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Financial CMA Exam
Certified Management Accountant (Page 39 )

Updated On: 1-Feb-2026
Page 39 of 270
PDF with 1336 Questions
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In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as

  1. Factory management costs.
  2. General office costs.
  3. Avoidable fixed costs.
  4. Depreciation costs.

Answer(s): C

Explanation:

The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed costs will not be incurred if the "buy" decision is selected.



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Listed below are a company's monthly unit costs to manufacture and market a particular product.


The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?

  1. $8.50
  2. $6.75
  3. $7.75
  4. $5.25

Answer(s): B

Explanation:

The key to this question is, what costs will the company avoid if it buys from the outside supplier? It will no longer incur the $2.00 of direct materials, nor the $240 of direct labor, nor the $1.60 of variable overhead, nor $0.75 ($2.50 x 30%) of the variable marketing costs (regardless of whether the company makes or buys, it will still incur 70% of the variable marketing costs). The firm will therefore avoid costs of $6.75 ($2.00 + $240 +$1.60 +$0.75). Hence, it will at least break even by paying no more than $6.75.



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Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One of the components, Part No. 456, has a variable manufacturing cost of $30. The part can be sold domestically or shipped to the French subsidiary for use in the manufacture of a residential subassembly. Relevant data with regard to Part No. 456 are shown below.


* lf deemed preferable, these units could be sold in the U.S. Polar's applicable income tax rates are 40% in the U.S. and 70% in France.Polar will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the domestic market price. On the basis of this information, which one of the following strategies should be recommended to Polar's management?

  1. Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs.
  2. Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs.
  3. Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France.
  4. Transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs.

Answer(s): C

Explanation:

If the 150,000 components are sold separately in the U.S., the after-tax profit per unit will be $21 [($65-$30)x.6]. The French subsidiary will then purchase150,000 components domestically to include in the subassembly. The per-unit profit on sales of the subassembly will be $12 [($170-$75-$55)x.3]. The total per-unit profit for the consolidated entity from these transactions will therefore be $33 ($21 + $12).



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Condensed monthly operating income data for Korbin, Inc. for May follows:


Additional information regarding Korbin's operations follows:
· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars. · Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
· The operating results for May are representative of all months.
One-half of the Suburban Store's dollar sales are from items sold at variable cost to attract customers to the store. Korbin is considering the deletion of these items, a move that would reduce the Suburban Store's direct fixed expenses by 15% and result in a 20% loss of Suburban Store's remaining sales volume. This change would not affect the Urban Store. A decision by Korbin to eliminate the items sold at cost would result in a monthly increase (decrease) in Korbin's operating income of

  1. $(5,200)
  2. $(1,200)
  3. $(7,200)
  4. $2,000

Answer(s): B

Explanation:

If 50% of the Suburban Store's sales are at variable cost, its contribution margin (sales- variable costs) must derive wholly form sales of other items. However, eliminating sales at variable cost reduces other sales by 20%. Thus, the effect is to reduce the contribution margin to $28,800 ($36,000x.8). Moreover, fixed costs will be reduced by 15% to $ 34,000 ($40,000x.85). Consequently, the new segment margin is $(5,200) ($34,000 direct fixed costs-$28,800 contribution margin), a decrease of $1,200[$(5,200)-$(4,000)].



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Condensed monthly operating income data for Korbin, Inc for May follows:


Additional information regarding Korbin's operations follows:
· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars.
· Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
· The operating results for May are representative of all months. Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this store's sales by 10% would result in a monthly increase (decrease) in Korbin's operating income during the year (rounded) of

  1. $(5000)
  2. $(1400)
  3. $487
  4. $7,000

Answer(s): B

Explanation:

The $60,000 advertising campaign will increase direct fixed costs by $5,000 per month ($60,000 / 12). Sales and contribution margin will also increase by 10%. Hence, the contribution margin for the Suburban Sore will increase by $3,600 ($36,000 x 10%), and income will decline by $1,400 ($5,000-$3,600).



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