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Financial CMA Exam
Certified Management Accountant (Page 29 )

Updated On: 1-Feb-2026
Page 29 of 270
PDF with 1336 Questions
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Production of a special order will increase gross profit when the additional revenue from the special order is greater than

  1. The direct materials and labor costs in producing the order.
  2. The fixed costs incurred in producing the order.
  3. The indirect costs of producing the order.
  4. The marginal cost of producing the order.

Answer(s): D

Explanation:

Gross profit will increase if the incremental or marginal cost of producing the order is less than the marginal revenue. Marginal cost equals the relevant variable costs assuming fixed costs are not affected by the special order.



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A company needs special gears. The machinery to make the gears can be rented for $100000 for 1 year, but the company can buy the gears and avoid the rental cost. Because the demand for the gears may be high (0.6 probability) or low (0.4 probability) and contribution margins vary, the company prepared the following decision tree:


Which of the following statements is true?

  1. The expected value of making is $20,000.
  2. The expected value of buying is $70000.
  3. Making the gears is the best choice.
  4. Buying the gears is the best choice.

Answer(s): B

Explanation:

The expected value of buying the gears is



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Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant will provide the company's power needs for the next 20 years. Hermo will use only 60% of the power output annually. At this level of capacity', Hermo's annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity'. This would reduce the estimated life of the plant to 14 years. The maximum amount Quigley would be willing to pay Hermo annually for the power is

  1. $600,000
  2. $1,050,000
  3. $1,200,000
  4. Some amount other than those given.

Answer(s): C

Explanation:

Since Quigley is currently paying $1,200,000, it would not want to pay any more for the same service.



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The ABC Company manufactures components for use in producing one of its finished products. When 12,000 units are produced, the full cost per unit is $35, separated as follows:
Direct materials $ 5
Direct labor 15
Variable overhead 10
Fixed overhead 5
The XYZ Company has offered to sell 12,000 components to ABC for $37 each. If ABC accepts the offer, some of the facilities currently being used to manufacture the components can be rented as warehouse space for $40,000. However, $3 of the fixed overhead currently applied to each component would have to be covered by ABC's other products. What is the differential cost to the ABC Company of purchasing the components from the XYZ Company?

  1. $8000
  2. $20,000
  3. $24,000
  4. $44,000

Answer(s): B

Explanation:

Differential (incremental) cost is the difference in total cost between two decisions. The relevant costs do not include unavoidable costs, such as the $3 of fixed overhead. It would cost ABC an additional $20,000 to purchase, rather than manufacture, the components.



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Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools. A handle is used in three different tools. The unit cost budget for 201000 handles is



R&M Steel has offered to supply 20,000 handles to Cohasset for $1.25 each, delivered. If Cohasset currently has idle capacity that cannot be used, accepting the offer will

  1. Decrease the handle unit cost by $05.
  2. Increase the handle unit cost by $ .15.
  3. Decrease the handle unit cost by $15.
  4. Increase the handle unit cost by $.05.

Answer(s): B

Explanation:

Since the fixed cost will be incurred whether the company makes or buys the part, the relevant unit cost of making the part is the $1 .10 variable cost ($1 .30 -- $20 fixed overhead). The existence of idle capacity indicates that the firm has no opportunity cost to be considered in the calculation. Thus, accepting the offer would increase costs by$.15 per unit.



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