ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPALE  Pre-Week Summary Lecture

MANAGEMENT SERVICES A. LEE  E. ARAÑAS  K. MANUEL

MS PREWEEK – PROBLEMS
‘MS Preweek – Problems’ is a comprehensive material composed of questions taken from previously given
questions in the CPA board exams, foreign textbooks and other sources. This pre-week material shall be
used in conjunction with ‘MS Preweek – Theories.’

Consider the trend in the nature of 70 MS questions given for the past batches of CPA board exams. These
pieces of information are ESTIMATES only -- they are based on previous CPA candidates’ comments and
feedbacks obtained right after taking the CPALE subject MS (formerly MAS):

THEORIES PROBLEMS
October 2022  24 items (34%) 46 items (66%)
May 2022  39 items (56%) 31 items (44%)
Oct & Dec 2021  40 items (57%) 30 items (43%)
October 2019  33 items (47%) 37 items (53%)
May 2019  32 items (46%) 38 items (54%)
3-year Average  34 items (49%) 36 items (51%)

1. A banking system with a reserve ratio of 20% and a change in reserves of P 1,000,000 can increase its total
demand deposits by
A a. P 5,000,000 b. P 1,000,000 c. P 800,000 d. P 200,000
Solution: Reserves = deposits x reserve ratio 1,000,000 = deposits x 20%
2. Given the following employment and unemployment data of a country for the year 2023:
Adult population over the age of 16 253.5 million
In the labor force 159.1 million
Employed 151.4 million
Unemployed 7.7 million
Out of the labor force 94.4 million
Determine the unemployment rate.
B a. 3.04% b. 4.84% c. 8.16% d. 37.24%
Solution: Unemployment rate: Unemployed people ÷ Total labor force = 7.7 million ÷ 159.1 million
3. If the price elasticity of demand is 1.5 and a change in price of the product increases the quantity demanded
by 4%, then what is the percentage change in price?
D a. 0.375% increase b. 0.375% decrease c. 2.667% increase d. 2.667% decrease
Solution: ∆% Price x Elasticity = ∆% Quantity Demanded ∆% Price x 1.5 = 4%
4. A consumer has P 50 to spend. He must decide between buying two goods: magazines (mags) priced at P 5
each and DVDs priced at P 10 each. Which of the following combinations of the two goods will exactly satisfy
his budget constraint?
B a. 3 mags, 4 DVDs b. 2 mags, 4 DVDs c. 6 mags, 1 DVDs d. 2 mags, 2 DVDs
Solution: (2 mags x 5) + (4 DVDs x 10) = 50
5. Scenario: Juan must choose between driving and taking a train to destination A. Travelling by train will cost
her P400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasoline
costs P250. Her opportunity cost of time is P15 per hour. What must Juan do?
A a. Drive, to save P 120 c. Travel by train, since it is quicker
b. Drive, to save P 150 d. Travel by train, to P 30 in travel time
Solution: Train: 400 + 4 (15) = 460 Drive: 250 + 6 (15) = 340
6. A growing company is assessing current working capital requirements. An average of 58 days is required to
convert raw materials into finished goods and to sell them. An average of 32 days is required to collect on
receivables. If the average time the company takes to pay for its raw materials were 15 days after they are
received, then what would be the total cash conversion cycle for this company?
C a. 11 days b. 41 days c. 75 days d. 90 days
Solution: Cash conversion cycle = (Age, inventory) + (Age, AR) – (Age, AP) = 58 + 32 – 15
7. London Company has P 5,000,000 of average inventory and sales of P 30,000,000. Using a 365-day year,
calculate the firm’s inventory conversion period.
C a. 30.25 days b. 45.00 days c. 60.83 days d. 72.44 days
Solution: Inventory turnover: 30 M ÷ 5 M = 6 times Age of inventory: 365 ÷ 6

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
8. A firm has daily cash receipts of P 100,000. A bank has offered to reduce the collection time on the firm’s
deposits by two days for a monthly fee of P 500. If money market rates are expected to average 6% during
the year, what is the net annual benefit (loss) from having this service?
B a. P 12,000 b. P 6,000 c. P 3,000 d. P 0
Solution: Benefit: 100,000 (2) 6% = 12,000 Cost: 500 (12) = 6,000
9. Rome Company’s budgeted sales for the coming year are P 40,500,000 of which, 80% are expected to be
credit sales at terms of n/30. ABC estimates that a proposed relaxation of credit standards would increase
credit sales by 20% and increase in the average collection period from 30 days to 40 days. Cost of money is
15%. Based on a 360-day year, how much opportunity cost is involved with the proposed relaxation of
credit standards?
A a. P 243,000 b. P 540,000 c. P 900,000 d. P 1,620,000
Solution: Old AR balance: 32.4 M x (30 ÷ 360) = 2.7 M Opportunity Cost: 15% (4.32 M – 2.7 M)
New AR balance: 32.4 M x 1.2 x (40 ÷ 360) = 4.32 M
10. Paris Company uses 4,500 units of Part AYC-18 each year. The cost of placing one order for Part ML-44 is
estimated to be about P 20. Other costs associated with carrying Part AYC-18 in inventory are:
Annual cost per part
Insurance P 0.20
Property taxes 0.09
Interest on funds invested 0.15
Others 0.06
Total costs P 0.50

