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Financial CMA Exam
Certified Management Accountant (Page 27 )

Updated On: 1-Feb-2026
Page 27 of 270
PDF with 1336 Questions
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A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the coming year. The costs to manufacture and distribute the candy are detailed below. The organization has invested capital of $6,750,000.


The 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 is

  1. $9.70
  2. $11.05
  3. $11.50
  4. $11.86

Answer(s): D

Explanation:

The company expects to incur variable costs of $3,500,000 (500000 lbs. x $7) and fixed costs of $1,080,000 ($810,000 + $270,000). To earn a 20% return on invested capital ($6,750,000 x 20% = $1,350,000), the company must charge a price of $11.86 [($3,500,000 + $1 ,080,000 + $1 ,350 000) ÷ 500,000].



View Related Case Study

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 coming year. The costs to manufacture and distribute the candy are detailed below. The organization has invested capital of $6,750,000.


The confectioner has been asked by a retailer to submit a bid for a special order of 40,000 one-pound boxes of candy; this is a one-time order that will not be repeated. While the candy would be almost identical, the candy ingredients would be $0.45 less. The total distribution costs for the entire order would be $32,000. Special setup costs required by this order would amount to $60,000. There would be no other changes in costs, rates, or amounts. The minimum selling price per one-pound box that the confectioner would bid on this special order would be

  1. $7.05
  2. $8.85
  3. $9.05
  4. $9.55

Answer(s): A

Explanation:

The minimum selling price equals the incremental costs of the special order (variable manufacturing costs, variable packaging costs, distribution costs, and setup costs) divided by the units ordered. The fixed costs do not change because the manufacturer has excess capacity. Total variable manufacturing costs are $190,000 [40,000 x ($4.85 - $.45+ $.35)], distribution costs are $32,000, and setup costs are $60,000. Thus, the minimum unit price is $7.05 [$190,000 + $32,000 + $60,000) / $40,000].



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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 month, but Reese is unable to guarantee this delivery schedule. 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%1 the company's opportunity cost of purchasing the 60,000 units at the beginning of the year is

  1. $1,320
  2. $1,440
  3. $2,640
  4. $2,880

Answer(s): A

Explanation:

The cost of 60,000 zippers is $36,000 (60,000 x $.60). The monthly cost is $3,000 (5,000 x $60). The company would like to purchase the items monthly, so 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 is only $33,000. Because the alternative arrangement involves a constant monthly expenditure of $3,000, the incremental investment declines by that amount each month. The result is that the average incremental investment for the year is $16,500 ($33,000 ÷ 2), and the opportunity cost of purchasing 60,000 units at the beginning of the year is $1,320 ($16,500 x 8%).



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Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price's being less than the target price of $2.2 million. Briar's actual costs incurred were $1,920,000. How much should Briar receive from the contract?

  1. $2,060,000
  2. $2,112,000
  3. $2,156,000
  4. $2,200,000

Answer(s): C

Explanation:

The formula price is 110% of actual cost, or $2,112,000 (110% x $1,920,000), a savings of $88,000 on the $2,200,000 target price. Accordingly, Briar should receive $2,156,000 {$2,1 12,000 + [50% x ($2,200,000 -- $2,1 1 2,000)]}.



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If a U.S. manufacturer's price in the U.S. market is below an appropriate measure of costs and the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share, the seller has engaged in

  1. Collusive pricing.
  2. Dumping.
  3. Predatory pricing.
  4. Price discrimination.

Answer(s): C

Explanation:

Predatory pricing is intentionally pricing below cost to eliminate competition and reduce supply. Federal statutes and many state laws prohibit the practice. The U.S. Supreme Court has held that pricing is predatory when two conditions are met (1)the seller's price is below "an appropriate measure of its costs," and (2) it has a reasonable prospect of recovering the resulting loss through higher prices or greater market share.



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