Business Environment and Concepts Answer Key

1. Correct: b

Explanation: A new partner can be added to a limited partnership if all general partners agree; it is not necessary that the limited partners agree.

2. Correct: c

Explanation: To find pretax income with the absorption costing method, multiply the units in inventory by the variable manufacturing costs (2,500 x $50 = $125,000), then multiply the units in inventory by the fixed manufacturing costs (2,500 x $25 = $62,500), and combine those totals ($125,000 + $62,500 = $187,500). To find pretax income with the variable costing method, simply multiply the units in inventory by the variable manufacturing costs (2,500 x $50 = $125,000). Therefore, the pretax income will be $62,500 higher if Traverse uses the absorption costing method ($187,500 - $125,000 = $62,500).

3. Correct: a

Explanation: ROM, or read-only memory, is memory that can be accessed and read but not changed.

4. Correct: b

Explanation: When demand is inelastic, a price increase will be accompanied by a decrease in demand that is not as large in terms of percentage as the price increase. Therefore, if a 7% price increase leads to a 3% demand decrease, the demand is inelastic.

5. Correct: a

Explanation: When the government subsidizes a product, the producer can make the product more cheaply, and therefore the price of the product will decrease. The decrease in price will cause the producer (or producers) to change their supply decisions.

6. Correct: b

Explanation: To find the effective cost of the loan, use this formula: interest rate paid divided by the funds available. In this case, the interest rate paid is $300,000 multiplied by the 6.5% interest rate ($19,500), and the funds available are $225,000 ($300,000 minus the 25% compensating balance), so the effective cost of the loan is $19,500 divided by $225,000, or 8.67%.

7. Correct: a

Explanation: A server is a computer that provides other computers with shared access to things like files, folders, and software applications. It is not directly related to rules used when exchanging data or to data encryption.

8. Correct: c

Explanation: The unanimous consent of all partners in a general partnership is required before a new partner can be added.

9. Correct: d

Explanation: The Black-Scholes method is an options-pricing model that is commonly used. It was originally stated by Fischer Black and Myron Scholes in 1973. The model shows that the value of an option varies only with the stock price and time to expiry.

10. Correct: c

Explanation: To find the current yield of the bond, divide the annual interest by the bond market price. In this case, the annual interest is $1,000 x 6% = $60, and the bond market price is $450, so the bond's current yield is $60 divided by $450 = 13.33%.

11. Correct: a

Explanation: To find the relative risk level of an investment, take the standard deviation and divide it by the expected return rate. In this case, it's 12% divided by 15%, or 0.8.

12. Correct: b

Explanation: The percentage of profit on sales multiplied by the capital employed turnover rate yields the company's rate of return on an investment as determined by the DuPont ROI analysis. The ROS is net income divided by sales; residual income is net income minus the interest on invested capital; and EVA is operating profit after taxes minus the cost of invested capital.

13. Correct: c

Explanation: Functional benchmarking involves benchmarking within an industry. Benchmarking against best practices regardless of industry is known as generic benchmarking; benchmarking with a firm is known as internal benchmarking; and benchmarking against a firm's competitors is known as competitor benchmarking.

14. Correct: d

Explanation: To find the total amount of direct materials that Nathan Co. used during the month, total their purchase of direct materials with the amount that the direct materials inventory decreased during the month ($125,000 + $25,000 = $150,000).

15. Correct: c

Explanation: To find the cost per equivalent unit for materials during the month, begin by totaling the units completed and the ending work in progress (45,000 plus 5,000 = a total of 50,000 total equivalent units). Next, find the total costs incurred by adding the cost of materials for the beginning work in progress to the cost for materials for the units started ($5,000 + $15,000 = $20,000). Finally, divide the total costs incurred by the total equivalent units ($20,000 divided by 50,000 units) for a total of $0.40 per unit.

16. Correct: c

Explanation: To find the total cost of units in the ending work in progress inventory, total the material costs and the conversion costs. To find the material costs, first multiply the number of units in the ending work in process inventory by the amount the ending inventory was complete and then multiply that by the equivalent unit cost of materials {(36,000 x 80%) x $5.20 = $149,760}. Next, to find the conversion costs, multiply the ending work in process inventory by the amount the ending inventory was complete for conversion costs and then multiply that by the equivalent unit cost of conversion {(36,000 x 60%) x $4.60 = $99,360}. Total those figures to find that $149,760 + $99,360 = $249,120.

17. Correct: a

Explanation: In the standard regression equation, a is the constant variable, y is the dependent variable, b is the coefficient of the independent variable, and x is the independent variable.

18. Correct: a

Explanation: The equivalent unit cost of materials is determined by starting with the cost of materials used divided by the number of equivalent units of production. Answer b is incorrect because it is the formula for finding the equivalent units of production, and answers c and d are merely the equations in answers a and b with their elements in different orders.

19. Correct: c

Explanation: Regression coefficients are measured from -1.00 to 1.00. A regression coefficient of -1.00 shows a strong, perfect negative correlation; a coefficient of 0 shows no correlation; and a coefficient of 1.00 shows a strong, perfect positive correlation. In the examples above, only III is correct, because -0.93 is closer to -1.0 than 0.45 is to 1.0. Point II is incorrect because there can be no coefficient higher than 1, and point I is incorrect because the coefficient of -0.43 is stronger than that of 0.25, though negative.

20. Correct: c

Explanation: Money spent to pay quality assurance inspectors to inspect a product before it is shipped to customers is known as appraisal cost. An internal failure is a cost that results when defective products are discovered before shipment; an external failure is the cost of products returned by customers; and prevention cost is cost associated with designing a product so that it will not break down.