Assume that the company has been able to reduce the cost of placing an order to only P 1.00 and that when
the waste and inefficiency caused by inventories is considered, the cost to carry an inventory jumps to P
1.60 per unit. What would be the Economic Order Quantity (EOQ) under these conditions?
A a. 75 b. 80 c. 95 d. 100
Solution: EOQ = Square root of [2 D O ÷ C] = Square root of [ 2 (4,500) 1 ÷ 1.60]
11. New York Corporation’s economic order quantity (EOQ) for Material MR-69 is 5,000 pounds. If the company
maintains a safety stock of MR-69 at 500 pounds, and its order point is 1,500 pounds, what would be the
total annual carrying costs assuming the carrying cost per unit is P 0.20?
B a. P 100 b. P 600 c. P 1,000 d. P 1,100
Solution: Average inventory: (EOQ/2) + safety stock = (5,000/2) + 500 = 3,000 units
12. If a firm purchases raw material from its supplier on a 2/10, net 60 cash discount basis, what is the
equivalent annual interest rate (using a 360 day-year) of foregoing the cash discount and making payment
on the 60th day?
B a. 73.5% b. 14.7% c. 12.2% d. 2.0%
Solution: [Discount % ÷ (100% - Discount %)] x [360 ÷ (Credit term – Discount term)] = (2 ÷ 98) x (360 ÷ 50)
13. Berlin Traders borrowed P 20,000 at an APR of 10%. The loan called for a compensating balance of 10%.
What is the effective interest rate (EAR) on the loan? (Round final answer to two decimal places).
B a. 12.2% b. 11.1% c. 10% d. 9.1%
Solution: EAR = 10%* ÷ (100% - 10%**) *interest or APR **compensating balance
Alternatively: EAR = 10% (20,000) ÷ 20,000 (90%) = 2,000 ÷ 18,000
14. A company obtained a short-term bank loan of P 250,000 at an APR of 6%. As a condition of the loan, the
company is required to maintain a balance of P 25,000 in its checking account, which earns 2%. What is the
effective interest rate of the loan?
B a. 6.66% b. 6.44% c. 6.00% d. 5.80%
Solution: EAR = 6% (250,000) – 2% (25,000) ÷ (250,0000 – 25,000) = 14,500 ÷ 225,000
15. Prague Company has a P 2,000,000 line of credit. The line has an interest rate of 6% and a commitment fee
of 2%. If Prague is using P 400,000 of the line of credit, what is the effective rate on the line of credit?
C a. 6% b. 8% c. 14% d. 16%
Solution: EAR = [6% (400,000) + 2% (2,000,000 – 400,000)] ÷ 400,000
16. Based on the data presented below, what is Manila Corporation’s cost of sales for the year?
Current ratio 3.5
Acid test ratio 3.0
Year-end current liabilities P 600,000
Beginning inventory P 500,000
Inventory turnover 8.0
C a. P 1,600,000 b. P 2,400,000 c. P 3,200,000 d. P 6,400,000
Solution: Ending inventory = (current ratio – quick ratio) current liabilities = (3.5 – 3) 600,000 = P 300,000
Average inventory = (500,000 + 300,000) ÷ 2 = 400,000
Inventory turnover = CGS ÷ average inventory CGS = 8 times x 400,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
17. A firm has a debt-equity ratio of 50 percent. Currently, it has interest expense of P 500,000 on P 5,000,000
of total debt outstanding. Its tax rate is 40 percent. If the firm’s RoA is 6 percent, by how many percentage
points is the firm’s RoE greater than its RoA?
B a. 0.0% b. 3.0% c. 5.2% d. 7.4%
Solution: Du Pont technique: RoA ÷ equity ratio = RoE 6% ÷ (100 ÷ 150) = 9%
18. Tokyo Company’s net income for 2023 was P 60,250. Its average stockholders’ equity for 2023 was
P500,000, inclusive of P 50,000 par value of preferred stock with a dividend rate of 8%. What is the
company’s return on common stockholders’ equity?
C a. 11.25% b. 12.05% c. 12.50% d. 13.39%
Solution: Return on common SHE = Income available to common shareholders ÷ average common SHE
Return on common SHE = [60,250 – 8% (50,000)] ÷ (500,000 – 50,000)
Items 19 and 20 are based on the following information
Beijing Company has earnings per share (EPS) of P 6.20, pays dividend of P 3.72 per share, and has a
market price of P 49.60 per share.
19. What is the dividend yield?
A a. 7.5% b. 8% c. 13.3% d. 60%
Solution: Dividend yield = dividends ÷ price = 3.72 ÷ 49.60
20. What is the payout ratio?
D a. 7.5% b. 8% c. 13.3% d. 60%
Solution: Dividend payout = dividends ÷ EPS = 3.72 ÷ 6.20 = dividend yield x PE ratio = 7.5% x 8
Incidentally, retention or plowback ratio = 100% - dividend payout = 40%
21. Jakarta Company’s cost of equity is 18%, its before-tax cost of debt is 8%, and its corporate tax rate is 40%.
Given the following balance sheet, calculate the after-tax weighted average cost of capital.
ASSETS LIABILITIES & EQUITY
Cash P 100 Accounts payable P 200
Accounts receivable 400 Accrued taxes due 200
Inventories 2,000 Long-term debt 400
Plant and equipment 1,300 Equity 1,200
P 2,000 P 2,000
B a. 16.8% b. 14.7% c. 10.3% d. 9.7%
Solution: Debt: 8% (1-0.4) x (400 ÷ 1,600) Equity: 18% x (1,200 ÷ 1,600)
22. A company believes that it can sell long-term bonds with a 6% coupon, but a price that gives a yield-to-
maturity of 9%. If such bonds are part of next year’s financing plans, which of the following should be used
for bonds in the after-tax (40%) cost-of-capital calculation?
B a. 3.6% b. 5.4% c. 4.2% d. 6.0%
Solution: Cost of debt: yield rate (100% – tax rate) = 9% (100% – 40%)
23. Seoul Company sold 12%, non-convertible preferred stock with a par value of P 50. The stock sold for P 55,
and flotation costs were 6% of the market price. Tax rate is 30%. What is Seoul’s cost of preferred stock?
A a. 11.61% b. 10.91% c. 8.12% d. 7.64%
Solution: Cost of preferred stock: dividend yield = expected dividend ÷ net price = [50 (12%)] ÷ [55 (94%)]
24. A firm is expected to pay a dividend of P 5.00 per share this year. Dividend is expected to grow at a rate of
