IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 221:

  Power Systems. Inc. manufactures jet engines for the United States armed forces on a cost-plus basis. The cost of a particular jet engine the company manufactures is shown as follows:

  

  If production of this engine were discontinued1 the production capacity would be idle, and the supervisor would be laid off. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is

  A. $408,000

  B. $365,000

  C. $391,000

  D. $385,000

  Correct Answer: D

  The company will need to cover its variable costs and any other incremental costs. Thus, direct materials ($200,000), direct labor ($150,000), the supervisor's salary ($20,000), and fringe benefits on direct labor ($15,000) are the incremental unit costs of manufacturing the engines. The breakeven price is therefore $385,000 ($200,000 + $150,000 + $20,000 + $15,000).

• Question 222:

  Laurel Corporation has its own cafeteria with the following annual costs:

  

  The overhead is 40% fixed. Of the fixed overhead, $25,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and Laurel will continue to pay his/her salary, the maximum cost Laurel will be willing to pay an outside firm to service the cafeteria is

  A. $285,000

  B. $175,000

  C. $219,000

  D. $241,000

  Correct Answer: D

  Given that overhead is 40% fixed, $66,000 ($1 10,000 x 60%) is variable, and $44,000 is fixed. Of the latter amount, $25,000 is attributable to the supervisor's salary. The $19,000 remainder is allocated from total company overhead and is unavoidable. Assuming the company will continue to pay the supervisor's salary if an outside firm services the cafeteria, the total fixed overhead is not an avoidable (incremental) cost. Thus, the total avoidable cost of the cafeteria's operation is $241 ,000 ($100,000 food + $75,000 labor + $66,000 VOH). This amount is the savings from hiring an outside firm. Accordingly, it is also the maximum that Laurel should be willing to pay the outside firm.

• Question 223:

  In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as

  A. Factory management costs.

  B. General office costs.

  C. Avoidable fixed costs.

  D. Depreciation costs.

  Correct Answer: C

  The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed costs will not be incurred if the "buy" decision is selected.

• Question 224:

  Listed below are a company's monthly unit costs to manufacture and market a particular product.

  

  The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?

  A. $8.50

  B. $6.75

  C. $7.75

  D. $5.25

  Correct Answer: B

• Question 225:

  Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One

  of the components, Part No. 456, has a variable manufacturing cost of $30. The part can be sold

  domestically or shipped to the French subsidiary for use in the manufacture of a residential subassembly.

  Relevant data with regard to Part No.

  456 are shown below.

  

  *

  lf deemed preferable, these units could be sold in the U.S. Polar's applicable income tax rates are 40% in the U.S. and 70% in France.Polar will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the domestic market price. On the basis of this information, which one of the following strategies should be recommended to Polar's management?

  A.

  Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs.

  B.

  Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs.

  C.

  Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France.

  D.

  Transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs.

  Correct Answer: C

  If the 150,000 components are sold separately in the U.S., the after-tax profit per unit will be $21 [($65-$30)x.6]. The French subsidiary will then purchase150,000 components domestically to include in the subassembly. The per-unit profit on sales of the subassembly will be $12 [($170-$75-$55)x.3]. The total per-unit profit for the consolidated entity from these transactions will therefore be $33 ($21 + $12).

• Question 226:

  Condensed monthly operating income data for Korbin, Inc. for May follows: Additional information regarding Korbin's operations follows: One-fourth of each store's direct fixed costs would continue if either store is closed. Korbin allocates common fixed costs to each store on the basis of sales dollars. Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales. The operating results for May are representative of all months. One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store. Korbin is considering the deletion of these items, a move that would reduce the Suburban Store's direct fixed expenses by 15% and result in a 20% loss of Suburban Store's remaining sales volume. This change would not affect the Urban Store. A decision by Korbin to eliminate the items sold at cost would result in a monthly increase (decrease) in Korbin's operating income of

