Advanced Management Accounting
Exam Review
Paul Jeyakumar, M.Sc., CGA
To assist you in answering the examination questions, CGA-Canada includes the
following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.
Calculate
Compare
Contrast
Criticize
Define
Describe
Design
Determine
Diagram
Discuss
Mathematically determine the
amount or number, showing
formulas used and steps taken. (Also
Compute).
Examine qualities or characteristics
that resemble each other. Emphasize
similarities, although differences
may be mentioned.
Compare by observing differences.
Stress the dissimilarities of qualities
or characteristics. (Also Distinguish
between)
Express your own judgment
concerning the topic or viewpoint in
question. Discuss both pros and
cons.
Clearly state the meaning of the
word or term. Relate the meaning
specifically to the way it is used in
the subject area under discussion.
Perhaps also show how the item
defined differs from items in other
classes.
Provide detail on the relevant
characteristics, qualities, or events.
Create an outcome (e.g., a plan or
program) that incorporates the
relevant issues and information.
Calculate or formulate a response
that considers the relevant
qualitative and quantitative factors.
Give a drawing, chart, plan or
graphic answer. Usually you should
label a diagram. In some cases, add
a brief explanation or description.
(Also Draw)
This calls for the most complete and
detailed answer. Examine and
analyze carefully and present both
pros and cons. To discuss briefly
Evaluate
requires you to state in a few
sentences the critical factors.
This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not
sufficient.) Cite authorities. Cite
advantages and limitations.
Explain
In explanatory answers you must
clarify the cause(s), or reasons(s).
State the “how” and “why” of the
subject. Give reasons for differences
of opinions or of results.
Identify
Distinguish and specify the important
issues, factors, or items, usually based
on an evaluation or analysis of a
scenario.
Illustrate
Make clear by giving an example,
e.g., a figure, diagram or concrete
example.
Interpret
Translate, give examples of, solve, or
comment on a subject, usually
making a judgment on it.
Justify
Prove or give reasons for decisions or
conclusions.
List
Present an itemized series or
tabulation. Be concise. Point form is
often acceptable.
Outline
This is an organized description. Give
a general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Prove
Establish that something is true by
citing evidence or giving clear logical
reasons.
Recommend Propose an appropriate solution or
course of action based on an
evaluation or analysis of a scenario.
Relate
Show how things are connected with
each other or how one causes another,
correlates with another, or is like
another.
Review
Examine a subject critically,
analyzing and commenting on the
important statements to be made
about it.
State
Clearly provide a position based on
an evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in
condensed form, like the summary of
a chapter, omitting details and
illustrations.
Trace
In narrative form, describe progress,
development, or historical events
from some point of origin.
QUESTIONS:
1.
A company that produces 50,000 bicycles each year is considering
the purchase of wheels from an outside vendor. This outsourcing
would enable the company to increase its production by 15%. The
company would pay the vendor $60 for 2 wheels, whereas it now
costs $52 to produce the 2 wheels. Variable manufacturing costs are
$28 per bicycle when the company produces the wheels in-house,
but would decrease to $25 per bicycle if the wheels were outsourced.
Other unit variable costs would remain at $80. The company sells all
the bicycles for $280 each. What would be the increase or decrease
in net income for this outsourcing project?
Contribution margin:
Producing: 50,000(280 – 52 – 80 – 28)
Outsourcing: [50,000(1.15)](280 – 60 – 80 – 25)
Increase in net income
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
$6,000,000
$6,612,500
$ 612,500
Page 3/35
2.
Suzanne and her husband John own a strawberry field. They sell the
strawberries for $3 per 500 grams. The cost related to the culture of
strawberries is $1.50 per 500 grams. Instead of selling whole
strawberries, Suzanne can also make strawberry jam, strawberry
sauce, and strawberry pie. Each unit of a product requires 500 grams
of strawberries. The prices for each unit of jam, sauce, and pie are,
respectively, $6.00, $5.00, and $6.50. Additional unit costs for their
production are, respectively, $2.00, $2.50, and $3.00. Should Suzanne
and John sell whole strawberries or process further and sell jam,
sauce, and pie?
Incremental benefits associated with further processing:
Jam: $6 – 3 – 2 = $1
Sauce: $5 – 3 – 2.50 = $(0.50)
Pie: $6.50 – 3 – 3 = $0.50
Further process jam and pie. Do not produce sauce.
3.
A company manufactures 3 products. Product 1 requires 3 machine
hours and has a contribution margin of $390 per unit of product.
Product 2 requires 4 machine hours and has a contribution margin of
$487.50 per unit of product. Product 3 takes half the time of product
1 and has a contribution margin of $200 per unit of product.
However, the company has a limited number of machine hours
available for the production of these products. Which product should
the company manufacture to maximize profits?
CM per machine hour:
Product 1: $390/3 = $130.00 per machine hour
Product 2: $487.50/4 = $121.88 per machine hour
Product 3: $200/1.5 = $133.33 per machine hour
Manufacture Product 3.
4.
Powersport is an energy drink well known among sports federations
and athletes. Since it came out on the market 3 years ago, sales have
increased continuously. The company believes it will sell 200,000
cases next year. A case contains 12 bottles of 375 ml Powersport
and is sold for $18 per case to sporting events, which sell the bottles
for $3 each.
Based on the production of 200,000 cases, the production costs are:
Labour
$2.75 per case
Raw materials
$3.75 per case
Variable and fixed overhead
$3.00 per case
Total fixed overhead
$400,000
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 4/35
Last month, a manufacturer that makes containers out of recycled
materials offered to make the bottles for $0.15 each. This proposition
would enable Powersport to decrease its costs of labour and raw
materials by 20%, and variable overhead would decrease to $0.60 per
case.
a.
Should Powersport accept the proposition? Show all
calculations
b.
Calculate the maximum price that Powersport should pay for a
case of bottles.
a.
If the company does not accept the offer:
Labour
$ 2.75
Raw material
3.75
Variable overhead
1.00
$7.50
Fixed overhead is irrelevant = $400,000/200,000 cases = $2.00
per case.
