PM-G11-SEPTEMBER2023-TEST 5

The following scenario relates to questions 1 – 5.

Mertens Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry hours $200,000 10,000 hours
Account billing lines $140,000 4,000,000 lines
Account verification accounts $75,000 40,000 accounts
Correspondence letters $25,000 4,000 letters
Total costs $440,000

The above activities are used by Departments A and B as follows:

Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters

Question 1
How much of the account billing cost will be assigned to Department B?
A. $14,000
B. $140,000
C. $7,000
D. None of these answers are correct.
Question 2
How much of the total costs will be assigned to Department A?
$_________________________.
Question 3
How much of the total costs will be assigned to Department B?
A. $79,000
B. $40,000
C. $112,000
D. $440,000
Question 4
Activity-based costing is most likely to yield benefits for companies with, which of the following
characteristics?
A. numerous products that consume different amounts of resources
B. operations that remain fairly consistent
C. a highly competitive environment, where cost control is critical
D. accessible accounting and information systems expertise to maintain the system
Question 5
A single indirect-cost rate may distort product costs because:
 A. there is an assumption that all support activities affect all products
B. it recognizes specific activities that are required to produce a product
C. costs are not consistently recorded
D. it fails to measure the correct amount of total product costs
The following scenario relates to questions 6 – 10.
The owner, Z, of a business has been attending a course on scenario planning and decision making. As a result
of that advice the owner has produced, by using cost volume and profit analysis, 12 scenarios for a new
product that the business will launch in the near future. There are four possible marketing packages that could
be used (A, B, C or D) and there are three possible market conditions (poor, average or good) that could be
encountered. The Net Present Value of the cash flows resulting from each of the scenarios is shown in the
table below.
Marketing Packages ($’000)
Marketing Condition Probability A B C D
Poor 30% 180 230 220 190
Average 55% 190 200 210 275
Good 15% 550 260 210 500
Unfortunately, Z missed the session on how to deal with risk and uncertainty. He has sent the above table to
the tutor for the course and has asked for help. The tutor replied, based on your table you will need the
methods in the section on ‘Uncertainty’. If you can estimate the probability of each type of market condition
occurring, you need ‘Risk based methods’. However, whichever method you use, your decision will be
influenced by your attitude.”
Question 6
Assuming the management is risk averse, which marketing packages would be recommended?
A. A
B. B
C. C
D. D

Question 7
Based on expected value, the recommended marketing packages would be?
A. A
B. B
C. C
D. D

Question 8
What would be the maximum amount that can be paid for the perfect information?
A. $63,938
B. $283,250
C. $302,750
D. $19,500
Question 9
Based on minimax regret, determine the lowest maximum regret possible?
$__________________________

Question 10
The owner managed to carry out sensitive analysis on the above scenario and the outcome for selling price
and variable cost are 10% and 7% respectively.
Which TWO of the following statements is/are true?
1. Selling price must increase by 10% and variable cost must decrease by 7% for NPV to be NIL
2. Selling price must decrease by 10% and variable cost must increase by 7% for NPV to be NIL
3. Selling price is more sensitive than variable cost
4. Variable cost is more critical than selling price
5. Both variables must increase by 10% and 7% before NPV becomes NIL

The following scenario relates to questions 11 – 15.

A company sells three products: D, E and F. The market for the products dictates that the numbers of products
sold are always in the ratio of 3D:4E:5F.
D E F
Sales units 300 400 500
Sales price $80 $55 $70
Variable cost to sales ratio 30% 35% 50%
The budgeted total fixed costs for that period were $31,200

Question 11
Calculate for that period the weighted average contribution to sales ratio

A. 38%
B. 78%
C. 40%
D. 60%

Question 12
Calculate for that the period the break-even sales revenue based on assumption of constant sales mix

A. $82,105
B. $40,000
C. $78,000
D. $52,000

Question 13
Calculate for that the period the break-even sales revenue based on profitability ranking criteria.

A. $77,000
B. $62,400
C. $44,571
D. $46,200

Question 14
Calculate the total sales volume that would have needed to be sold if the company had wanted to earn a profit
of $29,520 in that period. (assume constant mix)

A. 3,748
B. 1,200
C. 1,000
D. 1,500

Question 15
Cost volume profit analysis assume the followings, EXCEPT?
1. Fixed costs remain constant in the long term regardless of the level of activity.
2. Variable cost per unit is the same at all level of activity.
3. Inventory level to remain zero.
4. There is negative correlation between selling price and demand.
5. Profit is affected by change in sales volume only.