Below are EXAM-ORIENTED NUMERICAL ILLUSTRATIONS WITH FULL ANSWERS on Decision Analysis exactly as tested in US CMA Part 2.
All illustrations include CVP, BEP, Marginal Analysis, Pricing Strategy, Margin of Safety, Make-or-Buy, Replacement, Joint Products (Further Processing).
📊 US CMA PART 2 – DECISION ANALYSIS
ILLUSTRATION 1: CVP Analysis & BEP (Units and Sales Value)
Data:
Selling price per unit = $50
Variable cost per unit = $30
Total fixed cost = $200,000
Required:
1. Contribution per unit
2. BEP (units)
3. BEP (sales value)
Solution:
✅ Answer:
• BEP Units =
• BEP Sales = $
ILLUSTRATION 2: Margin of Safety (MOS)
Actual sales = 14,000 units
BEP sales = 10,000 units
Required: Margin of Safety
✅ Answer: Margin of Safety = ***%
ILLUSTRATION 3: Target Profit (CVP)
Fixed cost = $180,000
Contribution per unit = $30
Target profit = $120,000
Required: Sales units to achieve target profit
✅ Answer: ******units
ILLUSTRATION 4: Special Order Pricing (Idle Capacity)
Normal price = $100
Variable cost = $60
Special order price = $75
Order quantity = 2,000 units
Idle capacity available
Decision: Accept or Reject?
✅ Answer:
📌 CMA Rule: Fixed cost irrelevant if idle capacity exists.
ILLUSTRATION 5: Key Factor / Limiting Factor (Product Mix)
Product Contribution per unit Machine hours/unit
A $40 4 hrs
B $30 2 hrs
Machine hours available = 800 hrs
Required: Optimal product mix
Contribution per limiting factor
Priority:
✅ Answer:
ILLUSTRATION 6: Make or Buy Decision
Particulars Make (per unit)
Direct material $18
Direct labor $12
Variable OH $10
Fixed OH $8 (40% avoidable)
Supplier price = $45
Relevant cost of making:
Decision:
✅ Answer:
ILLUSTRATION 7: Replacement Decision
Old machine:
• Book value = $50,000
• Salvage value now = $10,000
• Annual operating cost = $80,000
New machine:
• Cost = $120,000
• Salvage value = $0
• Annual operating cost = $40,000
• Life = 5 years
Relevant Cost Comparison:
✅ Answer:
ILLUSTRATION 8: Shut Down or Continue
Sales = $500,000
Variable cost = $320,000
Fixed cost = $220,000
Avoidable fixed cost = $120,000
Decision:
✅ Answer:
ILLUSTRATION 9: Joint Products – Further Processing Decision
Joint cost (irrelevant) = $100,000
Product Split-off Value After Processing Value Further Processing Cost
X $80,000 $120,000 $30,000
Incremental Analysis:
Incremental revenue =
Incremental cost =
Net benefit =
✅ Answer:
ILLUSTRATION 10: Pricing Strategy (Minimum Price)
Variable cost per unit = $45
Fixed cost = $200,000 (already covered)
Minimum acceptable price?
Minimum price = Variable cost only
✅ Answer:
🔑 CMA EXAM KEY RULES TO REMEMBER
• Joint cost = Always irrelevant
• Book value = Sunk cost
• Contribution per limiting factor = Decision driver
• Fixed cost = Relevant only if avoidable
• Accept special order if positive contribution
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MCQ Questions...
Each question targets common CMA pitfalls: sunk cost confusion, relevant vs irrelevant cost, limiting factor logic, joint cost traps, pricing under capacity constraints, etc.
📊 US CMA PART 2
30 Decision Analysis MCQs...
CVP, BEP & Margin of Safety (Q1–Q6)
Q1. A company has contribution margin ratio of 40%. Fixed costs are $360,000. What is the BEP sales?
A. $900,000
B. $1,200,000
C. $1,440,000
D. $360,000
✅ Answer:
Q2. If selling price increases by 10% and variable cost increases by 10%, BEP sales will:
A. Increase
B. Decrease
C. Remain unchanged
D. Cannot be determined
✅ Answer:
(Contribution per unit increases → BEP decreases)
Q3. Margin of safety is BEST described as:
A. Excess of contribution over fixed cost
B. Excess of actual sales over BEP sales
C. Excess of budgeted sales over actual sales
D. Excess of profit over target
✅ Answer:
Q4. A company earns zero profit when sales are $800,000. If fixed costs increase by $40,000, new BEP sales will be:
A. $760,000
B. $800,000
C. $840,000
D. Cannot be determined
✅ Answer:
(CM ratio unknown – classic CMA trap)
Q5. At BEP level, which statement is TRUE?
