# Cpa Practice Questions

**Topics:**Types of business entity, Corporation, Variable cost

**Pages:**35 (11218 words)

**Published:**February 25, 2013

Following are multiple choice questions recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanation. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams.

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2009 AICPA Newly Released Questions – Business

1. A company's target gross margin is 40% of the selling price of a product that costs $89 per unit. The product's selling price should be: a. b. c. d. $124.60 $142.40 $148.33 $222.50

Solution: Choice "c" is correct. The selling price is computed at $148.33. The fact pattern provides the basic relationships and requires that you determine selling price either algebraically or in a tabular form. Putting the fact pattern in a table, the provide information is used to compute the solution as follows: Data Provided Percent Amount Selling price Costs Gross margin 100% ??? 40% ??? (89) ??? Computed Percent Amount 100% 60% 40% ↑ 148.33 (89)

The problem provides that the company has a 40% gross margin. By extension, costs are 60% of sales. If costs are $89, then selling price must be $148.33, as calculated below: Selling price = Costs ÷ Ratio of costs to sales Selling price = $89 ÷ 60% Selling price = $148.33 Choice "a" is incorrect. The proposed solution anticipates that selling price is 40 greater than costs ($89 x 1.4). Choice "b" is incorrect. The proposed solution anticipates that selling price is 60 greater than costs ($89 x 1.6), instead of 60% of costs as computed above. Choice "d" is incorrect. This proposed solution anticipates that selling price is a function of cost divided by gross margin percentage.

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2009 AICPA Newly Released Questions – Business 2. Wren Co. manufactures and sells two products with selling prices and variable costs as follows: Selling price Variable costs A $18.00 12.00 B $22.00 14.00

Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If operating income last year was $28,800, what was the number of units Wren sold? a. b. c. d. 5,486 6,000 9,600 10,500

Solution: Choice "d" is correct. Wren will have sold a total of 10,500 units to achieve a $28,800 operating profit assuming the fact pattern described above. The question requires the candidate to recall the basic contribution margin formula and apply some algebra. The fact pattern describes that the operating income is $28,800 and the fixed costs are $38,400. The contribution margin is; therefore, the total of the two $67,200. The basic formula to compute units sold is: CM per unit x Units = $67,200 The fact pattern indicates that Wren has two products with unique selling and cost patterns. First, compute the contribution margin: Selling price $18 $22 - Variable cost $12 $14 Contribution = margin per unit = $6 = $8

Product A Product B

Second, quantify the selling pattern and the relationship between the products. Wren sells 4 units of Product A for every unit of Product B, so expressing Product A in terms of Product B: Product A = 4 x Product B Third, determine the number of units of Product B that were sold: $6 contribution margin x (4B) + $8 contribution margin x B = $67,200 24B + 8B = 67,200 32B = 67,200 B = 2,100 Fourth, determine the number of Product A and the total number of products sold: A = 4 x B (4 x 2,100) or 8,400 Total units = 2,100 + 8,400 or 10,500 Choices "a", "b", and "c" are incorrect, per the computations above.

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2009 AICPA Newly Released Questions – Business

3. Which form of business entity has the following attributes? I. Limited liability for all its owners. II. Can permit all its owners to participate in management and control of the entity. III. Absent an agreement to the contrary, is dissolved on the death, withdrawal, or bankruptcy of an...

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