Decision Analysis — CMA Part 2 Practice Questions (Free)

Q: In a make-or-buy decision, which of the following costs is most relevant?

Avoidable costs of internal production. Avoidable costs are costs that will be eliminated if the company chooses to buy rather than make the product. Only differential (avoidable) costs are relevant in make-or-buy decisions; sunk costs and unavoidable allocations should be excluded.

Q: A product has a selling price of $50, variable costs of $30, and allocated fixed costs of $10 per unit. If the company has excess capacity, what is the minimum price it should accept for a special order?

$30. With excess capacity, the minimum acceptable price for a special order equals the variable cost per unit ($30). Fixed costs are incurred regardless, so any price above variable cost contributes to covering fixed costs and generating profit.

Q: Which of the following best describes an opportunity cost?

The benefit foregone by choosing one alternative over the next best option. Opportunity cost represents the value of the best alternative that is sacrificed when a particular course of action is chosen. It is a relevant cost in decision-making even though it does not appear in accounting records.

Q: A company manufactures three products using a shared bottleneck resource. Product A contributes $20 per unit with 2 hours of machine time, Product B contributes $36 per unit with 4 hours, and Product C contributes $15 per unit with 1 hour. In what order should the company prioritize production?

C, A, B. Contribution per machine hour: A = $20/2 = $10/hr, B = $36/4 = $9/hr, C = $15/1 = $15/hr. Rank by contribution per constraint unit: C ($15), A ($10), B ($9). When a resource is constrained, maximize contribution per unit of the scarce resource.

Q: A company is considering dropping a product line that shows an operating loss of $30,000. The product line has $200,000 in revenue, $130,000 in variable costs, and $100,000 in fixed costs, of which $60,000 are avoidable. Should the company drop the product line?

No, because dropping it would reduce overall income by $10,000. Contribution margin = $200,000 - $130,000 = $70,000. Avoidable fixed costs = $60,000. If the line is dropped, the company loses $70,000 in contribution margin but saves only $60,000 in avoidable costs, reducing overall income by $10,000. The line should be kept.

Q: In a linear programming model for product mix optimization, the objective function represents:

The quantity to be maximized or minimized, such as total contribution margin. The objective function in linear programming defines the goal of the optimization, typically maximizing total contribution margin or profit (or minimizing cost). Constraints represent the limitations on resources such as labor, materials, or machine hours.

Q: A company is evaluating whether to process a joint product further. Joint costs to the split-off point are $80,000. Product X can be sold at split-off for $60,000 or processed further for an additional $25,000 and sold for $90,000. What should the company do?

Process further because the incremental revenue of $30,000 exceeds the incremental cost of $25,000. Joint costs are sunk and irrelevant to the sell-or-process-further decision. Incremental revenue = $90,000 - $60,000 = $30,000. Incremental cost = $25,000. Since incremental revenue exceeds incremental cost by $5,000, the company should process further.

Q: A company uses expected value analysis to evaluate a project with three scenarios: Best case (probability 20%, payoff $500,000), Most likely (probability 50%, payoff $200,000), and Worst case (probability 30%, payoff -$100,000). What is the expected monetary value?

$170,000. EMV = (0.20 x $500,000) + (0.50 x $200,000) + (0.30 x -$100,000) = $100,000 + $100,000 - $30,000 = $170,000. Expected value weighs each outcome by its probability to determine the average expected result.

Q: A company is considering automating a production process. The current manual process has variable costs of $15 per unit and fixed costs of $100,000. The automated process would have variable costs of $8 per unit and fixed costs of $240,000. At what volume level is the company indifferent between the two alternatives?

20,000 units. Set total costs equal: $100,000 + $15Q = $240,000 + $8Q. Solving: $7Q = $140,000, so Q = 20,000 units. Below 20,000 units the manual process is cheaper; above 20,000 units automation is preferred.

Q: A division has the capacity to produce 50,000 units of a component. It currently sells 40,000 units externally at $25 per unit with variable costs of $15 per unit. The assembly division wants to buy 15,000 units internally. What is the minimum transfer price per unit for the first 10,000 units and the last 5,000 units, respectively?

$15 and $25. For the first 10,000 units (using excess capacity), the minimum transfer price equals variable cost of $15 since no external sales are displaced. For the last 5,000 units, external sales must be forgone, so the minimum is variable cost plus lost contribution ($15 + $10 = $25).

Question 1easy

In a make-or-buy decision, which of the following costs is most relevant?