  

  A. $(5,200)

  B. $(1,200)

  C. $(7,200)

  D. $2,000

  Correct Answer: B

  If 50% of the Suburban Store's sales are at variable cost, its contribution margin (sales- variable costs) must derive wholly form sales of other items. However, eliminating sales at variable cost reduces other sales by 20%. Thus, the effect is to reduce the contribution margin to $28,800 ($36,000x.8). Moreover, fixed costs will be reduced by 15% to $ 34,000 ($40,000x.85). Consequently, the new segment margin is $(5,200) ($34,000 direct fixed costs-$28,800 contribution margin), a decrease of $1,200 [$(5,200)-$(4,000)].

• Question 227:

  Condensed monthly operating income data for Korbin, Inc for May follows: Additional information regarding Korbin's operations follows: One-fourth of each store's direct fixed costs would continue if either store is closed. ?Korbin allocates common fixed costs to each store on the basis of sales dollars. Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales. The operating results for May are representative of all months. Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this store's sales by 10% would result in a monthly increase (decrease) in Korbin's operating income during the year (rounded) of

  

  A. $(5000)

  B. $(1400)

  C. $487

  D. $7,000

  Correct Answer: B

  The $60,000 advertising campaign will increase direct fixed costs by $5,000 per month ($60,000 / 12). Sales and contribution margin will also increase by 10%. Hence, the contribution margin for the Suburban Sore will increase by $3,600 ($36,000 x 10%), and income will decline by $1,400 ($5,000-$3,600).

• Question 228:

  Condensed monthly operating income data for Korbin, Inc. for May follows

  

  Additional information regarding Korbin's operations follows:

  One-fourth of each store's direct fixed costs would continue if either store is closed.

  Korbin allocates common fixed costs to each store on the basis of sales dollars.

  Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban

  Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.

  The operating results for May are representative of all months. A decision by Korbin to close the Suburban

  Store would result in a monthly increase (decrease) in Korbin's operating income of

  A. $(10,800)

  B. $(6,000)

  C. $(1,200)

  D. $4,000

  Correct Answer: A

  If the Suburban Store is closed, one-forth of its direct fixed costs will continue. Thus, the segment margin that should be used to calculate the effect of its closing on Korbin's operating income is $6,000 {$36,000 contribution margin- [$40,000 direct fixed costs x(1.0-.25)]}. In addition, the sales ( and contribution margin) of the Urban Store will decline by 10% if the Suburban store closes. A 10% reduction in Urban's $48,000 contribution margin will reduce income by $4,800. Accordingly, the effect of closing the Suburban Store is to decrease operating income by $10,800 ($6,000 + $4,800).

• Question 229:

  When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the highest

  A. Sales price per unit.

  B. Individual unit contribution margin.

  C. Sales volume potential.

  D. Contribution margin per unit of the constraining resource.

  Correct Answer: D

  In the short run, many costs are fixed. Hence, contribution margin (revenues -- all variable costs) becomes the best measure of profitability. Moreover, certain resources are also fixed. Accordingly, when deciding which products to produce at full capacity, the criterion should be the contribution margin per unit of the most constrained resource. This approach maximizes total contribution margin.

• Question 230:

  Whitehall Corporation produces chemicals used in the cleaning industry During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-i 2 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90000.Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?

  A. The operating profit last month was $50,000, and the inventory value is $15,000.

  B. The operating profit last month was $50,000, and the inventory value is $45,000.

  C. The operating profit last month was $125,000, and the inventory value is $30,000.

  D. The operating profit last month was $200,000, and the inventory value is $30,000.

  Correct Answer: B

  Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 + (60,000 units of AM-12 + 40,000 units of BM36)]. The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost + 60,000 units)]. Total inventory value is $45,000 (10,000 units x $4.50), and total operating profit is $50,000 [50,000 units sold x ($5.50 unit price -- $4.50 unit cost)]