Free IMANET Certified Management Accountant CMA Exam Questions

Decision tree analysis is useful when the most beneficial series of decisions is to be chosen. The possible decisions for each decision point, the events that might follow from each decision, the probabilities of these events, and the quantified outcomes should be known.

The second step in a value-chain analysis is to determine how each value-creating activity can produce a competitive advantage for the firm. This step has multiple substeps: (1) Identify the firm's competitive advantage (e.g., cost reduction, product differentiation) so that the firm's position in the industry's value chain can be clarified. (2) Identify the ways in which the firm's value-creating activities can generate additional customer value. (3) Identify activities that are candidates for cost reduction or, in the case of non-core competencies, outsourcing. (4) Identify value-adding ways in which the firm's remaining activities can be linked.

Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of value engineering.

If it is expensive to switch suppliers, customers will be less motivated to respond competitor advances.

Relevant costs are anticipated costs that will vary among the choices available. In other words1 if two courses of action share some costs, those costs are not relevant because they will be incurred regardless of the decision made.

Because Italy has experienced the greater inflation, its currency should depreciate in relation to Canada's. For example, if Canada trades 100 units of a product to Italy for preinflation price of $100 ( the domestic price in Canada), and Italy pays with 10,000 units of an Italian product that sells domestically for 10,000 pre-inflation lira, the exchange rate without regard to inflation is 100 lira per $1 (10,000 lira / $100). Allowing for the inflation, the 100 units of the Canadian product would sell for $105. The 10,000 units of the Italian product would sell for 11,000 lira. Thus, the new exchange rate will be 104.76 lira per $1 (11,000 lira / $105), and the price of the Canadian dollar will increase by 4.76% (rounded to 5%)

A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income. -

Dividend policy determines the portion of net income distributed to stockholders. Corporations normally try to maintain a stable level of dividends, even though profits may fluctuate considerably, because many stockholders buy stock with the expectation of receiving a certain dividend every year. Thus, management tends not to raise dividends if the payout cannot be sustained. The desire for stability has led theorists to propound the information content or signaling hypothesis a change in dividend policy is a signal to the market regarding management's forecast of future earnings. This stability often results in a stock that sells at a higher market price because stockholders perceive less risk in receiving their dividends.

The breakeven point in units equals total additional fixed costs divided by the unit contribution margin. Unit variable costs total $8 ($3.25 + $4.00 + $75). Thus, UCM is $6 ($14 unit selling price---$6 unit VC), and the breakeven point is 20,000 units ($120,000 PC $6). Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product

The company will also be absorbing $120.000 of additional fixed costs associated with this new product. A corporate fixed charge of $20000 currently absorbed by other products will be allocated to this new product.

Even that collections will be accelerated by2 days, at the rate of $300000 per day, the firm will have an additional $600,000 to invest. At 11%, the interest earned will be $66,000 per year. However1 the bank will charge $36,000 ($3,000 per month x 12 months) for its services. Thus, the firm will increase its pretax income by $30000 ($66000--- $36J00).

Incremental costing can be used in making decisions regarding the acceptance of special orders and make-or-buy decisions. Many quantitative and non quantitative factors are involved in such decisions. The first step is to determine which costs are relevant to the decision. A relevant cost is any cost that will differ depending upon the decision made. The costs described in situations I and IV are relevant costs. In situation I, the cost can be avoided if the special order is not accepted. In situation IV, an opportunity cost is associated with the ''make'' alternative.

Management accountants are frequently asked to analyze various decision situations, including the following:

I . The cost of a special device that is necessary if a special order is accepted.

II . The cost proposed annually for the plant service for the grounds at corporate

headquarters.

Ill. Joint production costs incurred, to be considered in a sell-at-split versus a processfurther decision.

IV . The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

V . The cost of obsolete inventory acquired several years ago, to be considered in a keepversus- disposal decision.

When a company has a scarce resource machine hour capacity, the company should maximize contribution per machine hour to maximize overall profits. Because product 615 has the lowest contribution per machine hour of the three products, product 615 will be produced using the remaining hours after product 613 and product 611 have been produced to equal demand. There fore the 400 hours needed to produce product 613 and the 1,000 hours needed to produce product 611 are subtracted from the 3.000 available machine hours. This leaves a total of 1,600 machine hours for product 615, which equates to 800 units being produced.

The variable costs of producing B18 total $ 10.50 ($3.75 + $4.50 + $2.25). Thus, purchasing at $ 13.50 would result in a loss of $3 per bearing. Given that each bearing requires 3 hours of machine time, the loss is $1 per machine hour.

The size of Mulva's capital budget will be determined by the number of projects it can profitably undertake, i.e., those projects for which the IRR is greater than the applicable weighted average cost of capital. First, the cost of each type of capital must be determined. The formula for calculating the cost of retained earnings is ks = (D1 + Po) + G, where D equals the dividend after year one, P0 equals the current stock price, and G equals the expected growth rate. The cost of retained earnings is 11 .25% [($2.50 $40) + 0.05]. The formula for calculating the cost of new equity is ke = [(D1 + (Po ---floating cost)]+ G. The cost of new equity is 11 .58%{[$2.50 + ($40 ---$2)] + 0 .05}. Given the firm's target capital structure and its retained earnings balance of $900,000, the firm can raise $1 500,000 with debt and retained earnings before it must use outside equity. Therefore, the WACC for $0 --- $1 500,000 of financing is equal to 9.15% [04 (0.10)(1 ---04) + 0.6(0.1125) = 0.0915]. Above $1,500,000, the firm must issue some new equity, so the WACC is 9.35% [04(0.10)(1 ---04) + 0.6(0.1158) = 0.0935]. Projects A, B, and C will definitely be undertaken because the IRR is greater than the WACC. Next, determine whether Project D will be profitable. Financing Projects A, B, and C, requires $1 200,000 in capital. Therefore, the $550,000 needed for Project D would involve financing $300,000 with debt and retained earnings and $250,000 with debt and equity. Thus, the WACC for Project D is 9.24% [($300,000 + $550,000) x 0.0935], which is less than Project D's IRR. Thus, Projects A, B, C, and D should be accepted, and the firm's capital budget is $1 750,000.

Total cost is defined as carrying cost plus expected stock out cost. At 20% of the $50 unit inventory cost, carrying cost is $10 per unit per year. Thus. carrying cost for 100 units of safely stock is $1 .000. A stock out has a 15% probability at this level of safely stock, and stock out costs are $500 (100 x $5) for each occurrence. If the firm orders 10 times per year, the expected number of stock outs is 1.5(15% x 10). Hence, total expected stock out cost for they aeries $750 ($500x1.5). Total cost is $1750 per year ($1 .000 + $750).