If the company accepts the offer:
Labour [$2.75 × (1 – 0.20)]
DM [$3.75 × (1 – 0.20)]
Variable overhead
Bottles ($0.15 × 12)
$ 2.20
3.00
0.60
1.80
$ 7.60
The company should not accept the offer since the relevant
costs would be $0.10/case higher.
b.
5.
MA2
$7.50 – (7.60 – 1.80) = $1.70 per case
In the context of a special order that will enable a firm to use its idle
capacity, which of the following costs are relevant?
1)
Amortization of the equipment
2)
Direct labour
3)
Fixed marketing costs
4)
Fixed overhead costs
Answer 2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 5/35
6.
A company has developed a regression equation to analyze the
behaviour of its manufacturing costs (M) as a function of machine
hours (H). The following equation was developed using monthly
observations for the last 6 months:
M = $12,000 + 6.75H
If 2,000 machine hours are worked in 1 month, what would the
estimated total manufacturing costs be?
1)
$12,000
2)
$13,500
3)
$25,500
4)
$27,000
Answer 3
7.
Every month, NewHome Design uses 2,500 MG1 parts to
manufacture one of its products. The unit costs incurred to
manufacture the MG1 component are the following:
Direct materials $
85
Direct labour
$
135
Overhead costs are applied on the basis of direct labour dollars.
Overhead costs amount to $650,000 a month and consist of 40%
fixed costs. The remaining costs are variable costs.
Last week, a vendor offered to partially make the MG1 component at
a price of $250. Buying this component will allow NewHome to avoid
all direct material costs and decrease the direct labour and variable
overhead costs by 70%.
Required
a.
In a make-or-buy decision, which costs are relevant?
MA2
b.
Should NewHome purchase the component from the outside
vendor if the capacity remains idle? Explain your decision.
c.
What is the maximum price that the company would be willing
to pay for the MG1 component?
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 6/35
a.
Relevant costs are variable and fixed costs that can be
avoided in the future if the decision is to buy.
b.
Make
Direct material
Direct labour
Variable overhead ($650,000 × 60% / 2,500)
Variable costs
Fixed costs ($650,000 × 40% / 2,500)
Total costs
$ 85.00
135.00
156.00
376.00
104.00
$480.00
Buy
Component
Direct labour ($135 × 30%)
Variable OH ($650,000 × 60% / 2,500) × 30%
Variable costs
Fixed costs ($650,000 × 40% / 2,500)
Total costs
$250.00
40.50
46.80
337.30
104.00
$441.30
NewHome Design should buy the MG1 component because
the total costs are lower when the component is bought.
c.
Savings as a result of purchasing the component:
Direct material ($85 × 100%)
$ 85.00
Direct labour ($135 × 70%)
94.50
VOH [($650,000 × 60% / 2,500) × 70%]
109.20
$288.70
Hence, the company should not pay more than $288.70.
8.
A small fudge company sells three delicious varieties of fudge: plain,
fudge with nuts, and fudge with raisins. Last week, the city asked the
company to produce 1,000 plain fudge packages for its annual
children’s festival. This order will require a set-up time cost of $200.
Variable costs are $0.80 per package. If the company has excess
capacity, what is the minimum price per package for this production,
considering that its fixed costs are $0.30 per package?
(200/1000) + 0.80 = $1.00
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 7/35
9.
A dairy company produces 1%, 2%, and 3.25% milk. The price of the
products is $1.50 for a litre of milk. The production costs of 100,000
litres are:
Milk
Direct labour
Overhead
$
$
$
35,000
25,000
50,000
Once the production is complete, the milk is poured into 1-litre
bottles and distributed to grocery stores. The cost of a bottle is $0.15
and transportation costs are $0.02 per litre of milk.
The company could also further process 50,000 litres of milk into
30,000 litres of ice cream. If the company decides to produce ice
cream, 1 litre of ice cream could be sold for $3.00 and all production
costs related to ice cream would increase by 20%. Each ice cream
container costs $0.20 and transportation costs are $0.05 per litre of
ice cream.
Should the company further process 50,000 litres of milk into
ice cream? Show all calculations.
If the company sells only milk:
Sales
($1.50 × 100,000)
$150,000
Cost of milk
(35,000)
Labour
(25,000)
Overhead
(50,000)
Bottle
($0.15 × 100,000)
(15,000)
Transportation costs
($0.02 × 100,000)
(2,000)
Profit
$ 23,000
If the company produces both ice cream and milk:
Sales of milk
($1.50 × 50,000)
$ 75,000
Sales of ice cream ($3.00 × 30,000)
90,000
Cost of milk ($35,000 × 50%)
(17,500)
($35,000 × 50%)1.2
(21,000)
Labour
($25,000 × 50%)
(12,500)
($25,000 × 50%)1.2
(15,000)
Overhead ($50,000 × 50%)
(25,000)
($50,000 × 50%)1.2
(30,000)
Milk bottles ($0.15 × 50,000)
(7,500)
Ice cream containers
($0.20 × 30,000)
(6,000)
Transportation— milk
($0.02 × 50,000)
(1,000)
ice cream ($0.05 × 30,000)
(1,500)
Profit
$ 28,000
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 8/35
The company should further process 50,000 litres of milk into ice
cream since it makes $5,000 more profit.
10.
Which of the following is least likely to be a relevant cost of
inventories for decision-making purposes?
1)
Market value
2)
Opportunity cost
3)
Historical cost
4)
Replacement cost
Answer 3
11.
Which of the following is not a principle of effective decision
framing?
1)
Need for component searches
2)
Need for pre-screening the decisions
3)
Irrelevance of increasing transformations
4)
Importance of local searches
Answer 2
12.
What do accountants use local linear approximations (LLAs) to
estimate?
1)
Total revenue
2)
Total cost
3)
Marginal revenue
4)
Marginal cost
Answer 4
Note:
Use the following information about product x to answer questions (13) and
(14).
Sales (50,000 units)
Raw materials
Direct labour
Variable overhead
Fixed overhead
Variable sales and administrative costs
Fixed sales and administrative costs
13.