Question 2easy

A product has a selling price of $50, variable costs of $30, and allocated fixed costs of $10 per unit. If the company has excess capacity, what is the minimum price it should accept for a special order?

Question 3easy

Which of the following best describes an opportunity cost?

Question 4medium

A company manufactures three products using a shared bottleneck resource. Product A contributes $20 per unit with 2 hours of machine time, Product B contributes $36 per unit with 4 hours, and Product C contributes $15 per unit with 1 hour. In what order should the company prioritize production?

Question 5medium

A company is considering dropping a product line that shows an operating loss of $30,000. The product line has $200,000 in revenue, $130,000 in variable costs, and $100,000 in fixed costs, of which $60,000 are avoidable. Should the company drop the product line?

Question 6medium

In a linear programming model for product mix optimization, the objective function represents:

Question 7medium

A company is evaluating whether to process a joint product further. Joint costs to the split-off point are $80,000. Product X can be sold at split-off for $60,000 or processed further for an additional $25,000 and sold for $90,000. What should the company do?

Question 8hard

A company uses expected value analysis to evaluate a project with three scenarios: Best case (probability 20%, payoff $500,000), Most likely (probability 50%, payoff $200,000), and Worst case (probability 30%, payoff -$100,000). What is the expected monetary value?

Question 9hard

A company is considering automating a production process. The current manual process has variable costs of $15 per unit and fixed costs of $100,000. The automated process would have variable costs of $8 per unit and fixed costs of $240,000. At what volume level is the company indifferent between the two alternatives?

Question 10hard

A division has the capacity to produce 50,000 units of a component. It currently sells 40,000 units externally at $25 per unit with variable costs of $15 per unit. The assembly division wants to buy 15,000 units internally. What is the minimum transfer price per unit for the first 10,000 units and the last 5,000 units, respectively?

Question 11easy

Which of the following costs is always irrelevant to a decision?

Question 12easy

In a special order decision, if the company has excess capacity, the minimum acceptable price is typically:

Question 13easy

What is the breakeven point?

Question 14easy

In CVP analysis, the contribution margin per unit is calculated as:

Question 15easy

Relevant costs in decision-making must be:

Question 16easy

A company is deciding whether to drop a product line. Which of the following costs is most likely relevant to this decision?

Question 17easy

In a sell-or-process-further decision, joint costs incurred up to the split-off point are:

Question 18easy

The contribution margin ratio is calculated as:

Question 19easy

A product sells for $50 per unit with variable costs of $30 per unit. If fixed costs are $200,000, what is the breakeven point in units?

Question 20easy

An opportunity cost is best defined as:

Question 21easy

In a make-or-buy decision, which of the following costs is typically relevant?

Question 22easy

Which pricing strategy involves setting a low initial price to gain market share?

Question 23easy

CVP analysis assumes all of the following EXCEPT:

Question 24easy

Expected value in decision analysis is calculated by:

Question 25easy

In a decision tree, a square node represents:

Question 26easy

When a company has a constrained resource, products should be ranked for production based on:

Question 27easy

Sensitivity analysis in decision-making involves:

Question 28easy

A product line should be dropped only if:

Question 29easy

The margin of safety represents:

Question 30easy

In a make-or-buy analysis, if a company can use freed-up capacity from buying externally to produce another profitable product, this represents:

Question 31easy

Which of the following is NOT an assumption of CVP analysis?

Question 32easy

Price skimming is a strategy that involves:

Question 33easy

In decision analysis, a circular node on a decision tree represents:

Question 34easy

The breakeven point in sales dollars is calculated as:

Question 35easy

Marginal analysis focuses on:

Question 36easy

A company has contribution margin per unit of $25 and fixed costs of $500,000. To earn a target profit of $100,000, how many units must be sold?

Question 37easy

In simulation analysis, the purpose is to:

Question 38easy

A special order should be accepted when:

Question 39easy

In a sell-or-process-further decision, a product should be processed further if:

Question 40easy

Which of the following is a relevant cost in a decision to accept or reject a special order?

Question 41medium

A company manufactures a component at a variable cost of $18 per unit and a fixed cost of $7 per unit (based on current production of 50,000 units). An outside supplier offers to provide the component for $22 per unit. If the company buys externally, $150,000 of fixed costs can be avoided. Should the company make or buy?

