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Free CMA Exam Braindumps (page: 44)

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View Related Case Study

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.



View Related Case Study

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.



View Related Case Study

Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26000, to determine which product will be more profitable. The results of the study follow.


*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset.
According to Gleason's market study, the expected value of the sales volume of the breakfast rolls is

  1. 125,000 units.
  2. 260,000 units.
  3. 275,000 units.
  4. Some amount other than those given.

Answer(s): B

Explanation:

The expected value is found by multiplying the probability of each possibility by the potential volumes:



View Related Case Study

Gleason Co. has two products, a frozen dessert and ready4o-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26000, to determine which product will be more profitable. The results of the study follow.


*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset.
Applying a deterministic approach, Gleason's revenue from sales of frozen desserts would be

  1. $549,000
  2. $540,000
  3. $216,000
  4. Some amount other than those given.

Answer(s): B

Explanation:

The word deterministic is used to characterize processes that are not probabilistic. Such an approach uses the most likely value. In this case, sales of desserts would most likely be 300,000 units. At $1.80 each1 total revenue would be $540,000.






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