$
$
$
$
$
$
$
750,000
150,000
100,000
60,000
65,000
6,000
24,000
What is the company’s approximate break-even point in units?
89,000 / [(750,000 – 150,000 – 100,000 – 60,000 – 6,000) / 50,000] =
10,254 units
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 9/35
14.
How many units the company needs to sell if the required net profit
is $50,000?
(50,000 + 89,000) / [(750,000 – 150,000 – 100,000 – 60,000 – 6,000) /
50,000] = 16,014
15.
Optoys Inc. manufactures and sells different models of toys, which
are grouped into 4 different product lines: T1, T2, T3, and T4. The
firm has been very successful, but the demand for toys is highly
seasonal and Optoys does not have enough capacity or flexibility to
satisfy the demand for Christmas sales on a just-in-time basis. To
overcome this problem, Optoys manufactures the toys in advance
and keeps them in a warehouse until they are shipped to retailers.
This allows Optoys to spread the production over many weeks.
However, warehousing capacity is limited and storage costs increase
with the holding period, which, over the last 2 years, has doubled
from an average of 5 weeks to an average of 10 weeks. The CEO of
Optoys is concerned that this lack of flexibility could be a constraint
in the future as the demand increases and storage costs become
prohibitive because additional space has to be rented.
A solution to the problem would be to invest in new molding
equipment that would double the production capacity, reduce the
average holding period, and reduce the storage costs. This
equipment acquisition would require a major financial investment
and the CEO is wondering what the effect would be on the
contribution margin of the firm.
The average contribution margin, the storage requirements, the
production requirements, and the maximum demand for each
product line are as follows:
Average CM/unit
Product Line
T1
T2
T3
T4
$
$
$
$
9.00
10.80
14.20
17.00
Storage
(Cubic Ft)
0.8
1.1
1.7
2.2
Production
(in Hours)
0.030
0.050
0.055
0.070
Demand
(in Units)
20,000
15,000
10,000
7,000
The maximum storage capacity of the warehouse is 24,000 cubic
feet, and the variable storage costs for a 10-week period are
estimated to be 10% of the average contribution margin. The monthly
production capacity currently available is 1,000 hours. Moreover,
retailers do not accept early deliveries so that only half of the units
can be delivered immediately. It is assumed that the other half will
have to be stored for an average of 10 weeks.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 10/35
To solve his problem, the CEO has set up the following linear program:
Maximize:
CM (T1D, T2D, T3D, T4D, T1S, T2S, T3S, T4S)
= 9.00T1D + 10.80T2D + 14.20T3D + 17.00T4D + 8.10T1S + 9.72T2S +
12.78T3S + 15.30T4S
Subject to:
T1D <= 10,000
(1)
T2D <= 7,500
(2)
T3D <= 5,000
(3)
T4D <= 3,500
(4)
T1D + T1S <= 20,000
(5)
T2D + T2S <= 15,000
(6)
T3D + T3S <= 10,000
(7)
T4D + T4S <= 7,000
(8)
0.03T1D + 0.05T2D + 0.055T3D + 0.07T4D <= 1,000 (9)
0.8T1S + 1.1T2S + 1.7T3S + 2.2T4S <= 24,000
(10)
Where:
T1D represents the number of units of T1 produced and delivered
immediately
T2D represents the number of units of T2 produced and delivered
immediately
T3D represents the number of units of T3 produced and delivered
immediately
T4D represents the number of units of T4 produced and delivered
immediately
T1S represents the # of units of T1 produced and stored for 10 weeks
T2S represents the number of units of T2 produced and stored for 10
weeks
T3S represents the number of units of T3 produced and stored for 10
weeks
T4S represents the number of units of T4 produced and stored for 10
weeks
The linear program was first solved using Solver and the current monthly
production capacity of 1,000 hours (see Exhibit 1). It was solved a second
time assuming a production capacity of 2,000 hours (see Exhibit 2).
EXHIBIT 1
First solution: monthly production capacity of 1,000 hours
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 11/35
Answer Report
Target Cell (Max)
Cell
Name
$J$10
Total contribution margin
Original Value
0
Final Value
477,199
Adjustable Cells
Cell
$B$9
$C$9
$D$9
$E$9
$F$9
$G$9
$H$9
$I$9
Number
Number
Number
Number
Number
Number
Number
Number
Original Value
0
0
0
0
0
0
0
0
Final Value
10,000
3,600
5,000
3,500
10,000
11,400
2,035
0
Constraints
Cell
$K$16
$C$14
$E$14
$D$14
$B$14
$M$16
$C$9
$D$9
$B$9
$E$9
Name
Storage capacity
Total demand for T2
Total demand for T4
Total demand for T3
Total demand for T1
Production capacity
Number of units of T2D
Number of units of T3D
Number of units of T1D
Number of units of T4D
Name
of units
of units
of units
of units
of units
of units
of units
of units
of
of
of
of
of
of
of
of
T1D
T2D
T3D
T4D
T1S
T2S
T3S
T4S
Cell Value
24,000
15,000
3,500
7,035
20,000
1,000
3,600
5,000
10,000
3,500
Formula
$K$16<=24000
$C$14<=15000
$E$14<=7000
$D$14<=10000
$B$14<=20000
$M$16<=1000
$C$9<=7500
$D$9<=5000
$B$9<=10000
$E$9<=3500
Status
Binding
Binding
Not binding
Not binding
Binding
Binding
Not binding
Binding
Binding
Binding
Slack
EXHIBIT 1 (Continued)
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 12/35
0
0
3,500
2,965
0
0
3,900
0
0
0
Sensitivity Report
Adjustable Cells
Cell
$B$9
$C$9
$D$9
$E$9
$F$9
$G$9
$H$9
$I$9
Name
Number of units of T1D
Number of units of T2D
Number of units of T3D
Number of units of T4D
Number of units of T1S
Number of units of T2S
Number of units of T3S
Number of units of T4S
Final
Reduce Objective
Value