6%. If the current market price of the stock is P 60 per share, what is the estimated cost of equity?
D a. 6% b. 8.3% c. 12% d. 14.3%
Solution: Cost of equity (Gordon model): dividend yield + growth rate = (5 ÷ 60) + 6%
25. Bangkok Corporation carries no debt in its capital structure. Its beta is 0.8. The risk-free rate is 9 percent
and the expected return on the market is 15 percent. The company has an opportunity to invest in a project
that earns 12%. What is Bangkok’s required rate of return (i.e., cost of capital)?
D a. 4.8% b. 9% c. 12% d. 13.8%
Solution: Cost of capital (CAPM): risk-free rate + beta-adjusted risk premium = 9% + 0.8 (15% - 9%)
26. Madrid Company considers replacing old equipment that has a net book value of P 100,000, remaining useful
life of 4 years with P 25,000 depreciation each year. The old equipment can be sold for P 80,000. The new
equipment costs P 160,000 and has a 4-year useful life. Cash savings on operating expenses before 40%
taxes amount to P 50,000 per year. What is the amount of initial net cash outflow in the new equipment?
C a. P 160,000 b. P 80,000 c. P 72,000 d. P 68,000
Solution: Net investment: costs – savings = present cash OUT – present cash IN = 160,000 – (80,000 + 8,000*)
* Tax savings from loss on sale of old equipment: 40% (80,000 – 100,000)
27. Geneva Industries invested in a new machine that cost P 80,000. The machine being depreciated over 5
years using straight-line depreciation with no salvage value. The machine is expected to produce incremental
cash revenues of P 100,000 per year and incremental cash expenses of P 30,000 per year. The tax rate is
25%. Calculate Geneva Industries’ incremental operating after-tax cash flows.
B a. P 70,000 b. P 56,500 c. P 52,500 d. P 40,500
Solution: After-tax cash flow: (100,000 – 30,000) 75% = 52,500
Tax shield of depreciation: (80,000 ÷ 5 years) 25% = 4,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
28. Amsterdam is considering an investment in a new machine to replace its existing one. Information on the
existing machine and the replacement machine follow:
Cost of the new machine P 40,000
Net annual savings in operating costs 9,000
Salvage value now of the old machine 6,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000
What is the expected payback period for the new machine?
C a. 8.50 years b. 4.44 years c. 3.78 years d. 2.67 years
Solution: Payback period = (40,000 – 6,000) ÷ 9,000
29. A piece of labor-saving equipment that Brasilia Company could use to reduce costs in one of its plants has
just come into the market. Relevant data follow:
Life of the equipment 12 years
Purchase cost of the equipment P 432,000
Annual cash savings from use of equipment P 90,000
What is the ARR based on original investment to be provided by the equipment?
B a. 8.3% b. 12.5% c. 20.8% d. 29.2%
Solution: ARR (original investment): (90,000 – 36,000*) ÷ 432,000 *Depreciation: 432,000 ÷ 12 years
Items 30 and 31 are based on the following information
Dublin Foundation is a tax-exempt charitable organization. Dublin invested P 400,000 in a five-year project at
the beginning of year 1. Dublin estimates that the annual cash savings from this project will amount to
P130,000. The P 400,000 of assets will be depreciated over their five-year life on the straight-line basis. On
investments of this type, Dublin’s required rate of return is 12%.
12% 14% 16%
PV of P 1 for 5 periods 0.57 0.52 0.48
PV of an annuity of P 1 for 5 periods 3.60 3.40 3.30
30. What is the net present value of the project?
C a. P 36,000 b. P 57,000 c. P 68,000 d. P 250,000
Solution: Net present value = 130,000 (3.6) – 400,000
Incidentally, Profitability index = 468,000 ÷ 400,000 = 1.17 times
31. What is the internal rate of return on the project?
D a. Less than 12% c. Less than 16%, but more than 14%
b. Less than 14%, but more than 12% d. More than 16%
Solution: IRR: PV, Cash IN = PV, Cash OUT 130,000 (PV factor) = 400,000 Target PV Factor = 3.076
32. Consider the following two mutually exclusive projects: Project X costs P 500 and has cash flows of P 400 in
each of the next 2 years. Project Y also costs P 500, and generates cash flows of P 600 and P 100 for the
next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25%?
A a. Project X c. Both
b. Project Y d. Neither
Solution: Project X: NPV = 400 (1.44) – 500 = 76 Project Y: NPV = 600 (0.8) + 100 (0.64) – 500 = 44
33. The following information pertains to a simple least squares regression for Sofia Corporation:
Mean value of the dependent variable 30
Mean value of the independent variable 8
Coefficient of the independent variable 3
Number of observations 12
What is the "a" value for the least-squares regression model?
C a. 60 b. 20 c. 6 d. 0
Solution: cost function → Y = a + bX 30 = a + 3 (8)
Items 34 and 35 are based on the following information
Kyoto Company incurred the following factory overhead costs for the second quarter of the year:
Machine Hours Factory Overhead
April 150 P 4,200
May 120 P 3,600
June 180 P 4,800
34. Using high-low method, how much is the fixed factory overhead cost for the second quarter?
C a. P 1,200 b. P 2,400 c. P 3,600 d. P 4,800
Solution: Variable cost per hour = ∆ Y ÷ ∆ X = (4,800 – 3,600) ÷ (180 – 120) = 20 per hour
Monthly fixed cost = 3,600 – 20 (120) = 1,200
35. Which of the following equations shall be used under least-squares method?
D a. 12,600 = 3 a + 69,300 b c. 1,890,000 = 450 a + 69,300 b
b. 1,926,000 = 3 a + 69,300 b d. 1,926,000 = 450 a + 69,300 b
Solution: Sum of the hours: 450 Sum of the squared hours: 69,300
Sum of the costs: 12,600 Equation 1: 12,600 = 3 a + 450 b
Sum of the hours x costs: 1,926,000 Equation 2: 1,926,000 = 450 a + 69,300 b

