Question 6

/8

Question 7

/10

Question 8

/6

Question 9

/4

Question 10

/6

Total

/66

Statement of Academic Integrity
The School of Management does not condone academic fraud, an act by a student that may result in a false academic evaluation of that student or of another student. Without limiting the generality of this definition, academic fraud occurs when a student commits any of the following offences: plagiarism or cheating of any kind, use of books, notes, mathematical tables, dictionaries or other study aid unless an explicit written note to the contrary appears on the exam, to have in his/her possession cameras, radios (radios with head sets), tape recorders, pagers, cell phones, or any other communication device which has not been previously authorized in writing.

Statement to be signed by the student:
I have read the text on academic integrity and I pledge not to have committed or attempted to commit academic fraud in this examination.
Signed:______________________________________
Note: an examination without this signed statement will not be graded

Midterm ADM 3346A Fall 2010

Page 1 of 10

Number in brackets is the grade for the question. You must show your work Q.1 (10)
One of your first major investment decisions at DSD was to invest $3 million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year. Pandora, a supplier of testing equipment, wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $300,000. The new equipment would enable you to increase your division’s annual revenue by 10 per cent. This new, more efficient machine would also decrease fixed cash expenditures by 5 percent. The rental machine would also require a warranty costing $50,000 per year in addition to rent. Without the new machine, operating revenues and costs for the year are estimated to be as shown below. Revenues and fixed and variable operating costs are all cash. Sales revenues................................................................$5,000,000 Variable operating costs......................................................500,000 Fixed operating costs .......................................................2,500,000 Equipment depreciation Testing Machine ..........................500,000 Other depreciation...............................................................400,000 If you rent the new testing equipment, DSD will have to write off the cost of the automated testing equipment this year; it has a salvage value of $50,000. Equipment depreciation shown in the income statement is for this automated testing equipment. Because the new machine will be installed on a company holiday, there will be no effect on operations this year from the changeover. Ignore any possible tax effects. Assume that the data given in your expected income statement are the amounts expected for this year and next.

Required:
Based on differential/relevant costing, should the machine be rented from Pandora? By how much will DSD be better or worse off based on this approach?......................................................................... This Year – the only differential item is salvage of $50,000, the write-off is not relevant Next year and on

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