Cost Coefficient
10,000
1.30
9.00
3,600
0.00
10.80
5,000
3.92
14.20
3,500
3.91
17.00
10,000
0.00
8.10
11,400
0.00
9.72
2,035
0.00
12.78
0
-1.24
15.30
Allowable
Allowable
Increase
Decrease
1.00E+30
1.30E+00
2.17E+00
9.35E+00
1.00E+30
3.92E+00
1.00E+30
3.91E+00
1.30E+00
2.09E+00
9.35E+00
1.45E+00
2.24E+00
9.57E-01
1.24E+00
1.00E+30
Name
Storage capacity
Total demand for T2
Total demand for T4
Total demand for T3
Total demand for T1
Production capacity
Final
Shadow Constraint
Value
Price R.H. Side
24,000
7.52
24,000
15,000
1.45
15,000
3,500
0.00
7,000
7,035
0.00
10,000
20,000
2.09
20,000
1,000 186.99
1,000
Allowable
Allowable
Increase
Decrease
5,040
3,460
3,145
4,582
1E+30
3,500
1E+30
2,965
4,325
6,300
195
157
Constraints
Cell
$K$16
$C$14
$E$14
$D$14
$B$14
$M$16
EXHIBIT 2
Second solution: monthly production capacity of 2,000 hours
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 13/35
Answer Report
Target Cell (Max)
Cell
Name
$J$10
Total contribution margin
Original Value
0
Final Value
540,368
Adjustable Cells
Cell
$B$9
$C$9
$D$9
$E$9
$F$9
$G$9
$H$9
$I$9
Name
Number of units of T1D
Number of units of T2D
Number of units of T3D
Number of units of T4D
Number of units of T1S
Number of units of T2S
Number of units of T3S
Number of units of T4S
Original Value
0
0
0
0
0
0
0
0
Final Value
20,000
12,100
10,000
3,500
0
2,900
0
0
Constraints
Cell
$E$14
$D$14
$B$14
$C$14
$K$16
$M$16
$C$9
$D$9
$E$9
$B$9
Name
Total demand for T4
Total demand for T3
Total demand for T1
Total demand for T2
Storage capacity
Production capacity
Number of units of T2D
Number of units of T3D
Number of units of T4D
Number of units of T1D
Cell Value
3,500
10,000
20,000
15,000
3,190
2,000
12,100
10,000
3,500
20,000
Formula
$E$14<=3500
$D$14<=10000
$B$14<=20000
$C$14<=15000
$K$16<=24000
$M$16<=2000
$C$9<=15000
$D$9<=10000
$E$9<=7000
$B$9<=20000
Status
Binding
Binding
Binding
Binding
Not binding
Binding
Not binding
Binding
Not binding
Binding
Slack
0
0
0
0
20,810
0
2,900
0
3,500
0
EXHIBIT 2 (Continued)
Sensitivity Report
Adjustable Cells
Cell
$B$9
$C$9
$D$9
$E$9
$F$9
$G$9
$H$9
$I$9
Name
Number of units of T1D
Number of units of T2D
Number of units of T3D
Number of units of T4D
Number of units of T1S
Number of units of T2S
Number of units of T3S
Number of units of T4S
Final
Reduce Objective
Value
Cost Coefficient
20,000
0
9
12,100
0
11
10,000
0
14
3,500
0
17
0
(0)
8
2,900
0
10
0
0
13
0
(0)
15
Allowable
Allowable
Increase
Decrease
1E+30
0
0
1
1E+30
0
1E+30
0
0
1E+30
1
0
0
13
0
1E+30
Name
Total demand for T4
Total demand for T3
Total demand for T1
Total demand for T2
Storage capacity
Production capacity
Final
Shadow Constraint
Value
Price R.H. Side
3,500
15.49
3,500
10,000
12.78
10,000
20,000
8.35
20,000
15,000
9.72
15,000
3,190
0.00
24,000
2,000
21.60
2,000
Allowable
Allowable
Increase
Decrease
3,500
2,071
0
12,241
0
4,833
18,918
2,900
1E+30
20,810
145
605
Constraints
Cell
$E$14
$D$14
$B$14
$C$14
$K$16
$M$16
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 14/35
Required
a.
Based on the reports of the first linear program (Exhibit 1), how
much more should Optoys be willing to pay for additional hours of
production capacity? Justify your answer.
b.
Based on the reports of the first linear program, how much more
should Optoys be willing to pay for additional storage capacity?
Explain and support your answer with appropriate calculations.
c.
Explain why only 3,600 units of T2D are produced in the first linear
program even though retailers would be willing to accept immediate
delivery of 7,500 units. Support your answer with appropriate
calculations.
d.
Based on the results of the two linear programs, how much should
Optoys be willing to pay for the new molding equipment? What
approaches could Optoys use to make the decision?
e.
Identify three other factors Optoys should consider before making
the decision to buy the equipment.
a.
Optoys should not pay more than additional $186.99 for each
additional hour of production capacity. This is given by the shadow
price for the production capacity constraint in the sensitivity report.
The shadow price measures the increase in contribution margin for
each additional hour of production capacity that becomes available.
The shadow price of $186.99 is only valid within certain limits. In this
case, it remains valid as long as total production capacity does not
increase by more than 195 hours or decrease by more than 157
hours. It is also assumed that all relationships remain linear and that
no other constraint changes.
b.
Optoys should not pay more than an additional $7.52 for each
additional cubic foot of storage capacity. This is given by the
shadow price for the storage capacity constraint in the sensitivity
report. If more space is available, more units of T3 will be stored.
Since a unit of T3 requires 1.7 cubic feet and has a contribution
margin per unit of $14.20, one more foot of storage will increase
contribution margin by ($14.20 × 0.9)/1.7 = $7.52. This price is only
valid within certain limits. In this case, it remains valid as long as
total storage capacity does not increase by more than 5,040 cubic
feet or decrease by more than 3,460 cubic feet. It is also assumed
that all relationships remain linear and that no other constraint
changes.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 15/35
c.
Immediate delivery would help Optoys avoid the variable storage
costs but the firm’s production capacity is limited to 1,000 hours.
