BEC 1

Question 1

What is the price elasticity of supply?

Answer 1

Percentage change in quantity supplied / Percentage change in price

• Greater than 1, relativey elastic
• Equal to 1 means unitary elastic
• Less than 1, demand is relatively inelastic

Question 2

What is the price elasticity of demand?

Answer 2

Sensitivity of the quantity demanded to a change in its price

• Greater than 1, relativey elastic
• Equal to 1 means unitary elastic
• Less than 1, demand is relatively inelastic

Question 3

What is the Point Method?

Elasticity of Demand

Answer 3

Measures the price elasticity of demand at a given point on the demand curve.

• %Q = [Quantity demanded after the change - Quantity demanded before the change] / Quantity demanded before the change
• %P = [Price after the change - Price before the change] / Price before the change
• %Q/%P = Percentage change in quantity demanded / Percentage change in price

Question 4

What is the Midpoint Method (Arc Method)

Answer 4

The midpoint method measures the price elasticity of demand of a range for a specified change in a product’s price.

(Q1 - Q2) / (Q1 + Q2)
%
(P1 - P2) / (P1 + P2)

Question 5

How is the annualized cost of not taking a trade discount calculated?

Offered by suppliers on trade receivables.

Answer 5

Question 6

What is the effective rate of interest?

Answer 6

Effective interest rate = Interest expense (interest to be paid) / Usable funds (net proceeds)

Question 7

How do you compute totwal borrowings for a discounted loan?

Answer 7

Total borrowings = Amount needed / (1.0 - stated rate)

Question 8

In financing arrangements, how do you calculate the effective rate on a discounted loan?

Answer 8

Effective rate on discounted loan = Stated rate / (1.0 - Stated rate)

Question 9

How do you compute total borrowings with a compensating balance?

Answer 9

Total borrowings = Amount needed / (1.0 - compensating balance)

Question 10

How do you compute effective rate with compensatory balance?

Answer 10

Effective rate with compensatory balance = Stated rate / (1.0 - Compensating balance %)

Question 11

What is target operating income?

Answer 11

Target sales in units = (Fixed costs + Target operating income) / (Contribution margin per unit)

Target sales in dollars = (Fixed costs + Target operating income) / (Contribution margin ratio)

Question 12

How do you compute the equivalent units of production (EUP) under weighted average?

Answer 12

EUP = Total Units Completed this Period + EWIP x Percent Complete

Note: No beginning inventory in calculation

Question 13

How do you calculate EUP under weighted average?

Answer 13

Total units completed (transferred out) during the current period
+Ending WIP x Percent completed
=EUP under weighted average

First start by determining physical flow.
Physical flow = Beginning WIP + Units started this period = Units transferred out + Ending WIP

Question 14

How do you calculate weighted average per EUP?

Answer 14

(Beginning WIP costs + Current period costs) / Weighted average EUP

Question 15

How do you compute the equivalent units of production (EUP) under the FIFO method?

Answer 15

Beginning work in process x Percent left to complete
+Units started and completed during the current period
+Ending work in process x Percent complete
=EUP under FIFO

First start by determining physical flow:
Physical flow = Beginning WIP + Units started this period = Units transferred out + Ending WIP
EUP in beginning work-in-process (work done in the prior period) must be excluded from the calculation.

Question 16

How do you calculate FIFO cost per EUP?

Answer 16

FIFO Cost Per EUP= Current period costs / FIFO EUP

Question 17

What are the steps in activity based costing?

Answer 17

1. Activity analysis - identify value adding activities
2. Assign resource costs to activities
3. Allocate costs in activity cost pools to final cost objects

Question 18

How do you compute breakeven point in units?

Answer 18

Breakeven point in units = Fixed costs / unit contribution margin

Question 19

How do you compute breakeven point in dollars?

Answer 19

Breakeven point in dollars = Fixed costs / contribution margin ratio

Contribution margin ratio is the contribution margin as a percentage of sales

Question 20

Margin of safety in dollars

Answer 20

Total sales in dollars - Breakeven point in dollars

Question 21

Margin of safety (%)

Answer 21

Margin of safety (in dollars) / Total sales (in dollars)

Question 22

Target sales in units

Answer 22

(Fixed costs + Target operating income) / UCM

Question 23

Target sales in dollars

Answer 23

(Fixed costs + Target operating income) / Contribution margin ratio

Question 24

Operating income

Answer 24

Sales - Variable Costs - Fixed Costs

Question 25

What are the steps in a disinvestment decision?

Answer 25

1. Identify the fixed costs that will be eliminated
2. Determine revenue needed to justify continuing operations
3. Establish opportunity costs of funds
4. Determine whether the carrying amount of assets is equal to their economic value

Question 26

How do you address a keep or drop decision question?

Answer 26

Prepare a new income statement with impacts of decision:

Sales
-Variable Expenses
=Contribution Margin
-Fixed Costs
=Operating income

May be either asked for new operating income or change in operating income

Question 27

What is the value of common stock and the dividend growth model?

Answer 27

Question 28

What are the differences between price and efficiency variances?

Answer 28