1.0 Name the three broad categories of manufacturing costs: (3 pts)

Cost 1:_____________________________________________

Cost 2:_____________________________________________

Cost 3:_____________________________________________

2.0 Which of the following is not a non-manufacturing cost: (1 pt.)

a General and administrative costs

b. Advertising costs

c. Janitor wages (Manufacturing Overhead)

d. Human Resource administration

e. Depreciation

3.0 Classify the following costs – fixed (F) or variable (V): (10 pts.)

a. Wages paid to temporary workers F or V

b. Property taxes on factory building F or V

c. Property taxes on the administration building F or V

d. Sales commission F or V

e. Electricity for machinery and equipment in the plant F or V

f. Natural gas and electricity for the administrative office F or V

g. Salaries paid to design engineers F or V

h. Regular maintenance on machinery and equipment F or V

i. Factory property and casualty insurance F or V

h. Shipping attributable to delivery of product F or V

4.0 The cost of producing a unit appears on financial

statements as soon as the final product is manufactured. (1 pt) T or F

5.0 A steel fabricator constructing an addition to the

manufacturing plant is viewed as direct labor. (1pt) T or F

6.0 The break-even point is where total sales equals the total costs. T or F

(1pt)

7.0 The cost-of-goods-sold budget is equal to the production budget. T or F

(1pt)

8.0 The following graphs represent what types of cost behaviors: (2 pts.)

Cost

Quantity or Volume

Cost

a.____________

b. ____________

Quantity or Volume

 

9.0 Name the three types of Cash Flow element categories: (3 pts)

a. ___________________________________________

b. ___________________________________________

c. ___________________________________________

10.0 Complete the following formula: (2 pts)

Cash Flow from Operations = ___________ + __________

11.0 Complete the simple Income and Cash Flow Statements categories: (5 pts)

INCOME STATEMENT

Revenues

Expenses:

O&M

a._________________________

 

Taxable Income

Income Taxes

 

b. ________________________

CASH FLOW STATEMENT

Operating Activities:

Net Income

c.______________________

Investment Activities:

Investment

d. _____________________

Gains Tax

Financing Activities:

Borrowed funds

Repayment of principle

 

e.__________________________________

12.0 (55 pts)

A Firm is considering purchasing a machine that costs $65,000. It will be used for 6 years and the salvage value is expected to be zero at the end of that time. The machine will save $35,000 per year in labor, but it will cost $12,000 in operating and maintenance (O&M) costs each year. The machine will depreciate according to the five year MACRS. The firm’s tax rate is 40%. Complete the following financial statements for this project:

Income Statement	0	1	2	3	4	5	6
Revenues
Expenses:
O&M
Depreciation
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax
Net Cash Flow

Note: 5 Year MACRS is as follows:

Year	Depreciation Percentage (per IRS)
1
2
3
4
5
6
7

13.0 (55 pts)

Jim owns a lawn care service. He would like to obtain a new heavy duty trailer to haul his equipment and materials from job to job. He’s found one that will suit his needs. The purchase price is $8,500. Jim is in a 28% tax bracket and sales taxes are 5%. The cost of capital for Jim to purchase the trailer is 8%. The trailer qualifies for 5 year MACRS depreciation method. Jim intends on using the equipment for 60 months. The salvage value of the trailer at the end of the use period is $4500. Jim has also found a dealer that is willing to lease the trailer to him for 60 months for $150 per month. The lease payments would be due at the beginning of the month. Determine if Jim should lease or buy this trailer.

Lease Option: (show work)

a) Total lease payment = _________________________

b) Net after-tax monthly lease expense = ____________

c) PW ( 8%/12)_lease =

PW_lease =

Buy Option: (show work)

a) Complete this chart: (round to the nearest dollar)

End of Year	5 year MACRS	Depreciation	Tax Benefit	PW (8%) (P/F,i,N)
1	20%
2	32%
3	19.2%
4	11.52%
5	5.76%
Total Sum

a) Up-front cash payment = __________________________

b) Book Value at the end of year 5 =_____________________

c) Taxable Gains = ____________________________

d) Tax Depreciation Benefit = (from table above)

e) Net proceeds from sale = Net salvage = ______________ ;

f) PW(8%) =

g) Decision: lease or buy (circle one)_____.

14.0 What three conditions must exist in order for an item to be depreciated? (3 pts)

1.

2.

3.

15.0 Explain the difference between book depreciation and tax depreciation. (3 pts)

16.0 Name the four components of information needed to calculate depreciation: (4pts)

1. ___________________________________________

2. ___________________________________________

3. ___________________________________________

4. ___________________________________________

17.0 For the project described below, find the net income for the first year of operation.

(10 pts)

Project description:

· Purchased equipment costing $56,000

· Gross income: $100,000/yr

· Cost of goods sold: $40,000/yr

· Operating expenses: $12,000/yr

· Depreciation method – 7-year MACRS (see table in Ch9)

· Income tax rate: 40%

· Determine the net income during the first year of operation

(see next page for table)

17.0 (cont’d)

Item	Amount
Gross Income (revenue)
Expenses:
Cost-of-goods-sold
Depreciation
Operating Expenses
Taxable Income
Taxes
Net Income

18.0 Define inflation: (5pts)

19.0 Define Producer Price Index: (5(pts)

20.0 Define Consumer Price Index: (5pts)

21.0 List 5 major groups that would be considered in the “market basket” used to determine the Consumer Price Index: (5pts)

1.

2.

3.

4.

5.

22.0 What two periods were the CPI indices re-baselined (base years)? (5pts)

1.__________ 2. __________

23.0 Given the costs over the years shown in the following table, determine the yearly and the average inflation rate: (5pts)

Year	Cost
0	$604,000
1	$638,000
2	$677,000
3	$729,500

Year 1

Year 2:

Year 3

f =

24.0 The base price of a commodity is $100. The inflation rate for this item in year one is 8% and the inflation rate in year two is 12%. Calculate the actual inflated price at the end of year two and the average inflation rate by solving the equivalence equation: (10 pts)

$100 (1+f)² = Price at end of year 2

25.0 Name the six phases of the Cone of Uncertainty: (10pts)

1.

2.

3.

4.

5.

6.

26.0 Which phase analyzes whether or not the project realized the projected benefits? (1pt)

27.0 Define Break-Even Analysis (5 pt):

28.0 Reference problem 13.0. Jim determined to purchase the trailer that he would like to finance the entire purchase. Use the following information to fill in the Loan Repayment Schedule (20pts).

Amount financed: $8500 (do not include taxes)

Finance Rate: 8% per year

Annual Installment: A=

Round to the nearest $xxxx.xx

End of Year	Beginning Balance	Interest Payment	Principle Payment	Ending Balance
1
2
3
4
5

Note: Rounding issues may vary within $2.00 for the final Principle Payment entry.

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