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Free CMA Exam Braindumps (page: 122)

Page 122 of 336
PDF with 1336 Questions
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Sunk costs

  1. Are substitutes for opportunity costs.
  2. In and of themselves are not relevant to decision making.
  3. Are relevant to decision making.
  4. Are fixed costs.

Answer(s): B

Explanation:

Sunk costs are those that cannot be avoided because the expenditure has already 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 decision choice selected.



View Related Case Study

In a manufacturing environment, the best short4erm profit maximizing approach would be to

  1. Maximize unit gross profit times the number of units sold.
  2. Minimize variable costs per unit times the number of units produced.
  3. Minimize fixed overhead cost per unit by producing at full capacity.
  4. Maximize contribution per unit times the number of units sold.

Answer(s): D

Explanation:

In the short run, the best approach is to maximize the unit contribution margin (price - unit variable cost) times the units sold because fixed costs can be ignored. The important consideration is the total contribution margin available to cover fixed costs and contribute to profits.



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When management must decide to accept or reject a one-time-only special order, given sufficient idle capacity, which one of the following is not relevant to the decision?

  1. Absorption costs.
  2. Differential costs.
  3. Direct costs.
  4. Variable costs.

Answer(s): A

Explanation:

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. In special-order situations, given sufficient excess capacity, management is not concerned with full absorption costing because it includes certain product costs (fixed factory overhead) that will not change if the special order is accepted. The principal issue is recovery of the variable costs of processing the special order and earning a contribution margin to apply toward covering fixed costs and profits. Thus, given sufficient capacity that would otherwise be idle (opportunity cost is zero), accepting a special order may be indicated as long as the organization recoups its variable costs.



View Related Case Study

When an organization decides on a course of action that is selected from a group of alternative courses of action, the benefit lost by not choosing the best alternative course of action is the

  1. Expected value.
  2. Incremental cost.
  3. Net realizable value.
  4. Opportunity cost.

Answer(s): D

Explanation:

An opportunity cost is defined as the benefit forgone, for example, the contribution to income, by not selecting the best alternative use of scarce resources. Opportunity costs are not recorded in the accounting records1 but they are important for management decision making.



Page 122 of 336



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