Question 42medium

A company produces three products using a single machine with 8,000 hours of available capacity. Product A: CM = $40, 4 machine hours; Product B: CM = $30, 2 machine hours; Product C: CM = $50, 5 machine hours. Demand: A = 1,000 units, B = 2,000 units, C = 800 units. Which product should be produced first to maximize profit?

Question 43medium

A company is considering a special order of 5,000 units at $35 per unit. The normal selling price is $50. Variable manufacturing cost is $28 per unit, variable selling cost is $5 per unit (not incurred on special order), and fixed overhead is $8 per unit. The company has excess capacity. Should the special order be accepted?

Question 44medium

A product has a selling price of $100, variable costs of $60, and the company has total fixed costs of $400,000. The company currently sells 12,000 units. What is the margin of safety in units?

Question 45medium

A company is deciding whether to drop Product Line Z. Product Line Z has revenue of $500,000, variable costs of $300,000, direct fixed costs of $120,000 (avoidable), and allocated common fixed costs of $150,000. If Product Line Z is dropped, the effect on total company profit would be:

Question 46medium

In linear programming, the feasible region represents:

Question 47medium

A company sells Product M for $80 per unit. Variable costs are $48 per unit. Fixed costs total $640,000. What is the current breakeven point in units, and if variable costs increase by $4.80 per unit, what is the new breakeven point?

Question 48medium

A company can sell a joint product at the split-off point for $30,000 or process it further at an additional cost of $12,000 and sell it for $45,000. The joint cost allocated to the product is $20,000. What should the company do?

Question 49medium

A project has three possible outcomes: Outcome A with probability 0.3 and payoff $100,000; Outcome B with probability 0.5 and payoff $60,000; Outcome C with probability 0.2 and payoff -$20,000. What is the expected monetary value?

Question 50medium

A company produces two products using a limited raw material. Product X has a contribution margin of $24 and requires 3 pounds of material. Product Y has a contribution margin of $20 and requires 2 pounds of material. With 12,000 pounds available, demand is unlimited. What product mix maximizes profit?

Question 51medium

A company's current sales are $1,000,000 with a contribution margin ratio of 40% and fixed costs of $300,000. If the company increases advertising spending by $50,000 and expects sales to increase by 20%, what would be the change in operating income?

Question 52medium

In a make-or-buy decision, a company currently makes 10,000 units with the following costs per unit: direct materials $12, direct labor $8, variable overhead $5, fixed overhead $10 (60% avoidable). A supplier offers the part at $28 per unit. What is the relevant cost of making?

Question 53medium

Operating leverage is defined as the degree to which a company uses fixed costs in its cost structure. A company with high operating leverage will experience:

Question 54medium

A segment has the following data: Revenue $800,000, Variable costs $480,000, Direct fixed costs $200,000, Allocated common fixed costs $180,000. What is the segment margin?

Question 55medium

A decision tree analysis shows two alternatives. Alternative 1: 60% chance of $200,000 profit and 40% chance of $50,000 loss. Alternative 2: 80% chance of $100,000 profit and 20% chance of $30,000 profit. Which alternative has the higher expected value?

Question 56medium

A product can be sold at the split-off point for $8 per unit or processed further at a cost of $3 per unit and sold for $13 per unit. Annual production is 50,000 units. What is the financial advantage of further processing?

Question 57medium

A company has a product with a selling price of $75, variable costs of $45, and total fixed costs of $600,000. The company wants to earn a target profit of $150,000. What sales revenue is needed?

Question 58medium

In linear programming, the optimal solution is always found:

Question 59medium

A company is evaluating whether to accept a special order for 2,000 units at $40 per unit. Normal selling price is $55. Unit costs are: direct materials $15, direct labor $10, variable overhead $8, fixed overhead $12. The company is currently at 90% capacity (45,000 of 50,000 units). Should the order be accepted?

Question 60medium

In CVP analysis for multiple products, the weighted average contribution margin is used because:

Question 61medium

A company produces Product K and Product L in a joint process. At the split-off point, 10,000 units of K can be sold for $5 each or processed further at $2 per unit and sold for $8 each. 8,000 units of L can be sold for $7 each or processed further at $4 per unit and sold for $9 each. Which products should be processed further?

Question 62medium

The degree of operating leverage (DOL) at a given sales level is calculated as:

Question 63medium

A company uses sensitivity analysis and finds that a 5% decrease in selling price reduces profit by 40%, while a 5% increase in variable costs reduces profit by 30%. This indicates that:

Question 64medium

A company currently outsources a component for $25 per unit (10,000 units annually). It can make the component using idle equipment at a variable cost of $18 per unit plus $50,000 in additional fixed costs. At what volume is the company indifferent between making and buying?

