Certified Management Accountant Decision Analysis 3

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?

Accepted Answer

$10

Answer

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?

Accepted Answer

Fixed costs that will be eliminated if internal production stops

Answer

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:

Accepted Answer

Buy; opportunity cost makes total cost of making $12 > $11 buy price

Answer

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?

Accepted Answer

Data security and confidentiality of employee records

Answer

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?

Accepted Answer

Make; total cost to make $130,000 < $140,000 to buy

Answer

Total cost to make = ($8 × 10,000) + $50,000 = $130,000, which is less than the $140,000 purchase cost.

Certified Management Accountant Practice Test

Certified Management Accountant Practice Test

Certified Management Accountant Decision Analysis 3