[jeff]

@h0wdyus

Incorrect

The answer is B. Comparable sales.

“The use of comparable sales is not an income approach to valuation of a business, it is a market approach. Under the comparable sales approach, the value of a business is determined by comparing it to other entities with comparable characteristics for which the value is more readily determinable.”

This was a tricky one

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Anonymous]

@M.O.D.

An 80% learning curve means that the cumulative average time to produce a unit will decrease by 20% as output doubles. Knowing this information, the answer can be found as follows:

Time to produce 1 unit: 10,000 hours

Time to produce 2 units: 16,000 hours = 2*10,000*0.80

Time to product 4 units: 25,600 hours = 2*16,000*0.80

Time to produce 8 units: 40,960 hours = 2*25,600*0.80

Therefore, I think the time to produce 7 additional units is 30,960 hours (40,960 – 10,000). Hopefully I did that right.

@klink24

Isn't it just $258.02? Just take your average total cost multiplied by total units.

[M.O.D.]

@ CPA2B, correct

@klink

units 7×36.86 (average cost for 7 units) = 258.02

This is a easy question disguised as a trick question.

Next:

Show your work please:

During the previous year, Morrison, Inc., produced 200,000 pogo sticks and sold them all for $10 each. The explicit costs of production were $700,000, and the implicit costs of production were $200,000. The firm had an accounting profit of

A. $1.1 million and economic profit of $0.

B. $1.3 million and economic profit of $1.1 million.

C. $1.3 million and economic profit of $1.3 million.

D. $1.3 million and economic profit of $1.5 million.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[stoleway]

Answer is B….1.3 million and economic profit of $1.1 million

Total sales= 2,000,000

Explicit or Accounting cost= 700,000

Implicit or Opportunity cost= 200,000

Economic Cost = explicit + implicit cost = 900,000

Accounting Profit = Sales – Explicit cost

=2,000,000 – 700,000

=1,300,000

Economic Profit = Sales – Economic cost

= 2,000,000 – 900,000

=1,100,000

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Mass-CPA

[klink24]

@CPA_2_B and M.O.D., it is an easy question disguised as a trick question, which is why I hate them the most.

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4 up, 4 down, in 4 months.

Licensed 9/22 in NC.

[M.O.D.]

stoleway, correct

What is a complementary good? Give examples.

What is a substitute good? Examples.

A decrease in the price of a complementary good will

A. Shift the demand curve of the other commodity to the right.

B. Shift the demand curve of the other commodity to the left.

C. Shift the supply curve of the other commodity to the left.

D. Increase the price paid for a substitute good.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[stoleway]

A complementary good's demand increases when the price of another good is decreased.

eg…tennis racket and tennis ball, gasoline and car etc

A substitute good's demand increases when the price of another good is increased

eg, Honda and Hyundai, robots and human, American coffee and Mexican coffee…etc

decrease in the price of a complementary good will

A. Shift the demand curve of the other commodity to the right.

REG -63│ 84!!
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[M.O.D.]

stoleway, correct. You should change your signature from stupid BEC to smart BEC: develop positive thinking. When walking into prometric you want to feel smart and confident.

Give an example of check digit.

The purpose of check digit verification of an account number on an update transaction is to

A. Detect a transposition of an account number entered into the system.

B. Require the account number to have the correct logical relationship with other fields.

C. Verify that the account number corresponds to an existing account in the master file.

D. Ensure that supporting documentation exists for the update transaction.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[stoleway]

M.O.D.

Lol…I'm definitely expecting to round it up this time around, I need to have my life back.

REG -63│ 84!!
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Mass-CPA

[M.O.D.]

Difficult question? For me it required some reasoning. What is your reasoning?

A company uses its company-wide cost of capital to evaluate new capital investments. What is the implication of this policy when the company has multiple operating divisions, each having unique risk attributes and capital costs?

A. High-risk divisions will under-invest in high-risk projects.

B. Low-risk divisions will over-invest in low-risk projects.

C. Low-risk divisions will over-invest in new projects and high risk divisions will under-invest in new projects.

D. High-risk divisions will over-invest in new projects and low risk divisions will under-invest in new projects.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[rzrbkfaith]

@M.O.D. I actually diagrammed this question to help me answer it. I put Low Risk Company A (0.5 capital cost) on the left, the WACC in the middle (1.0) , and High Risk Company B (1.5 capital cost) on the right. For some reason, the visual representation made it make sense.

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[stoleway]

MOD ….answer is D…..I dont have a proper explanation for this but my assumption is that managers in a high risk division are likely to invest in projects that increases net income, so they over-invest hoping for a greater ROI.

Question….

A company sells 20,000 widgets in Year One for $8 each. Variable costs are $4 each and the company made a net income of $50,000. In Year Two, the company raises the sales price to $10 each because of a 50 percent increase in fixed costs. Variable cost is not impacted. How many units must the company sell just to break even?

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[M.O.D.]

Re diagram. Yes I had to diagram it too the first time I read it (it was during the middle of the CMA exam unfortunately). The answer is D.

I got this one wrong. I don't think it is worded well. What do you think?

Polo Co. requires higher rates of return for projects with a life span greater than 5 years. Projects extending beyond 5 years must earn a higher specified rate of return. Which of the following capital budgeting techniques can readily accommodate this requirement?

Internal Rate of Return

Net Present Value

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[rzrbkfaith]

NPV since the rate of return is specified. And I agree that the questions are tricky…

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[M.O.D.]

I thought so too, but the answer is both:

“A project’s internal rate of return is the discount rate at which its net present value is zero. A project’s net present value is the excess of the present value of the expected future net cash inflows over the cost of the investment. Thus, both techniques can be readily adjusted for an increase in the desired return by changing the discount rate.”

I thought they wanted to say that the required rate is lower the first 5 years and then changes to a higher rate for any years beyond 5. But the only way this works is if the rate is the same for the life of the project. Because whereas NPV can accommodate changing rates, (using different factors for each year's cash flow), IRR calculates one rate for the entire project.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

@stoleway

To figure out how many units are need to break even we must find the total fixed costs. In year one the company had $160,000 in sales and $50,000 in net income. We know the total variable costs were $80,000, so that means the total fixed costs must have been $30,000.

A 50% increase in fixed costs leads to $45,000 in total fixed costs in year two. Since the variable cost is not impacted, the contribution margin per unit would be $6 (=10-4) and the break even unit sales would be 7,500 ($45,000/$6).

[Author]

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