Since the storage costs are all equal to 10% of the contribution
margin, Optoys maximizes its total contribution margin by first using
its production capacity to produce for immediate delivery the
maximum number of units of the product with the highest
contribution margin per hour of production capacity. It then
produces the product with the second-highest contribution margin
and so on until all hours are used.
Contribution margin of each product per hour of production:
T1
T2
T3
T4
Contribution margin per unit $9.00
$10.80
$14.20
$17.00
Hours of production per unit
0.03
0.05
0.055
0.07
CM per hour of production
$300
$216
$258.18 $242.86
Production that maximizes the contribution margin is given in the following
table:
Production
Hours/unit
Units
manufactured
Hours
used
Hours
left
T1
T3
T4
T2
0.030
0.055
0.070
0.050
10,000
5,000
3,500
3,600
300
275
245
180
1,000
700
425
180
0
d.
With the new equipment, the contribution margin will increase by
$63,169 ($540,368 – $477,199). One approach would be to use an
appropriate payback period, and suggest the maximum price.
Another approach would be to compare the net present value of the
increase in the contribution margin with the present value of the
investment in the new equipment.
e.
Some factors to consider:
• Whether the new equipment could improve the quality of
the products
• The cost of the new equipment
• A possible reduction of the fixed costs related to the
storage capacity
• The possibility of renting the storage space that will not be
used
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 16/35
Note:
Use the following information to answer parts (16) and (17).
A company manufactures a maximum of 30,000 backpacks per year.
The unit costs of direct labour, raw materials, and applied overhead
(based on 80% of the maximum production) are, respectively, $9.50,
$6.00, and $15.00. Fixed overhead represents 60% of total applied
overhead.
16.
What should the unit selling price of a backpack be to break
even?
1)
$21.50
2)
$24.50
3)
$30.50
4)
$38.13
Answer 3
SP at BEP = $9.50 + $6.00 + 0.4 ($15.00) + 0.6 ($15.00) = $30.50
17.
If the unit selling price is set at $65.00, how many units must
be sold to generate an income of $20,000?
1)
5,426
2)
6,667
3)
6,841
4)
8,406
Answer 1
CM = $65.00 - $21.50 = $43.50/unit
Fixed costs + Target income = 0.60 x 15 x 24,000 + 20,000 =
$236,000
No of units = $236,000/$43.50 = 5,426
18.
MA2
What is the theory of constraints?
1)
A theory which requires that limiting constraints be identified
and ranked from the most to the least limiting
2)
A theory which requires managers to identify the ethical
constraints
3)
A theory which requires that decisions involving limited
resources be based on constraint prices
4)
A theory which requires that the net present value of an
investment be determined after having considered all the
constraints
Answer 1
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 17/35
19.
A company uses a firm-wide allocation basis to assign overhead to
products. The coefficient of determination of this basis with
overhead costs is 0.54. The price of the products is $20. What does
this result suggest?
1)
That 0.54 of the variation in the basis is explained by a change
in overhead costs
2)
That 0.54 of the variation in overhead costs is explained by a
change in the allocation basis
3)
That 0.54 of the variation in the price of the products is
explained by a change in overhead costs
4)
That 0.54 of the variation in the gross profit is explained by a
change in overhead costs
Answer 2
Note:
Use the following information to answer parts (20), (21), and (22).
In the year 2004, a biopharmaceutical company introduced a
new product, which has been very successful. Sales for this
product are increasing at a rate of 6% per month. At this pace,
the company will not be able to meet future demand with its
current equipment, and as a result, it is planning to purchase
another machine. The cost of the new machine is $800,000,
and the company will incur a cost of $90,000 to train new staff
to operate it. Cash flows before tax are estimated at an
average of $180,000 per year. The useful life of the machine is
15 years, and no salvage value is expected. The company’s
cost of capital is 12%, its income tax rate is 40%, and its
capital cost allowance (CCA) is 10%.
20.
What is the present value of the cash inflows of the new
machine?
1)
$274,945
2)
$473,617
3)
$549,890
4)
$735,577
Answer 4
Present value of cash inflows:
180,000[(1 – (1.12)-15)/0.12](1 – 0.4), or 180,000 (1 – 0.4) (6.8109)
= $735,577
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 18/35
21.
What is the present value of the CCA tax saving of the new
machine?
1)
$105,569
2)
$137,662
3)
$172,078
4)
$344,155
Answer 2
Present value of CCA tax saving:
800,000 × 40% × 10% 1 + 0.5 (0.12)
×
=$137,662
0.10 + 0.12
1 + 0.12
22.
What is the payback period?
1)
4.74 years
2)
4.94 years
3)
7.41 years
4)
7.91 years
Answer 4
854,000/180,000 (1 – 0.40) = 7.91 years
23.
A company is considering replacing an old machine with a
new one. Which of the following is not relevant in the
investment analysis?
1)
Differences in recurring cash flows
2)
Initial investment in the old equipment
3)
Initial investment in the new equipment
4)
Tax shield from amortization
Answer 2
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 19/35
24.
A company is considering replacing a machine acquired 7
years ago at a cost of $38,000. The market value of this
machine is now $2,500. Managers wish to buy a new machine
because they want to reduce manufacturing costs. The best
machine available on the market costs $52,000. It is expected
to last for 5 years and the salvage value at the end of 5 years
would be $5,000.
Currently, the price charged for 1 unit of the company’s
product is $4, and 100,000 units are sold each year. The
production costs per unit are:
Direct materials $
0.85
Direct labour
0.70
Overhead
0.60
Total
$
2.15
70% of overhead costs are fixed. With the new machine,
managers expect to save 20% of variable costs. The desired
rate of return before-tax is 25%, the capital cost allocation rate
is also 25%, and the company tax rate is 40%.
Required
Use the net present value method to determine whether the
company should replace its old machine with a new one. State
your conclusion.