Question 65medium

A company operates at full capacity of 100,000 units. A customer offers a special order for 5,000 units at $38 per unit. Variable cost is $30, fixed cost is $10 per unit. To fill the order, the company must sacrifice regular sales at $45 per unit. What is the opportunity cost per unit of accepting the special order?

Question 66medium

In a Monte Carlo simulation for capital budgeting, which of the following statements is correct?

Question 67medium

A company has two segments. Segment 1: Revenue $1,200,000, Variable costs $720,000, Traceable fixed costs $300,000. Segment 2: Revenue $800,000, Variable costs $520,000, Traceable fixed costs $200,000. Common fixed costs are $250,000. If Segment 2 is dropped and all its traceable fixed costs are avoidable, total company profit will:

Question 68medium

A target-costing approach sets the target cost by:

Question 69medium

A company makes 15,000 units of a part with the following per-unit costs: direct materials $20, direct labor $15, variable overhead $10, and fixed overhead $12. A supplier offers the part at $43 per unit. If the company buys, all fixed costs remain. The company should:

Question 70medium

A company sells a product for $120 with a CM ratio of 35%. Fixed costs are $840,000. What is the breakeven point in sales dollars and in units?

Question 71medium

When using expected value analysis, a risk-neutral decision-maker would choose:

Question 72medium

A company has fixed costs of $360,000 and a contribution margin ratio of 45%. What is the breakeven point in sales dollars?

Question 73medium

A company is deciding whether to accept a rush order for 500 units at $70 per unit. Normal variable cost is $45 per unit, but overtime labor adds $8 per unit. Fixed overhead is $15 per unit. The company has no idle capacity and must use overtime. Should the order be accepted?

Question 74medium

A company currently produces and sells 30,000 units. Selling price is $90, variable costs are $54, and fixed costs are $720,000. What is the degree of operating leverage?

Question 75medium

A company is evaluating a product mix decision with two products. Product J: selling price $60, variable cost $36, required machine time 3 hours. Product K: selling price $80, variable cost $52, required machine time 4 hours. Available machine hours are 12,000. Demand for each product is 5,000 units. How many units of each should be produced?

Question 76medium

In a product line decision, common fixed costs that are allocated to the product line based on sales volume are:

Question 77medium

A product has a selling price of $150 and variable costs of $90. Fixed costs total $480,000. If the selling price is increased by 10% and volume drops by 5%, what is the new operating income? Current volume is 10,000 units.

Question 78medium

A company uses absorption costing. Product R has a full cost of $85 per unit (variable cost $55, fixed overhead $30). A customer offers $65 per unit for 3,000 units. The company has idle capacity. From a decision-analysis perspective, the order should be:

Question 79medium

A company faces a make-or-buy decision. The in-house variable cost is $22 per unit. An outside supplier quotes $26 per unit. However, making the product internally requires a specialized machine that could be rented out for $48,000 per year if the company buys externally. Annual production is 15,000 units. What should the company do?

Question 80medium

When evaluating a special order that would require using capacity currently devoted to regular production, the relevant cost of the special order includes:

Question 81hard

A company produces 40,000 units of a component at a total cost of $20 per unit (variable cost $12, fixed cost $8). An outside supplier offers the component at $15 per unit. If the company buys, it will use the freed capacity to produce a new product contributing $80,000 annually. Only $120,000 of fixed costs ($3 per unit) are avoidable. What should the company do?

Question 82hard

A company sells three products with the following data. Product A: Price $100, VC $60, Mix 50%. Product B: Price $80, VC $56, Mix 30%. Product C: Price $120, VC $84, Mix 20%. Total fixed costs are $480,000. What is the breakeven point in total units?

Question 83hard

A company is deciding between two technologies for a new product. Technology A: Fixed costs $500,000, Variable costs $20 per unit. Technology B: Fixed costs $800,000, Variable costs $12 per unit. At what volume are the two technologies equally costly?

Question 84hard

A product requires 3 sequential processes. Process 1 can handle 500 units/hour, Process 2 can handle 400 units/hour, and Process 3 can handle 600 units/hour. The company operates 8 hours per day. If demand is 4,000 units per day, what is the bottleneck and the daily shortfall?

