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Free CMA Exam Braindumps (page: 40)

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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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When considering a special order that will enable a company to make use of currently idle capacity. which of the following costs is irrelevant?

  1. Materials.
  2. Depreciation.
  3. Direct labor.
  4. Variable overhead.

Answer(s): B

Explanation:

Because depreciation will be expensed whether or not the company accepts the special order, it is irrelevant to the decision. Only the variable costs are relevant.



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Which of the following cost allocation methods is used to determine the lowest price that can be quoted for a special order that will use idle capacity within a production area?

  1. Job order.
  2. Process.
  3. Variable.
  4. Standard.

Answer(s): C

Explanation:

If idle capacity exists, the lowest feasible price for a special order is one covering the variable cost. Variable costing considers fixed cost to be a period cost, not a product cost. Fixed costs are not relevant to short term inventory costing with idle capacity because the fixed costs will be incurred whether or not any production occurs. Any additional revenue in excess of the variable costs will decrease losses or increase profits.



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When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that

  1. Manufacturing fixed and variable costs are linear.
  2. Selling and administrative fixed and variable costs are linear.
  3. Acceptance of the order will not affect regular sales.
  4. Acceptance of the order will not cause unit selling and administrative variable costs to increase.

Answer(s): C

Explanation:

Granting a lower-than-normal price for a special order has potential ramifications for regular sales because other customers may demand the same price. Thus, the decision to consider differential manufacturing costs only should be based on a determination that all other costs are not relevant, that is, that these other costs do not vary with the option chosen.






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