Initial investment outlay
Investment in new equipment $
Sale of old equipment
Total initial investment outlay $
52,000
2,500
49,500
Net present value
Initial investment outlay
$
(49,500)
Present value of cash flows from operating cost savings
(0.85 + 0.70 + 0.60 × 30%) × 20% × 100,000 × (1 – 40%) = 20,760
20,760 × 3.3522 (annuity factor for 15% 1, 5 years)
69,592
Present value of tax saving from CCA
$49,500 × 25% × 40% 1 + 0.5 × 15%
×
25% + 15%
1 + 0.15
MA2
Exam Review
11,568
Paul Jeyakumar, M.Sc., CGA
Page 20/35
Present value of loss due to salvage value
$5,000 × 25% × 40%
1
×
25% + 15%
(1 + 0.15) 5
(621)
Present value of salvage value
$5,000 × (1 + 15 %)-5 or $5,000 × 0.4972
Net present value of the new machine
2,486
$
33,525
Decision: the net present value is positive. The company should
replace the old machine with a new one.
1
25% (1 – 40%) = 15%
25.
Management of Hillman Company (HC) is considering a proposal to
acquire a new piece of manufacturing equipment. The new
equipment has the same capacity as the old equipment but will
provide operating efficiencies in direct labour and direct materials
usage. The savings in operating costs are estimated at $100,000
annually.
The new equipment will cost $485,000 and will be purchased at the
beginning of 2004. The equipment dealer is certain that the
equipment will be fully operational commencing at the beginning of
the third quarter of 2004. Therefore, HC’s management believes that
only 55% of the estimated savings can be obtained in 2004.
During the first few days, the staff will undergo training on the use of
the new equipment at a cost of $25,000. During the same few days,
management estimates that production will be reduced by 300 units
because of the training activities. The sale price and total unit cost
are:
Sale price per unit $
Direct materials $
Direct labour
Variable overhead
Fixed overhead
Total unit cost
$
60
15
12
13
5
45
The old equipment has a book value of $37,000 but HC’s
management expects to receive $22,000 for its disposal. The new
equipment will have a disposal value of $50,000 after its expected
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 21/35
economic life of 10 years. Straight-line amortization is used for
accounting purposes. The new equipment’s capital cost allowance
rate is 20%. HC requires a 12% after-tax return on investment and
has a 40% tax rate.
Required
Based on the net present value method, determine if HC should
acquire the new manufacturing equipment. Show all calculations.
Net present value of the new manufacturing equipment:
Initial investment outlay
$
(485,000)
After-tax cot of training [$25,000 – (1 – 0.4)]
(15,000)
Proceeds from old equipment
22,000
Contribution margin lost on the 300 units
300 × ($60 – $45 + $5) = $6,000
$6,000 × (1 – 40%)
(3,600)
Cost savings in 2004
55% × $100,000 × (1 – 40%) × 1.12–1
29,466
PV of cost savings in 2005 until 2013 (9 years, 12%)
$100,000 (1 – 40%) × 5.3282 × 0.8929
285,453
Present value of tax saving from amortization
($485,000 − $22,000) × 20% × 40% × 1.06
20% + 12%
1.12
109,549
Present value of loss due to salvage value
$50,000 × 20% × 40%
1
×
20% + 12%
(1.12)10
Present value of salvage value
$50,000 × (1.12)–10
Net present value of the new equipment investment
(4,025)
16,099
$(45,058)
Based on the net present value method, Hillman Company should
not invest in the new equipment because the net present value is
negative.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 22/35
26.
Which of the following can be best described as a target cost?
1)
Cost incurred after the end of the target cycle
2)
Cost incurred during the development stage
3)
Cost incurred to meet profit targets
4)
Cost incurred to meet sales targets
Answer 3
27.
Which of the following statements represents the main objective of
Kaizen costing?
1)
Kaizen costing accumulates all costs that are associated with
a short- or long-term project.
2)
Kaizen costing simplifies the computation of costs in a just-intime environment.
3)
Kaizen costing reduces costs and improves quality through
continuous improvement.
4)
Kaizen costing evaluates the amount of costs related to the
quality of a product.
Answer 3
28.
Kaizen costs are generally used during which period of the life cycle
of a product?
1)
Control
2)
Planning
3)
Production
4)
Development
Answer 3
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 23/35
29.
Recently, the accountant of SYST Inc. prepared a report on the costs of
quality for the last 3 years. He needs someone to help interpret these
results.
SYST INC.
Cost of Quality Report
2004 - 2006
2004
2005
2006
Amortization of testing equipment $10,000
Disposal of defective products
12,000
Inspection
11,000
Net cost of scrap
5,200
Product recalls
8,000
Product testing
8,500
Quality engineering
4,000
Rework labour
6,000
Statistical process control
4,500
Supplies used in testing
8,750
System development
10,500
Warranty repairs
10,650
Warranty replacements
9,550
TOTAL
$ 108,650
$9,500
18,000
10,500
7,100
10,500
8,600
3,800
8,100
4,600
8,300
10,000
13,050
10,850
$122,900
$8,700
22,500
10,000
9,100
13,500
8,000
3,750
8,950
4,800
7,550
9,000
19,450
14,250
$139,550
% of sales
12.94%
14.69%
11.44%
The amount of sales is $950,000 for each year.
Required
a.
Calculate the prevention costs and the external failure costs for
every year, including the total costs as a percentage of sales.
b.
Interpret your answer in part (a), and explain briefly the effect of the
results on future sales.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 24/35
a.
2004
2005
2006
$10,500
4,000
4,500
$19,000
$10,000
3,800
4,600
$18,400
$9,000
3,750
4,800
$ 17,550
2.00%
1.94%
1.85%
$8,000
10,650
9,550
$ 28,200
$10,500
13,050
10,850
$34,400
$ 13,500
19,450
14,250
$ 47,200
2.97%
3.62%
4.97%
Prevention costs
Systems development
Quality engineering
Statistical process control
Total
% of sales
External failure costs
Products recalls
Warranty repairs
Warranty replacements
Total
% of sales
b.
Since 2004, investments in prevention costs have decreased but
external failure costs have increased. The company should invest in
prevention costs because its external failure costs have increased.
The effects of this increase in external failure costs could have a
negative impact on futures sales.
30.