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
36. Listed below are costs of quality that a manufacturing company has incurred throughout its operations. The
company plans to prepare a report that classifies these costs into the following four categories: preventive
costs, appraisal costs, internal-failure costs, and external-failure costs.
Cost items Amount
A) Design reviews P 275,000
B) Finished goods returned due to failure 55,000
C) Freight on replacement finished goods 27,000
D) Labor inspection during manufacturing 75,000
E) Labor inspection of raw materials 32,000
F) Manufacturing product-testing labor 63,000
G) Manufacturing rework labor and overhead 150,000
H) Materials used in warranty repairs 68,000
I) Process engineering 180,000
J) Product-liability claims 145,000
K) Product-testing equipment 35,000
L) Repairs to equipment maintenance 22,000
M) Scheduled equipment maintenance 90,000
N) Scrap material 125,000
O) Training of manufacturing workers 156,000
What would be the amount of quality costs classified as PREVENTIVE costs for the manufacturing firm?
B a. P 643,000 b. P 701,000 c. P 736,000 d. P 768,000
Solution: Preventive costs: A, I, M & O Internal-failure costs: G, L & N
Appraisal costs: D, E, F & K External-failure costs: B, C, H, & J
37. Moscow Manufacturing Corporation has the following information:
Moving time 8 days Processing time 10 days
Inspection time 2 days Storage time 30 days
What is the manufacturing cycle efficiency (MCE)?
A a. 20% b. 25% c. 60% d. 80%
Solution: MCE: value-added time ÷ throughput time (manufacturing cycle) = 10 ÷ 50
38. Copenhagen will make P 500,000 if the fishing season weather is good, P 200,000 if the weather is fair, and
would actually lose P 50,000 if the weather is poor during the season. If the weather service gives a 40%
probability of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what
is the expected monetary value for Copenhagen?
B a. P 200,000 b. P 232,500 c. P 267,500 d. P 500,000
Solution: Expected value (100%) = 40% (500,000) + 25% (200,000) + 35% (-50,000)
39. Lake Corporation manufactures specialty components for the electronics industry in a highly labor-intensive
environment. Arc Electronics has asked Lake to bid on a component that Lake made for Arc last month. The
previous order was for 80 units and required 120 hours of direct labor to manufacture. Arc would now like
240 additional components. Lake experiences an 80% learning curve on all of its jobs. The number of direct
labor hours needed for Lake to complete the 240 additional components is:
A a. 187.2 b. 256.0 c. 307.2 d. 360.0
Solution: Average hours per unit (based on 80 units): 120 hours ÷ 80 units = 1.5
Average hours per unit (based on 320 units): 1.5 x 80% x 80% = 0.96
Total hours (based on 320 units): 320 units x 0.96 = 307.2
Total hours for 240 additional units (320 units less 80 units): 307.2 hours – 120 hours
40. Oslo produces two products, A and B. The company has 100 pounds of raw materials and 300 direct labor
hours available for production. The time requirement and contribution margins per unit are as follows:
A B
Raw materials per unit (pounds) 1 2
Direct labor hours per unit 4 2
Contribution margin per unit P4 P5
What is the objective function for maximizing profits and the equation for the constraint on raw materials?
Objective Function Constraint on raw materials
B a. Max Z = 1 A + 2 B 4 A + 2 B < 100
b. Max Z = 4 A + 5 B 1 A + 2 B < 100
c. Max Z = 4 A + 2 B 4 A + 5 B < 100
d. Min Z = 4 A + 5 B 4 A + 2 B < 300

