IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 531:

  A cost that can be saved by not adopting a particular option is a(n)

  A. Imputed cost.

  B. Avoidable cost.

  C. Unavoidable cost.

  D. Postponable cost.

  Correct Answer: B

  An avoidable cost is one that can be saved by not adopting a particular alternative.

• Question 532:

  Which one of the following is most relevant to a manufacturing equipment replacement decision?

  A. Original cost of the old equipment.

  B. Disposal price of the old equipment.

  C. Gain or loss on the disposal of the old equipment.

  D. A lump-sum write-off amount from the disposal of the old equipment.

  Correct Answer: B

  Management decision analysis is based on the concept of relevant costs. Relevant costs differ among decision choices. Thus, incremental or differential costs are always relevant. Because they were incurred in the past, historical costs, such as the original cost of the equipment, are not relevant. Similarly, any gain or loss on the old equipment is not relevant because this amount is based on the historical cost. However, the disposal price of the old equipment is relevant because it involves a future cash inflow that will not occur unless the equipment is disposed of.

• Question 533:

  All of the following costs are relevant to a decision to accept or reject an order except

  A. Differential costs.

  B. Out-of-pocket costs.

  C. Replacement costs.

  D. Sunk costs.

  Correct Answer: D

  A sunk cost cannot be avoided because either the expenditure has occurred, or an irrevocable decision to incur the cost has been made. Sunk costs are irrelevant to management decision-making because they cannot vary with the option selected.

• Question 534:

  In a decision analysis situation1 which one of the following costs is generally not relevant to the decision?

  A. Incremental cost.

  B. Differential cost.

  C. Avoidable cost.

  D. Historical cost.

  Correct Answer: D

  Management decision analysis is based on the concept of relevant costs. Relevant costs differ among decision choices. Thus, incremental (differential or avoidable) costs are always relevant. Opportunity cost is also relevant because it is the benefit forgone by selecting one choice instead of another. Historical costs, because they occurred in the past, are sunk costs and not relevant to most management decisions.

• Question 535:

  American Coat Company estimates that 60,000 special zippers will be used in the manufacture of men's jackets during the next year. Reese Zipper Company has quoted a price of $.60 per zipper. American would prefer to purchase 5,000 units per month1 but Reese is unable to guarantee this delivery schedule. In order to ensure availability' of these zippers, American is considering the purchase of all 60,000 units at the beginning of the year. Assuming American can invest cash at 8%, the company's opportunity' cost of purchasing the 60,000 units at the beginning of the year is

  A. $1,320

  B. $1,440

  C. $1,500

  D. $2,640

  Correct Answer: A

  The cost of 60,000 zippers is $36,000 (60,000 x $60). The monthly cost is $3,000 (5,000 x $60). Because the company wants to purchase the items monthly, it will invest at least $3,000 in January. Accordingly, the zippers to be used in January will be purchased at the first of the year even if no special purchase is made. Thus, the incremental advance purchase will be only $33,000, not $36,000. The incremental investment will decline at a constant rate of $3,000 per month, so the amount for February will be $30,000, for March $27,000, etc. Hence, the incremental investment for December will be $0. Accordingly, assuming consumption is uniform, the average incremental investment during the year will be $16,500 ($33,000 + 2) if the onetime purchase is made. Total opportunity cost is therefore $1,320 ($16,500 x 8% cost of capital).

• Question 536:

  An important concept in decision making is described as "the contribution to income that is forgone by not using a limited resource in its best alternative use." This concept is called

  A. Marginal cost.

  B. Incremental cost.

  C. Potential cost.

  D. Opportunity cost.

  Correct Answer: D

  An opportunity cost is the maximum benefit sacrificed by employing a scarce productive resource in a specified manner. In other words, it is the value or worth of that resource in its next best alternative use.

• Question 537:

  In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?

  A. Labor.

  B. Overhead.

  C. Depreciation.

  D. Selling.

  Correct Answer: C

  Most types of costs either are variable or contain some mix of fixed and variable components. For example, labor and materials are primarily variable. Their amounts fluctuate with the relevant cost drivers. Selling expenses and overhead costs can be either fixed or variable. Depreciation, however, is strictly a fixed cost when viewed in a decision analysis situation because it requires no cash outlay. Instead, the initial acquisition of the long-lived asset requires the cash outlay.

• Question 538:

  The best example of a marketable security with minimal risk would be

  A. Municipal bonds.

  B. The common stock of an Aaa-rated company.

  C. Gold.

  D. The commercial paper of an Aaa-rated company.

  Correct Answer: D

  Of the choices given, the commercial paper of a top-rated (most creditworthy) company has the risk. Commercial paper is preferable to stock or stock options because the latter represent only a residual equity in a corporation Commercial paper is debt and thus has priority over shareholders' claims. Also, commercial paper is a very short-term investment. The maximum maturity allowed without SEC registration is 270 days. However, it can be sold only to sophisticated investors without registration.

• Question 539:

  Maple Motors buys axles in order to produce automobiles. Maple carries an average credit balance of $25,000,000 with its axle supplier. The axle supplier provides credit terms of 1/10 net 25. The nominal annual cost of Maple not taking the trade discount is closest to which one of the following? Assume a 360day year.

  A. 14.4%

  B. 14.5%

  C. 24.0%

  D. 24.2%

  Correct Answer: D

• Question 540:

  The Red Company has a revolving line of credit of $300,000 with a one-year maturity. The terms call for a 6% interest rate and a 1(2% commitment fee on the unused portion of the line of credit. The average loan balance during the year was $100,000. The annual cost of this financing arrangement is

  A. $8,000

  B. $6,500

  C. $7,000

  D. $7,500

  Correct Answer: C

  The annual cost of Red's financing arrangement can be calculated as follows Cost = (Amount borrowed x Interest rate) + [(Credit limit - Amount borrowed) x Commitment fee] = ($100,000 *6%) + [($300,000 --$100,000) x .05] = $6,000+$1,000 = $7,000