Which of the following costs is considered an internal failure cost in
a quality-cost report?
1)
Inspection
2)
Rework labour
3)
Training
4)
Warranty repairs
Answer 2
31.
In a quality-cost report, each category of quality costs is expressed
as a percentage of which of the following?
1)
Total costs
2)
Total labour costs
3)
Total quality costs
4)
Total sales
Answer 4
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 25/35
32.
Recently, the shipping department of a company has experienced
several problems, such as an increasing employee turnover rate,
increasing costs, and late deliveries. In order to reduce the effects of
these problems, senior management has decided to perform an
activity-based analysis.
Required
a.
State the steps that the company should undertake to gather
all the relevant information relative to the problems.
b.
In this particular situation, explain the benefits associated with
using an activity-based management system (ABM).
a.
•
•
•
•
•
•
•
•
•
•
MA2
Obtain the existing cost information and reports on the
shipping process.
Determine the major processes and activities that occur within
the shipping department. Observations, interviews,
storyboards, and analyses of company records could identify
the processes of the shipping department.
Identify the inputs that start each process and the outputs that
each process produces.
Determine the activities in the process.
Identify the resources used by each activity.
Define an output measure, financial or nonfinancial, for each
major activity.
Define a performance measure, financial or nonfinancial, for
each major activity.
Record the actual performance on the selected performance
measures.
Compare the actual performance measure to historical
performance, an external benchmark, or a target.
Find improvement ideas.
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 26/35
b.
•
•
•
33.
ABM leads to better process understanding of the shipping
department.
It provides a detailed understanding of practices used and
their impact on costs, quality, and time.
• It helps the company to determine the non-value-added
activities in the shipping process and how they can be
eliminated.
• By a better understanding of the organization, it helps
the company to determine which particular practices
need to be improved.
It encourages employee participation and shows them that
their participation is valued.
What is the purpose of total-life-cycle product costing?
1)
To enable management to determine if a specific product line
is profitable
2)
To enable management to determine if a specific market
region is profitable over its life cycle
3)
To enable management to determine if a customer is profitable
over its life cycle
4)
To enable management to determine if a product is profitable
over its life cycle
Answer 4
34.
PicturesPerfect is a camera manufacturing company. For two
decades, the company was a market leader in the camera industry.
However, with increasing competition, the last two years have been
difficult for PicturesPerfect. The company has experienced a
decrease in sales since competitors have been able to offer a similar
product at a lower price. The company suspects that its
manufacturing process and obsolete machinery are partly
responsible for its inability to keep production costs competitive.
Required
MA2
a.
Explain why a benchmarking analysis would help solve the
company’s problems.
b.
Explain how the benchmarking analysis should be
implemented in PicturesPerfect.
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 27/35
a.
•
•
•
•
b.
•
•
•
•
MA2
Benchmarking is a search for the best practices within another
organization. It would point out which areas of the business
should be improved and would provide information that could
be used to improve manufacturing processes.
Comparisons with the best practices of other companies
would allow the company to determine what the actual
problems of the company are and why PicturesPerfect is not
competitive in the present environment.
By making comparisons such as how other organizations
manage their manufacturing processes, it would help the
company to determine if processes and machinery are really a
problem and what results can be achieved with other
manufacturing procedures and new equipment.
Benchmarking would force the company to consider
competitors; it would help the company focus on what should
be done if it wants to stay in business.
Conducting internal study and preliminary analysis
Developing long-term commitment to the benchmarking
project and coalescing the benchmarking team
Identifying benchmarking partners
Information-gathering and sharing methods
• Taking action to meet or exceed benchmarks
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 28/35
35.
Which of the following is an example of adverse selection?
1)
Decentralization
2)
Goal congruence
3)
Life insurance
4)
Trust
Answer 3
36.
What is the meaning of in vitro?
1)
From within the organization
2)
From within the living organism
3)
From without the living organism
4)
From without the organization
Answer 3
37.
When does information asymmetry exist?
1)
When agency costs are superior to profits
2)
When all parties have access to the same information
3)
When costs are assigned to the wrong party
4)
When one party has access to information that the others do
not have access to
Answer 4
38.
Which of the following is a concept underlying agency theory?
1)
Benchmarking
2)
Linear programming
3)
Moral hazard
4)
Outsourcing
Answer 3
39.
Organizational architecture consists of which of the following
systems?
1)
Cost accounting
2)
Differentiation
3)
Mission of the firm
4)
Partition decision rights
Answer 4
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 29/35
40.
Which of the following statements correctly defines agency cost?
1)
The decline in firm value that results from principals pursuing
their own interest
2)
The decline in firm value that results from agents pursuing
their own interest
3)
The cost of resolving disputes with customers
4)
The cost incurred when employees try to influence decisions
in their own interest
Answer 2
41.
What are the two basic advantages of long-term employment and
internal labour markets under agency theory?
1)
Motivation and truth-inducing bonus
2)
Information and participative budgeting
3)
Motivation and information
4)
Information and truth-inducing bonus
Answer 3
42.
What does in vivo mean?
1)
From within the organization
2)
From within the living organism
3)
From without the living organism
4)
From without the organization
Answer 2
43.
A small company in Vancouver sold $788,000 worth of its products
last year. Net income represents 24% of sales. NOPAT and total
capital are, respectively, $240,000 and $520,000. The weighted
average cost of capital and the required cost of capital were,
respectively, 15% and 12%. What is EVA?
1)
$111,120
2)
$126,720
3)
$162,000
4)
$177,600
Answer 3
EVA = NOPAT – (WACC × Total capital)
$240,000 – (0.15 × $520,000) = $162,000
44.
MA2
Which of the following is an example of a profit centre?
1)
A distribution centre
2)
A division
3)
A factory
4)
A branch
Answer 4
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 30/35
45.
Which of the following performance measures is most appropriate
for an investment centre?
1)
Return on investment
2)
Gross margin
3)
Variances
4)
Net margin
Answer 1
46.
The following information pertains to a major soft drink company.
The company’s cost of capital is 12%. The 2002 data are as follows:
Sales
Net profit
Investments
Profit margin as a % of sales
Investment turnover 1
Return on investment
Residual income
1
?