41. Lima Co. incurred direct costs of P 500,000 based on a particular course of action during 2023. If a different
course of action had been taken, direct costs would have been P400,000. In addition, Lima’s 2023 fixed
costs were P 90,000. What was the incremental cost?
C a. P 10,000 b. P 90,000 c. P 100,000 d. 190,000
Solution: 500,000 – 400,000 NOTE: Fixed costs are considered irrelevant, unless avoidable.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
42. Rio plans to shut down a division with a P 20,000 contribution margin. Overhead allocated is P 50,000,
P5,000 of which cannot be eliminated. What is the increase in income by discontinuing the division?
C a. P 5,000 b. P 20,000 c. P 25,000 d. P 30,000
Solution: Segment margin = CM – avoidable fixed cost = 20,000 – (50,000 – 5,000) = (P 25,000)
43. Vienna Company currently sells 10,000 units of product M for P 18.00 each. Variable costs are P 8.00 per
unit. A discount store has offered P 16.00 for 4,000 units of product M. The managers believe that if they
accept the special order, they will lose some sales at the regular price.
Determine the number of units Vienna could lose before the order became unprofitable.
C a. 2,000 units b. 2,667 units c. 3,200 units d. 5,000 units
Solution: Special order margin = Regular sales margin → 4,000 (16 – 8) = x (18 – 8)
44. Istanbul Company is approached by a customer to fulfill a large one-time-only special order for a product
similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Direct materials P 455
Direct labor 300
Variable manufacturing support 45
Fixed manufacturing support 100
Total manufacturing costs P 900
Mark-up (60%) 540
Targeted selling price P 1,440
Istanbul has excess capacity. If Istanbul accepts the order, direct materials cost will increase by P 30 per
unit. What is the minimum acceptable price of this one-time-only special order?
A a. P 830 b. P 900 c. P 930 d. P 1,470
Solution: Minimum price (with excess capacity) = (455 + 30) + 300 + 45
45. Brussel Company uses 8,000 units of a certain part in production each year. Presently, this part is purchased
from an outside supplier at P 12 per unit. For some time now, there has been idle capacity in the factory
that could be utilized to make this part. The following are the unit costs of making this part internally:
Direct materials P 3.25
Direct labor 2.75
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 5.00
The above fixed manufacturing overhead represents an allocation of existing costs to this part. However,
there would be an increase of P 12,000 in fixed manufacturing overhead costs for the salary of a new
supervisor. If Brussel outsources the part from the outside supplier, what is the effect on a per-unit basis?
D a. P 2.50 savings b. P 3.50 savings c. P 1.00 loss d. P 2.50 loss
Solution: Relevant cost to make = 3.25 + 2.75 + 2 + (12,000 ÷ 8,000) vs. Relevant cost to buy = 12
Items 46 to 49 are based on the following information
The following is available for an investment center of Stockholm Corporation for 2023:
Sales P 100,000
Operating expenses 85,000
Average operating assets 40,000
Stockholder’s equity 25,000
Required rate of return 18%
46. Determine the operating profit margin.
A a. 15% b. 25% c. 37.5% d. 60%
Solution: Profit margin = operating income ÷ sales = (100,000 – 85,000) ÷ 100,000
47. What is the assets turnover?
B a. 1.5x b. 2.5x c. 3.5x d. 4x
Solution: Assets turnover = sales ÷ operating assets = 100,000 ÷ 40,000
48. What is the return on investment?
C a. 15% b. 25% c. 37.5% d. 60%
Solution: RoI = operating income ÷ operating assets = (100,000 – 85,000) ÷ 40,000
RoI (alternative solution) = profit margin x assets turnover = 15% x 2.5
49. What is the residual income?
B a. P 7,200 b. P 7,800 c. P 9,600 d. P 15,000
Solution: Residual income = operating income – required income = 15,000 – 18% (40,000)
50. The following information is available for Helsinki Enterprises for 2023:
Net operating profit after taxes P 36,000,000
Depreciation expense 15,000,000
Change in net working capital 10,000,000
Capital expenditures 12,000,000
Invested capital (total assets – current liabilities) 100,000,000
Weighted average cost of capital 10%

