Certified Management Accountant Decision Analysis 3 — Questions and Answers
Question 1: A component costs $15/unit to manufacture: direct materials $5, direct labor $3, variable overhead $2, allocated fixed overhead $5. An outside supplier offers it for $12. What is the relevant cost to make?
- $15
- $10 (Correct answer)
- $12
- $5
Correct answer: $10
Only variable costs ($5 + $3 + $2 = $10) are relevant; the $5 allocated fixed overhead is unavoidable and does not change whether the component is made or bought.
Question 2: In a make-or-buy analysis, which fixed costs are considered relevant?
- All fixed costs currently allocated to the product
- Fixed costs that will be eliminated if internal production stops (Correct answer)
- Fixed costs equal to the supplier's markup
- No fixed costs under any circumstances
Correct answer: Fixed costs that will be eliminated if internal production stops
Only avoidable (escapable) fixed costs — those that disappear if the activity is discontinued — are relevant to the make-or-buy decision.
Question 3: A make-or-buy decision shows variable cost to make = $9/unit and purchase price = $11/unit. However, buying frees capacity generating $3/unit in contribution margin from another product. The correct choice is to:
- Make; $9 < $11 so making is cheaper
- Buy; opportunity cost makes total cost of making $12 > $11 buy price (Correct answer)
- Make; opportunity costs are never quantifiable
- Buy; outside suppliers inherently have economies of scale
Correct answer: Buy; opportunity cost makes total cost of making $12 > $11 buy price
Total cost to make = $9 variable + $3 opportunity cost = $12, which exceeds the $11 purchase price, so buying is optimal.
Question 4: When outsourcing is under consideration, which qualitative factor is MOST critical for a payroll processing function?
- Supplier's contribution margin structure
- Data security and confidentiality of employee records (Correct answer)
- The company's gross margin percentage
- Whether the supplier uses the same ERP system
Correct answer: Data security and confidentiality of employee records
Employee payroll data is sensitive; a breach could create legal liability and reputational damage, making data security the paramount qualitative concern.
Question 5: A company buys 10,000 units/year from a supplier at $14. It could make them for $8 variable cost per unit plus $50,000 in avoidable fixed costs. Should the company make or buy?
- Buy; $14 × 10,000 = $140,000 < total cost to make
- Make; total cost to make $130,000 < $140,000 to buy (Correct answer)
- Buy; avoidable fixed costs always make making uneconomical
- Make; variable cost per unit ($8) is always the deciding factor
Correct answer: Make; total cost to make $130,000 < $140,000 to buy
Total cost to make = ($8 × 10,000) + $50,000 = $130,000, which is less than the $140,000 purchase cost.
Question 6: A division manufactures a sub-component it could outsource. If it outsources, 3 workers would be laid off with no severance. The most appropriate classification of those labor savings is:
- Sunk cost
- Unavoidable fixed cost
- Avoidable cost relevant to the buy decision (Correct answer)
- Opportunity cost
Correct answer: Avoidable cost relevant to the buy decision
Labor costs that will be eliminated if production is outsourced are avoidable costs and therefore relevant to the make-or-buy analysis.
Question 7: In a make-or-buy decision where facilities would sit idle if production is outsourced (no alternative use), how does idle facility cost affect the analysis?
- Idle facility costs favor buying because they are eliminated
- Idle facility costs favor making because they are already being incurred (Correct answer)
- Idle facility costs are relevant only if they equal the purchase price
- Idle facility costs are never relevant to the decision
Correct answer: Idle facility costs favor making because they are already being incurred
If facility costs continue whether or not production occurs (no alternative use), they are unavoidable and irrelevant — they favor neither option but do not penalize making.
Certified Management Accountant Decision Analysis 3
A component costs $15/unit to manufacture: direct materials $5, direct labor $3, variable overhead $2, allocated fixed overhead $5.
An outside supplier offers it for $12.
What is the relevant cost to make?