Question 85hard

A company has a product with a selling price of $200 and variable costs of $120. Fixed costs are $400,000. The company is considering a 10% price reduction that is expected to increase volume by 25%. Currently, the company sells 8,000 units. Should the company reduce the price?

Question 86hard

A company has a degree of operating leverage (DOL) of 4.0 at its current sales level. If sales increase by 8%, what is the expected percentage change in operating income?

Question 87hard

A decision tree shows: Decision A leads to Outcome 1 (probability 0.4, payoff $500,000) and Outcome 2 (probability 0.6, payoff $100,000). If Outcome 1 occurs, a follow-up decision can either invest further (70% chance of $200,000 additional gain, 30% chance of $50,000 additional loss) or do nothing additional. What is the expected value of Decision A with optimal follow-up?

Question 88hard

A company currently sells 50,000 units at $30 per unit. Variable cost is $18 per unit and total fixed costs are $400,000. The marketing department proposes spending $60,000 on a campaign that would increase volume by 15%. Should the proposal be accepted?

Question 89hard

A company produces three products sharing a painting machine limited to 6,000 hours per month. Product P: demand 2,000 units, CM $30, 2 hours/unit. Product Q: demand 3,000 units, CM $20, 1 hour/unit. Product R: demand 1,500 units, CM $48, 3 hours/unit. What is the optimal production plan and maximum contribution margin?

Question 90hard

A company is evaluating a new product with the following probability distribution for annual demand: 10,000 units (probability 0.2), 20,000 units (probability 0.5), 30,000 units (probability 0.3). Selling price is $50, variable cost is $35, and annual fixed costs are $180,000. What is the expected annual operating income?

Question 91hard

A company with a CM ratio of 30% and fixed costs of $600,000 wants to achieve a target after-tax income of $168,000. The tax rate is 30%. What level of sales revenue is required?

Question 92hard

In a linear programming problem, a company maximizes Z = 8X + 6Y subject to constraints. The corner points of the feasible region are (0, 500), (200, 400), (400, 200), and (600, 0). What is the optimal solution?

Question 93hard

A company currently produces Product A (CM $40, uses 5 lbs material) and Product B (CM $25, uses 2 lbs material). Material is limited to 20,000 lbs. Current production: A = 2,000 units, B = 5,000 units. A customer offers a special order for 1,000 units of Product C at a price of $60 (variable cost $35, uses 4 lbs material). Should the company accept the special order?

Question 94hard

A company considers two mutually exclusive projects. Project X has expected NPV of $200,000 with a standard deviation of $150,000. Project Y has expected NPV of $180,000 with a standard deviation of $60,000. Using the coefficient of variation (CV), which project has less relative risk?

Question 95hard

A company uses CVP analysis and is considering switching from a commission-based sales force (10% of sales) to a salaried sales force costing $500,000 per year. Current data: price $100, variable manufacturing cost $50, current sales 20,000 units, other fixed costs $300,000. At what sales volume would the company be indifferent?

Question 96hard

A segment reports the following: Revenue $2,000,000, Variable costs 65% of revenue, Traceable fixed costs $400,000, Allocated common costs $250,000. A proposal to increase advertising by $100,000 is expected to boost revenue by 15%. Should the advertising increase be approved?

Question 97hard

A company is analyzing a pricing decision using elasticity of demand. The current price is $80 with demand of 10,000 units. The price elasticity of demand is estimated at -2.0. If the company raises its price by 5%, what is the approximate change in total revenue?

Question 98hard

A company produces a product that can be sold at the split-off point for $40 per unit or processed further. Further processing costs $15 per unit and yields Grade A product (60% of output, selling for $70) or Grade B product (40% of output, selling for $45). For a batch of 10,000 units, what is the financial advantage of further processing?

Question 99hard

A company manufactures two products, Alpha and Beta, using a joint process costing $200,000. At the split-off point, Alpha (8,000 units) can be sold for $15 per unit and Beta (12,000 units) for $10 per unit. Alpha can be processed further at $4 per unit and sold for $22, while Beta can be processed further at $6 per unit and sold for $14. What is the maximum total profit from the optimal sell-or-process decisions?

Question 100hard

A company is analyzing three mutually exclusive investment options using a decision tree with the following data. Option A: 50% chance of $400,000 and 50% chance of $100,000, investment cost $200,000. Option B: 70% chance of $300,000 and 30% chance of $50,000, investment cost $180,000. Option C: 40% chance of $600,000 and 60% chance of $0, investment cost $150,000. Which option has the highest expected net value?