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
What is the amount of the economic value added (EVA)?
B a. P 36,000,000 b. P 26,000,000 c. P 20,000,000 d. P 15,000,000
Solution: EVA = profit after tax – required profit = 36 M – 10% (100 M)
Items 51 & 52 are based on the following information
The Motor Division of Singapore Zodiac Corporation uses 5,000 carburetors per month in its production of
automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an
average cost of P 100. The Carburetor Division of Singapore Zodiac manufactures the exact type of
carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of
15,000 units per month and sells all of its output to a foreign car manufacturer at P 106 per unit. Its cost
structure (on 15,000 units) is:
Variable production costs P 70
Variable selling costs 10
All fixed costs 10
The Carburetor Division would not incur any variable selling costs on units that are transferred internally.
51. What is the maximum of the transfer price range for a transfer between the two divisions?
B a. P 106 b. P 100 c. P 90 d. P 70
Solution: Maximum transfer price is based on the purchase price offered by the outside supplier.
52. What is the minimum of the transfer price range for a transfer between the two divisions?
C a. P 70 b. P 90 c. P 96 d. P 106
Solution: Minimum transfer price (full capacity): 106 – 10
Alternatively, minimum transfer price = Unit VC + Lost UCM = 70 + (106 – 80)
Items 53 and 54 are based on the following information
An organization sells a single product for P 40 per unit, which it purchases for P 20. The salespeople receive
a salary plus a commission of 5% of sales. Last year the organization’s net income (after taxes) was P
100,800. The organization is subject to an income tax rate of 30%. The fixed costs of the organization are:
Advertising P 124,000
Rent 60,000
Salaries 180,000
Other fixed costs 32,000
Total P 396,000
53. What is the breakeven point in unit sales for the organization?
D a. 8,800 units b. 18,000 units c. 19,800 units d. 22,000 units
Solution: BEP: 396,000 ÷ (40 – 20 – 2)
54. The organization is considering changing the compensation plan for sales personnel. If the organization
increases the commission to 10% of sales and reduces salaries by P 80,000, what peso sales volume must
the organization have in order to earn the same net income as last year?
C a. P 1,042,000 b. P 1,100,000 c. P 1,150,000 d. P 1,630,000
Solution: Required peso sales: [(396,000 – 80,000) + (100,800 ÷ 0.7)] ÷ [40 – (20 + 4)] = 28,750 units
55. Product RST has sales of P 200,000, a contribution margin ratio of 20% and a margin of safety of P 80,000.
What is RST’s fixed cost?
B a. P 16,000 b. P 24,000 c. P 80,000 d. P 96,000
Solution: Margin of safety x CMR = profit = 16,000 CM = 200,000 x 20% = 40,000 FC = CM – profit
56. A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes
annually but forecasts that it will produce and sell only 500,000 boxes in the next year. The costs to
produce and distribute the candy are detailed below. The organization has invested capital of P 6.75 million.
Variable costs per pound
Manufacturing P 4.85
Packaging 0.35
Distribution 1.80
Total P 7.00
Annual fixed costs
Manufacturing overhead P 810,000
Marketing and distribution 270,000
What selling price per pound that the confectioner should charge for a one-pound box of candy to obtain a
20% rate of return on invested capital?
D a. P 9.70 b. P 11.05 c. P 11.50 d. P 11.86
Solution: FULL COST per box: 7 + [(810,000 + 270,000) ÷ 500,000] = P 9.16
PROFIT per box: 20% (6.75 M) ÷ 500,000 = P 2.70 Selling price = full cost + profit
57. Taipei’s income declined by 300% when sales declined from P 10 M to P 8 M. What was the operating
leverage?
C a. 2.7 times b. 12 times c. 15 times d. 30 times
Solution: DOL = CM ÷ profit before tax = ∆% pre-tax profit ÷ ∆ % sales = 300% ÷ 20%

