Certified Management Accountant Decision Analysis 2 — Questions and Answers
Question 1: A company with idle capacity receives a special order for 500 units at $18/unit. Variable cost is $14/unit and allocated fixed overhead is $8/unit. What is the impact on operating income if accepted?
- Increase by $2,000 (Correct answer)
- Decrease by $2,000
- Increase by $9,000
- No impact because price is below full cost
Correct answer: Increase by $2,000
With idle capacity, only variable cost ($14) is relevant; the $4/unit spread × 500 units = $2,000 increase in operating income.
Question 2: Which of the following costs is NEVER relevant for short-term decision analysis?
- Incremental fixed costs
- Opportunity costs
- Sunk costs (Correct answer)
- Avoidable variable costs
Correct answer: Sunk costs
Sunk costs are past expenditures that cannot be recovered and therefore have no bearing on future decisions.
Question 3: Product A can be sold at split-off for $30,000 or processed further for $45,000, incurring additional costs of $10,000. The joint cost allocated to A is $20,000. What is the correct decision?
- Process further; incremental revenue ($15,000) exceeds incremental cost ($10,000) (Correct answer)
- Sell at split-off; joint costs make further processing uneconomical
- Process further; total revenue ($45,000) exceeds joint cost ($20,000)
- Sell at split-off; the $5,000 net gain is insufficient
Correct answer: Process further; incremental revenue ($15,000) exceeds incremental cost ($10,000)
Joint costs are sunk and irrelevant; the decision hinges solely on whether incremental revenue ($15,000) exceeds incremental processing cost ($10,000).
Question 4: When evaluating a special order that would use otherwise idle capacity, which item should be EXCLUDED from the relevant cost calculation?
- Direct materials for the special order
- Incremental shipping costs
- Allocated common fixed manufacturing overhead (Correct answer)
- Direct labor for the special order
Correct answer: Allocated common fixed manufacturing overhead
Allocated common fixed overhead does not change with the special order and is therefore irrelevant to the accept-or-reject decision.
Question 5: A firm operates at 90% capacity producing 9,000 units. A customer requests 500 units at $17 each. Variable cost per unit is $15; total fixed costs are $45,000. What is the incremental effect on net income?
- Increase by $1,000 (Correct answer)
- Decrease by $1,000
- Increase by $8,500
- No effect because the order is below normal price
Correct answer: Increase by $1,000
Incremental contribution = ($17 − $15) × 500 = $1,000; fixed costs do not change, so net income rises by $1,000.
Question 6: An 'out-of-pocket cost' in decision analysis is best described as:
- A past cost that was paid in cash
- A future cost requiring an actual cash disbursement (Correct answer)
- An allocated portion of overhead
- An opportunity cost foregone
Correct answer: A future cost requiring an actual cash disbursement
Out-of-pocket costs are future cash expenditures that will actually be paid if a particular alternative is chosen.
Question 7: A product line shows: selling price $50, variable cost $30, avoidable fixed cost $5, unavoidable allocated fixed cost $8. The minimum acceptable price in a one-time special order with idle capacity is:
- $30 (Correct answer)
- $35
- $43
- $50
Correct answer: $30
With idle capacity, the floor price equals variable cost ($30) because unavoidable fixed costs and avoidable fixed costs irrelevant to a one-time order with no capacity impact.
Certified Management Accountant Decision Analysis 2
A company with idle capacity receives a special order for 500 units at $18/unit.
Variable cost is $14/unit and allocated fixed overhead is $8/unit.
What is the impact on operating income if accepted?