Question

1.XYZ Company produces two models of a component, Model A-3 and Model B-2. The unit contribution margin for Model A-3 is GH¢ 6; the unit contribution margin for Model B-2 is GH¢ 14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model A-3 requires 15 minutes of machine time; Model B-2 requires 30 minutes of machine time. If XYZ Company can sell only 5,500 units of each model. How many units of Model A-3 should be produced?

Select one:

a. 5,500 units.

b. 5,000 units.

c. 3,000 units.

d. 1,250 units.

2.Fixed cost per unit is GH¢ 9 when 20,000 units are produced and GH¢ 6 when 30,000 units are produced. What is the total fixed cost when nothing is produced?

Select one:

a. GH¢ 360,000.

b. GH¢ 150,000.

c. GH¢ 180,000.

d. GH¢ 240,000.

3.

Allan invested in a project with a payback period of 6 years. The project brings in GH¢ 18,000 per year for a period of 9 years. What was the initial investment?

Select one:

a. GH¢ 107,500.

b. GH¢ 108,000.

c. cannot be determined from this information.

d. GH¢ 162.000.

4.

A project should be accepted if its internal rate of return exceeds:

Select one:

a. the rate the company pays on borrowed funds.

b. the rate of return on a government bond.

c. the company’s required rate of return.

d. zero.

Answer 1

1) since model B-2 has the highest margin we need to sell full quantity of this.

Total machine hours taken to produce 5500 units of model B-2 = 5500 units * 30 min / 60 min = 2750 hours.

The remaining hours will be taken to produce model A-3 = 1250 hours * 60 min / 15 min = 5000 units .

Therfore number of units of model A-3 should be produced = 5000 units.

2) The total fixed cost when produced nothing = 20000 units * GHc 9 = GHc 180000.

Since total fixed cost will not change with the change in quantity.

3) Simple payback period = Initial investment / cash flow per period

Initial investment = GHc 18000 * 6 years = GHc 108000.

4) c) The companies required rate of return.