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
58. Cape Company had the following costs when it produces 100,000 and sold 80,000 units of its only product:
Manufacturing costs Selling & Admin. Costs
Fixed P 180,000 Fixed P 90,000
Variable 160,000 Variable 40,000
How much lower would net income be if it used variable costing (VC) instead of absorption costing (AC)?
A a. P 36,000 b. P 54,000 c. P 68,000 d. P 94,000
Solution: ∆ income = ∆ Inventory x unit FFOH = (100,000 – 80,000) x (180,000 ÷ 100,000)
NOTE: If Production > Sales, then Ending Inventory > Beginning Inventory, AC profit > VC profit
59. Athens Company manufactures a single product. Unit variable production costs are P 20 and fixed
production costs are P 150,000. Athens uses a normal activity of 10,000 units to set its standard costs.
Athens began the year with no inventory, produced 11,000 units, and sold 10,500 units.
Ending inventory under absorption costing amounts to:
C a. P 10,000 b. P 15,000 c. P 17,500 d. P 20,000
Solution: Absorption (full) costing inventory: [20 + (150,000 ÷ 10,000)] x (11,000 – 10,500)
NOTE: Once normal capacity is given, the unit FFOH is based on NORMAL production. A capacity or volume
variance explains any difference between the normal capacity used and actual production attained.
Items 60 and 61 are based on the following information
GHI Company has a budgeted normal monthly capacity of 5,000 labor hours with a standard production of
4,000 units at this capacity. Standard costs are:
Materials 2 kilos at P1.00
Labor P 8.00 per hour
Factory overhead at normal capacity:
Fixed expenses P 5,000.00
Variable expenses P 1.50 per labor hour
During November, actual factory overhead totaled P 11,250 and 4,500 labor hours cost P 33,750. Production
during the month was 3,500 units using 7,200 kilos of materials at a cost of P 1.20 per kilo.
60. What was the material price variance?
A a. P 1,440 U b. P 3,440 U c. P 204 F d. P 2,187.50 F
Solution: Material price variance (MPV): AQ (AP – SP) = 7,200 (1.20 – 1.00)
NOTE: If silent, MPV is preferably based on actual quantity of materials purchased (i.e., MPPV).
61. What was the labor efficiency variance?
B a. P 2,250 U b. P 1,000 U c. P 2,187.50 F d. P 62.50 F
Solution: Labor efficiency variance: (AH – SH) SR [4,500 – 3,500 (1.25*)] 8
* Standard hours per unit (based on normal capacity): 5,000 ÷ 4,000 = 1.25
Items 62 to 64 are based on the following information
A company uses a standard cost system and prepared the budget for May when 24,000 machine hours of
activity were expected: variable overhead, P 48,000; fixed overhead: P 240,000. Actual data for May were:
Standard machine hours allowed for output attained: 25,000 Variable overhead incurred: P 50,000
Actual machine hours worked: 24,000 Fixed overhead incurred: P 250,000
62. What was the standard variable overhead rate for May?
A a. P 2.00 b. P 2.08 c. P 5.00 d. P 5.21
Solution: Standard variable overhead rate: P 48,000 ÷ 24,000 machine hours
63. What were the variable-overhead (A) spending and (B) efficiency variances, respectively?
D a. P 0, P 0 b. P 0, P 2,000 U c. P 2,000 U, P 0 d. P 2,000 U, P 2,000 F
Solution: VFOH spending variance: AFOH (V) – BAAH (V) = 50,000 – 24,000 (2)
VFOH overhead efficiency variance: BAAH (V) – BASH (V) = (AH – SH) VR = (24,000 – 25,000) 2
64. What were the fixed-overhead (A) budget and (B) volume variances, respectively?
D a. P 0, P 10,000 F b. P 10,000 F, P 0 c. P 10,000 U, P 0 d. P 10,000 U, P 10,000 F
Solution: FFOH budget (spending) variance: AFOH (F) – BAAH (F) = 250,000 – 240,000
FFOH volume variance: BASH (F) – SHSR (F) = 240,000 – 25,000 (240,000 ÷ 24,000)
NOTE: In standard cost variance analysis, under-applied = unfavorable (over-applied = favorable)
65. UVW Company began operations on January 1 of the current year with a P 12,000 cash balance. 40% of
sales are collected in the month of sale; 60% are collected in the month following sale. 20% of purchases
are paid in the month of purchase, and 80% are paid in the month following purchase.
January February
Sales P 35,000 P 55,000
Purchases 30,000 40,000
Operating expenses (P 2,500 monthly depreciation) 7,000 9,000
If operating expenses are paid in the month incurred, what is the increase in cash balance for February?
B a. P 2,000 increase b. P 4,500 increase c. P 5,000 increase d. P 7,500 increase
Solution: 40% (55,000) + 60% (35,000) – 20% (40,000) – 80% (30,000) – (9,000 – 2,500)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems
Items 66 to 67 are based on the following information
Taipei Company has budgeted quarterly sales for the year 2024 as follows:
Quarter 1 2 3 4
Sales in unit 12,000 14,000 18,000 16,000
The ending inventory of finished goods for each quarter should equal 25% of the next quarter's budgeted
sales in units. Four pounds (lbs.) of raw materials are required for each unit produced. The raw materials
inventory at the end of each quarter should equal 10% of the next quarter's production needs in materials.
66. What is the budgeted or scheduled production for the third quarter (in units)?
B a. 16,500 b. 17,500 c. 18,000 d. 18,500
Solution: 3Q production = sales + closing units – opening units = 18,000 + (25% x 16,000) – (25% x 18,000)
67. Assuming that the budgeted production in second quarter is 15,000 units, what would be budgeted
purchases of raw materials in the second quarter (in pounds)?
A a. 61,000 b. 61,500 c. 62,000 d. 62,500
Solution: Q2 purchases = usage + closing lbs. – opening lbs. = (15,000 x 4) + 0.1 (17,500 x 4) – 0.1 (15,000 x 4)
Items 68 to 70 are based on the following information
Manila Company presents the results of its budgeted manufacturing operations for 2024:
January 1, 2024 December 31, 2024
Direct materials P 36,000 P 30,000
Work-in-process 18,000 12,000
Finished goods 54,000 72,000
Additional budgeted information for the year 2024:
Direct materials purchases P 84,000
Direct manufacturing labor payroll 60,000
Direct manufacturing labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00
68. What was 2024’s budgeted prime cost?
D a. P 90,000 b. P 120,000 c. P 144,000 d. P 150,000
Solution: DM usage: (36,000 + 84,000 - 30,000) DL: 60,000
69. What was 2024’s budgeted conversion cost?
B a. P 90,000 b. P 140,000 c. P 144,000 d. P 170,000
Solution: DL: 60,000 FOH: (60,000 ÷ 7.50) 10
70. What was 2024’s budgeted cost of goods manufactured?
D a. P 218,000 b. P 224,000 c. P 230,000 d. P 236,000
Solution: TMC: 90,000 + 60,000 + 80,000 = 230,000 CGM: 230,000 + 18,000 – 12,000
 END 

