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Free CMA Exam Braindumps (page: 32)

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Kator Co. is a manufacturer of industrial components. One of their products that is used as a subcomponent in auto manufacturing is KB-96. This product has the following financial structure per unit.


KatorCo. has received a special, one-time order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity and that the contribution margin of the output that would be displaced by the special order is $10,000. Using the original data, the minimum price that is acceptable for this one-time special order is in excess of

  1. $60
  2. $70
  3. $87
  4. $100

Answer(s): A

Explanation:

Given no excess capacity, the price must cover the incremental costs. The incremental costs for KB-96 equal $50 ($20 direct materials + $15 direct labor + $12 variable overhead + $3 shipping and handling).Opportunity cost is the benefit of the next best alternative use of scarce resources. Because acceptance of the special order would cause the company to forgo a contribution margin of $10,000, that amount must be reflected in the price. Hence, the minimum unit price is $60 [$50 unit incremental cost +($10,000 lost CM / 1,000 units )].



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In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold to maximize profits?

  1. Separable costs after the split-off point.
  2. Joint costs to the split-off point.
  3. Sales salaries for the period when the units were produced.
  4. Purchase costs of the materials required for the joint products.

Answer(s): A

Explanation:

Joint products are created from processing a common input. Common costs are incurred prior to the split-off point and cannot be identified with a particular joint product. As a result, common costs are irrelevant to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if incremental revenues exceed the separable costs, products should be processed further, not sold at the split-off point.



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A firm produces two joint products (A and B) from one unit of raw material, which costs $1,000. Product A can be sold for $700 and product B can be sold for $500 at the split-off point. Alternatively, both A and/or B can be processed further and sold for $900 and $1 ,200, respectively. The additional processing costs are $100 for A and $750 for B. Should the firm process products A and B beyond the split-off point?

  1. Both A and B should be processed further.
  2. Only B should be processed further.
  3. Only A should be processed further.
  4. Neither product should be processed further.

Answer(s): C

Explanation:

The incremental costs ($100) for A are less than the incremental revenue ($200). However, the incremental costs of B ($750) exceed the incremental revenue ($700). Consequently, the firm should process A further and sell B at the split-off point.



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Copeland Inc. produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered:

I). Selling price per pound of X-547
II). Variable manufacturing costs of upgrade process
Ill). Avoidable fixed costs of upgrade process
IV). Selling price per pound of Xylene
V). Joint manufacturing costs to produce X-547

Which items should be reviewed when making the upgrade decision?

  1. I, II, and IV only.
  2. I, II, Ill, and IV only.
  3. I, II, IV, and V only.
  4. II and Ill only.

Answer(s): B

Explanation:

Common, or joint, costs cannot be identified with a particular joint product. By definition, joint products have common costs until the split-off point. Costs incurred after the split-off point are separable costs. The decision to continue processing beyond split- off is made separately for each product. The costs relevant to the decision are the separable costs because they can be avoided by selling at the split-off point. They should be compared with the incremental revenues from processing further. Thus, items I). (revenue from selling at split-off point), II). (variable costs of upgrade), Ill). (avoidable fixed costs of upgrade), and IV). (revenue from selling after further processing) are considered in making the upgrade decision.






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