Certified Management Accountant Decision Analysis 2

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?

Accepted Answer

Increase by $2,000

Answer

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?

Accepted Answer

Sunk costs

Answer

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?

Accepted Answer

Process further; incremental revenue ($15,000) exceeds incremental cost ($10,000)

Answer

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?

Accepted Answer

Allocated common fixed manufacturing overhead

Answer

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?

Accepted Answer

Increase by $1,000

Answer

Incremental contribution = ($17 − $15) × 500 = $1,000; fixed costs do not change, so net income rises by $1,000.

Certified Management Accountant Practice Test

Certified Management Accountant Practice Test

Certified Management Accountant Decision Analysis 2