Budget Analyzing cost

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1. Select from the following to answer questions A through D:

i. Zero-Based

ii. Formula

iii. Operating

iv. Accrual

vi. Flexible

A. To test a budget for the impact of changes in forecasted service volume on revenue and expenses, you would use a(n) ___________________ budget.

B. A(n) ____________________ budget represent forecasts of revenue and support earned and resources used during a fiscal year.

C. Decision packages are normally associated with a(n) _____________ budget.

D. ______________________ budgets are based on cash flows.

2. Answer the following questions regarding break-even analysis:

A. The difference between marginal revenue and marginal cost is called the ______ ____________________ .

B. If an organization sells ten fewer tickets to its annual gala than are needed to break even, the gala will produce (circle the correct answer)

a loss or deficit
break even results
a profit or surplus

C. March to Save the Pets expects to have $25,000 in fixed costs. If their fixed costs do not change but the amount each marcher raises through pledges declines from $75 to $65 and their variable cost/unit increases from $35 to $40, how much will their break-even quantity increase?

SAMPLE ANSWER:

A. The difference between marginal revenue and marginal cost is called the Profit.

B. If an organization sells ten fewer tickets to its annual gala than are needed to break even, the gala will produce a loss or deficit.

C. Fixed Costs 25,000

Selling price       75          Selling price       65          

Variable cost       35          Variable cost       40          

Break-even      625         Break-even      1000            


    Increase in break-even          375

3. A support variance is the difference between ___________________ support and __________________ support.

4. Save the Pets provides food and shelter for stray and abused dogs. The budgeted consumption of food is 1 pounds per day per dog. The clinic estimates the price of the food will be $0.65 per pound. It has budgeted feeding an average of 100 dogs per day. The clinic actually fed an average of 120 dogs per day. Each dog consumed .75 pounds of food and the average price per pound of food was $0.85.

What is save the Pet’s Total Daily-Food-Expense Variance? Is it Favorable or Unfavorable?

5. Answer the following questions about the value of money over time.

A. If you put $500 in the bank today and earn 2% simple interest, the future value at the end of 5 years will be:

How much would you have if the interest were compounded annually?

B. A capital project should be rejected if the net present value is _____________. (circle the correct answer)

less than zero
greater than zero
equal to zero

C. If an interest rate sets the present value of cash inflows equal to the present value of cash outflows it is called: (circle the correct answer.)

1. The cost of capital

2. The discount rate

3. The internal rate of return

4. The hurdle rate

6. Eye-Zapers Clinic has determined that the cash flows from a new Ophthalmic laser system will be as follows:

The machine has a four-year life and the discount rate for the clinic is 9.5% per year. Should Eye-Zapers buy the new laser? Explain why?

7. The Taos Museum owns a corporate bond issued by Walmart with face value at maturity of $100,000 and a coupon rate of 9% that will mature in June of 2013 exactly 10 years from today. In today’s market, the interest rate for that bond is a 6.3%. The bond pays interest every six months. If Taos were to sell the bond today, how much would it be worth?

8. Urban Summer provides inner-city children with summer camping experiences. They are in the process of replacing all of their tents. Outdoor Outfitters has given them proposals for two different types of tents. The first is made by Lifelong Adventures (LA), has an expected life of six years. The second, made by Outdoor experiences (OE), lasts five years. The projected costs of buying and using the two types of tents are shown below. Urban Summer’s cost of capital is 10%. Based on the projected cash flows below, which of the two tents should Urban Summer buy? Support your answer.