$300,000
?
30%
1.25
?
?
Defined as sales divided by investments.
Required
a.
Determine the amount of sales and investments, the return on
investment (ROI), and the residual income (RI).
b.
Briefly explain two different approaches that could be used by
the managers of the company to improve the ROI. Provide
calculations to support your explanation.
a.
Profit margin =
30% =
Income
Sales
$300,000
Sales
Therefore, Sales = $300,000 / 30% = $1,000,000
Investment turnover =
1.25 =
MA2
Sales
Investments
$1,000,000
Investments
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 31/35
Therefore, investments = $1,000,000 / 1.25 = $800,000
ROI = Sales margin × Investment turnover
ROI = 30% × 1.25 = 37.5%
Residual income = Income – (Cost of capital × Investments)
Residual income = $300,000 – (12% × $800,000) = $204,000
b.
There are three possible ways to improve the company’s ROI:
i)
Increase income, while keeping investments the same.
Suppose income increases to $400,000. The new ROI is:
ROI =
$400,000
Income
=
= 50% > 37.5%
Investments
$800,000
ii)
Decrease investments, while keeping income at the
same level as in part (a). Suppose invested capital decreases
to $700,000. The new ROI is:
ROI =
iii)
Income
$300,000
=
= 42.9% > 37.5%
Invested capital
$700,000
Increase income and decrease investments. Suppose income
increases to $400,000 and investments decrease to $700,000.
The new ROI is:
ROI =
47.
$400,000
Income
=
= 57.1% > 37.5%
Investments
$700,000
Which of the following statements best describes a cost centre as a
responsibility centre?
1)
Cost accountants are responsible for preparing reports.
2)
Managers are responsible for costs incurred but are not
responsible for revenues.
3)
Managers are responsible for both revenues and costs.
4)
Managers are responsible for controllable costs.
Answer 2
Use the following information to answer questions (47) and (48).
A company is putting together a training program to improve the
productivity of its workers. Managers expect that this program will
enable the firm to save $5,000 at the present level of sales. Here is
the income statement of the company.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 32/35
SPRING COMPANY
Income Statement
Year ended March 31, 2003
Sales
$
80,000
Cost of goods sold
(55,000)
Gross margin
25,000
Selling and administrative expenses (12,000)
Net income before taxes
$
13,000
Variable costs represent 80% of the cost of goods sold and 20% of
selling and administrative expenses.
48.
What is the approximate equivalent sales volume in sales dollars for
the proposed improvement, under the conceptual method?
1)
$
812.50
2)
$
8,620.00
3)
$
16,000.00
4)
$
30,769.00
Answer 4
Profit before tax as a % of sales = $13,000/$80,000 = 16.25%
Additional sales volume required = $5,000/16.25% = $30,769
49.
What is the approximate increase in sales volume required to match
the cost reduction resulting from the quality improvement program
using contribution margin approach?
1)
$
8,620
2)
$
11,905
3)
$
16,000
4)
$
30,769
Answer 2
CM = $80,000 – [($55,000 x 80%) + ($12000 x 20%] = $33,600
CM ratio = $33,600/$80,000 = 0.42
Increase in sales = $5,000/0.42 = $11,905
50.
The CD division of Musik Inc. is using the economic value added
(EVA) measure to assess performance. EVA for 2006 has been
calculated at $340,670. The data used to achieve this result were the
following:
Marginal tax rate
After-tax cost of debt
Cost of equity
40%
9%
13%
20% of the research costs were capitalized under GAAP in 2006.
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 33/35
The amortization period for the research $ development costs is 5
years.
GAAP income
$
435,000
EVA — adjusted total capital, December 31, 2005
1,330,000
Expected EVA — adjusted total capital, Dec 31, 2006 1,450,000
Total research costs in 2006
40,000
Development costs in 2006 expensed under GAAP
28,000
Impairment loss of goodwill attributed to CD division and
Included in its calculation of GAAP income
21,000
a.
Determine the capital structure of this company. Show all
calculations.
b.
Explain the significance of Musik’s EVA measure, and explain,
in general, the significance of an EVA measure to a company.
a.
Calculation of NOPAT:
GAAP income
$ 435,000
Research costs in 2006 expensed under
GAAP ($40,000 × 80%)
32,000
Development costs in 2006 expensed under GAAP
28,000
Amortization of R&D ($60,000 / 5)
(12,000)
Impairment loss of goodwill attributed to CD div
and included in its calculation of GAAP income
21,000
NOPAT
$ 504,000
Calculation of WACC:
WACC
= (NOPAT – EVA) / Total capital
= ($504,000 – $340,670) / $1,330,000
= 12.28%
Structure of capital:
WACC
= Debt ratio × After-tax cost of debt + Equity ratio
× Cost of equity
0.1228
= Debt ratio × 0.09 + (1 – Debt ratio) × 0.13
0.18 = Debt ratio
Thus, the capital structure of this company is 18% debt and
82% equity.
b.
The economic value added for the benefit of
shareholders is $340,670, which means that the company has
made profit and is able to create value. EVA is beneficial to the
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 34/35
company to assess the extent to which the market value of the
organization has increased or decreased and to learn how to
measure “true” profitability. It also helps to make operational
decisions that ensure optimal use of capital, to identify highreturn projects, and to redirect resources into them.
51.
SQ Inc. has two divisions, S1 and Q2. S1 can produce up to 2,000
units of T97 per year. 1,800 units can be sold at a market price of
$88. Q2 needs 300 units. For interdivisional sales, variable selling
cost can be avoided. Last year, S1 incurred the following unit costs:
Variable manufacturing costs
$37
Fixed manufacturing costs
$22
Variable selling cost
$5
What is the minimum transfer price per unit that would be acceptable
for S1?
Minimum transfer price
= Marginal/variable production costs + Lost contribution margin
= $37+100x$(88–5–37)/300 = $37+100x46/300 = $52.33
MA2
Exam Review
Paul Jeyakumar, M.Sc., CGA
Page 35/35