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Free CMA Exam Braindumps (page: 38)

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PDF with 1336 Questions
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A company's approach to an insourcing vs. outsourcing decision

  1. Depends on whether the company is operating at or below normal volume.
  2. Involves an analysis of avoidable costs.
  3. Should use absorption (full) costing.
  4. Should use activity-based costing.

Answer(s): B

Explanation:

Available resources should be used as efficiently as possible before outsourcing. If the total relevant costs of production are less than the cost to buy the item, it should be produced in-house. The relevant costs are those that can be avoided.



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Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as

  1. Avoidable fixed costs.
  2. Factory depreciation.
  3. Property taxes.
  4. Factory management costs.

Answer(s): A

Explanation:

Relevant costs are anticipated costs that will vary among the choices available. If two courses of action share some costs, those costs are not relevant because they will be incurred regardless of the decision made. Relevant costs include fixed costs that could be avoided if the items were purchased from an outsider.



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What is the opportunity cost of making a component part in a factory given no alternative use of the capacity?

  1. The variable manufacturing cost of the component.
  2. The total manufacturing cost of the component.
  3. The total variable cost of the component.
  4. Zero.

Answer(s): D

Explanation:

Opportunity cost is the benefit forgone by not selecting the best alternative use of scarce resources. The opportunity cost is zero when no alternative use is available.



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In an insourcing vs. outsourcing situation, which of the following qualitative factors is usually considered?

  1. Special technology.
  2. Skilled labor.
  3. Special materials requirements.
  4. All of the answers are correct.

Answer(s): D

Explanation:

Special technology may be available either within or outside the firm that relates to the particular product. The firm may possess necessary skilled labor or the supplier may.
Special materials requirements may also affect the decision process because one supplier may have monopolized a key component. Another factor to be considered is that assurance of quality' control is often a reason for making rather than buying.






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