Which of the following is a strategy that organizations can use to stimulate innovation?
1.Source from the most advanced suppliers.
2.Establish employee programs that reward initiative.
3.Identify best practice competitors as motivators.
4.Ensure that performance targets are always achieved.

• A.1 and 3 only
• B.2 and 4 only
• C.1, 2, and 3 only
• D.1, 2, 3, and 4

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A manufacturing firm has certain peak seasons; namely the Christmas season, the summer season, and the last 2 weeks of February. During these periods of increased output, the firm leases additional production equipment and hires additional temporary employees. Which of the following budget techniques would best fit this firm's needs?

• A.Flexible budgeting.
• B.Static budgeting_
• C.Zero-based budgeting.
• D.Project budgeting.

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One company executive has expressed concern about the operating loss that has occurred in Product Line 2 and has suggested that Product Line 2 be discontinued. If Product Line 2 is dropped, the manager of the line would be retained and assigned other duties with the company, but the other employees would not be retained. Management has indicated that the nature of the company's advertising might change with the elimination of Product Line 2, but the total dollar amount would not change. If Product Line 2 were to be dropped, the operating income of the company would:

• A.Increase by US $50,000
• B.Decrease by US $94,00
• C.Decrease by US $234,0
• D.Increase by US $416,000

Correct Answer: C

The operating income will decrease. Product Line 2 income will be lost, but only the traceable costs of commissions, cost of sales, and salaries will be avoided. Accordingly, the decrease will be US $234,000 [$-700.000 + $14,000 + $420,000 + $32,000)]. The other shared costs will have to be absorbed by the two remaining product lines. The segmented income statement for a retail company with three product lines is presented below:

The company buys the goods in the three product lines directly from manufacturers' representatives. Each product line is directed by a manager whose salary is included in the administrative expenses. Administrative expenses are allocated to the three product lines equally because the administration is spread evenly among the three product lines.
Salaries represent payments to the workers in each product line and therefore are traceable costs of each product line. Advertising promotes the entire company rather than the individual product lines. As a result, the advertising is allocated to the three product lines in proportion to the sales revenue. Commissions are paid to the salespersons in each product line based on 2% of gross sales. Rent represents the cost of the retail store and warehouse under a lease agreement with 5 years remaining. The product lines share the retail and warehouse space, and the rent is allocated to the three product lines based on the square footage occupied by each of the product lines.

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When an entity finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying:

• A.Working capital management.
• B.Return maximization.
• C.Financial leverage.
• D.A hedging approach.

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When determining cash flows accruing to the entity, using financial statements prepared for tax purposes will result in:

• A.No effect on cash flow amounts.
• B.An overstatement of cash flows throughout the economic life of the asset.
• C.An understatement of cash flows throughout the economic life of the asset.
• D.An overstatement of cash flows in the early years and then an understatement of cash flows in the later years of the economic life of the asset.

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