A. Contribution equals variable cost
B. Sales equals fixed cost
C. Contribution equals fixed cost
D. Profit equals contribution
✅ Answer:
Q6. If margin of safety is zero, the company is operating:
A. At maximum capacity
B. Above BEP
C. Below BEP
D. At BEP
✅ Answer:
Pricing & Special Order Decisions (Q7–Q11)
Q7. Minimum price for a special order when idle capacity exists equals:
A. Full cost
B. Variable cost
C. Variable + fixed cost
D. Market price
✅ Answer:
Q8. A special order should be REJECTED when:
A. Price < variable cost
B. Price < full cost
C. Fixed cost increases
D. Idle capacity exists
✅ Answer:
Q9. Fixed selling expenses are usually:
A. Relevant for pricing decisions
B. Irrelevant for pricing decisions
C. Relevant if avoidable
D. Always sunk
✅ Answer:
Q10. When capacity is FULL, accepting a special order requires considering:
A. Only variable cost
B. Only fixed cost
D. Joint cost
✅ Answer:
Q11. A company reduces price to increase volume. Fixed costs remain unchanged. BEP sales:
A. Increase
B. Decrease
C. Remain same
D. Become zero
✅ Answer:
Limiting Factor & Product Mix (Q12–Q16)
Q12. Key factor analysis prioritizes products based on:
A. Contribution per unit
B. Selling price per unit
C. Contribution per limiting factor
D. Gross margin
✅ Answer:
Q13. If labor hours are limiting, optimal product mix maximizes:
A. Total sales
B. Contribution per labor hour
C. Contribution per unit
D. Net profit per unit
✅ Answer:
Q14. Fixed costs are ignored in limiting factor decisions because they are:
A. Sunk
B. Unavoidable
C. Irrelevant to ranking
D. Always zero
✅ Answer:
Q15. When multiple constraints exist, CMA recommends using:
A. Simple ranking
C. Break-even analysis
D. Regression
✅ Answer:
Q16. Contribution per unit ranking instead of per limiting factor will MOST likely result in:
A. Optimal profit
B. Overproduction
C. Suboptimal profit
D. Same decision
✅ Answer:
Make or Buy & Replacement (Q17–Q21)
Q17. In a make-or-buy decision, which cost is NEVER relevant?
A. Direct material
B. Avoidable fixed cost
C. Allocated fixed overhead
D. Variable overhead
✅ Answer:
Q18. Book value of an old machine is:
A. Relevant
B. Opportunity cost
C. Sunk cost
D. Avoidable cost
✅ Answer:
Q19. Opportunity cost should be included in decisions when:
A. Capacity is idle
B. Resource has alternative use
C. Fixed costs exist
D. Joint products exist
✅ Answer:
Q20. Replacement decisions compare:
A. Total historical cost
B. Net book value
C. Future relevant costs
D. Market value
✅ Answer:
Q21. If old equipment has zero salvage value, it means:
A. Replace immediately
B. Book value is zero
C. No opportunity cost exists
D. Replacement is irrelevant
✅ Answer:
Shut Down & Continue (Q22–Q25)
Q22. A company should continue operations if:
A. Sales exceed variable cost
B. Contribution exceeds avoidable fixed cost
C. Contribution exceeds total fixed cost
D. Revenue exceeds total cost
✅ Answer:
Q23. Fixed costs are relevant in shutdown decisions when they are:
A. Historical
B. Avoidable
C. Allocated
D. Committed
✅ Answer:
Q24. A temporary shutdown decision is a:
A. Capital budgeting decision
B. Pricing decision
C. Short-term decision
D. Strategic decision
✅ Answer:
Q25. Loss minimization occurs when:
A. Contribution is zero
B. Contribution equals fixed cost
C. Contribution is maximized
D. Variable cost is minimized
✅ Answer:
Joint Products & Further Processing (Q26–Q30)
Q26. Joint cost is:
A. Relevant for pricing
B. Relevant for further processing
C. Always irrelevant for decisions
D. Relevant for inventory valuation only
✅ Answer:
Q27. Decision to process further depends on:
A. Allocated joint cost
B. Incremental revenue vs incremental cost
C. Market demand
D. Total cost
✅ Answer:
Q28. A product should be sold at split-off when:
A. Further processing cost < joint cost
B. Incremental loss occurs
C. Incremental profit occurs
D. Contribution is positive
✅ Answer:
Q29. Which is a by-product characteristic?
A. High sales value
B. Negative contribution
C. Minor relative value
D. Separate production
✅ Answer:
Q30. Incorrect allocation of joint cost leads to:
A. Wrong inventory valuation
B. Wrong further processing decision
C. Wrong tax calculation
D. Wrong contribution analysis
✅ Answer:
🎯 CMA EXAM STRATEGY
Ignore sunk & allocated costs. Focus only on future, incremental, and opportunity costs.
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