 For problems on Strategic Analysis to Operating Income (e.g., Revenue, Cost and Net Effects
of Growth, Price-Recovery & Productivity Components), please take time to revisit MS-07.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Batch 45 – May 2023 CPA Licensure Examination
MSPW - Problems

MANAGEMENT SERVICES (MS)

• CPALE Date & Time: 21 May 2023, Sunday, 8 AM – 11 AM
• Number of items: 70 multiple-choice questions (MCQs), mixture of theories and problems
• Topics covered based on latest CPALE Syllabus:

Part I – MANAGEMENT ACCOUNTING (40 items)

✓ Cost Concepts and Behavior
✓ Cost-Volume-Profit Analysis
✓ Standard Costing & Variance Analysis
✓ Variable Costing vs. Absorption Costing
✓ Financial Planning & Budgets
✓ Responsibility Accounting & Transfer Pricing
✓ Balanced Scorecard
✓ Relevant Costing & Differential Analysis
Part II – FINANCIAL MANAGEMENT (25 items)
✓ Financial Statement Analysis
✓ Working Capital Management
✓ Capital Budgeting
✓ Risks & Leverage
✓ Capital Structure & Long-Term Financing Decision
✓ Financial Markets
Part III – ECONOMICS (5 items)
✓ Macroeconomics
✓ Microeconomics

• Omitted topics: Management Consultancy, Project Feasibility Study, Activity-Based Costing (ABC)
& Activity-Based Management (ABM), Strategic Cost Management, PERT-CPM, Ethics & NOCLAR.
• Terminologies mentioned in the recent CPALEs --- 2022 (May/Oct) & 2021 (Oct/Dec) CPALE:
FINANCIAL MANAGEMENT MANAGEMENT ACCOUNTING ECONOMICS
Net Present Value Material & Labor Variances Fiscal Policy
Du Pont Technique Balanced Scorecard Monopolistic Competition
Line of Credit Accept vs. Reject Unemployment Rate
Standard Deviation Fixed Overhead Spending Variance Monetary Policy
APR & EAR Variable Overhead Efficiency Variance Elasticity
Profitability Index Scorekeeping Oligopoly
Non-Diversifiable Risks Make vs. Buy Free Riding
Solvency Ratio Segment Margin Trade Deficit
Capital Asset Pricing Model (CAPM) Quantity and Mix Variance Perfect Competition
Working Capital Policy Profit: Absorption vs. Variable Costing Recession
Financial Leverage Probability Market Price
Risk Averse vs. Risk Taker Learning Curve Okun’s Law
Reorder Point Organizational Chart
Additional Funds Needed Internal Business Processes
Turnover Ratio Management Acct vs. Financial Acct
Lockbox System Expected Value of Perfect Information
Beta Coefficient Flexible Budget
Current vs. Quick Ratio Slope Coefficient OTHERS
Expected Return Operating Leverage “Panunumpa ng Propesyonal”
Project Ranking vs. Screening Target Costing Price-Recovery Component
Payback Period Strategy Growth Component
Coefficient of Variation Coefficient of Correlation Activity Based Costing
Return on Common Equity Lead Time
Effective Rate High-Low Method
EOQ Minimum & Maximum Transfer Price

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