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QUESTION: 151 Topic 3: Part 3 Sec Three (106 to 176)

Details: Marginal Analysis 15
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Stewart Industries has been producing two bearings, components B12 and B18, for use in production.

Stewart's annual requirement for these components is 8,000 units of B12 and 11000 units of B18. Recently, Stewart's management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 411000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits). Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours. Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.
Srewart will maximize its net benefits by

Purchasing 4,800 units of B12 and manufacturing the remaining bearings.
Purchasing 8,000 units of B12 and manufacturing 11,000 units of B18.
Purchasing 11,000 units of B18 and manufacturing 8,000 units of B12.
Purchasing 4,000 units of B18 and manufacturing the remaining bearings.

Answer(s): D

Explanation:

Purchasing will increase the company's costs by $3 (11.25 -$2.25 - $4 - $2) for each B 12 bearing, or $1.20 per hour ($3/ 2.5). Buying B18 will only cost the company an additional $1 per machine hour [($13.50-$3.75-$4.50-$2.25)/3 machine hours]. Thus, the company should make all the needed B12s and compensate for the machine hours constraint by purchasing B18s. Given that each unit of B12 requires 2.5 hours of machine time, the company can produce the needed 8,000 units in 20,000 hours (2.5 x 8,000). The remaining 21,000 hours (41,000 20,000) can then be used for the production of 7,000 B18s (21,000 / 3hrs.). Because the annual requirement pf B18s is 11,000 units, the other 4,000 units will have to be purchased.

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QUESTION: 152 Topic 3: Part 3 Sec Three (106 to 176)

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Details: Marginal Analysis 15
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Stewart Industries has been producing two bearings, components B12 and B18, for use in production.

Stewart's annual requirement for these components is 8,000 units of B12 and 111000 units of B18. Recently, Stewart's management decided to devote additional machine time to other product lines resulting in only 41.000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B
18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).Assume that Stewart's idle capacity of 41,000 machine hours has a traceable avoidable annual fixed cost of $44,000 that will continue if the capacity is not used. The maximum price Stewart would be willing to pay a supplier for component B18 is

$10.50
$14.00
$14.50
Some amount other than those given.

Answer(s): D

Explanation:

If Stewart had sufficient idle capacity to manufacture its annual requirements of both bearings, it would be willing to pay no more than $10.50 ($3.75 + $4.50 + $2.25) for a unit of B18. Since the given fixed cost will continue if the idle capacity is not used, Stewart would increase its costs by paying more than the unit variable cost ($3.74 +$4.50+$2.25=$10,50). However, Stewart must purchase some bearings because it has insufficient idle capacity to produce its requirements. The given supplier's prices for B12 and B18 result in a loss per machine hour of $1.20 and $1.00, respectively. At those prices, Stewart should manufacture all its requirements of B12 and purchase some units of B18 . Assuming the given price of B12 is held constant, Stewart would benefit from purchasing B12 only if the loss per hour from buying B18 exceeded $1.20 per hour, or $3.60 per bearing (3 hrs. x $1.20). The maximum price for B18 is thus $ 14.10 ($10.50+ $3.60).

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QUESTION: 153 Topic 3: Part 3 Sec Three (106 to 176)

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Details: Marginal Analysis 15
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Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant will provide the company's power needs for the next 20 years. Hermo will use only 60% of the power output annually. At this level of capacity, Hermo's annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would reduce the estimated life of the plant to 14 years.If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in the life of the plant and the appropriate variable costs. Hermo has decided that the charge for the decreased life should be based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that Hermo would charge Quigley would be

$450,000
$630,000
$990,000
Some amount other than those given.

Answer(s): B

Explanation:

The minimum charge would include any variable costs incurred plus depreciation on a straight line basis. Currently, variable costs are $360,000 at 60% of capacity ($1 800,000 x 20%). If Quigley purchases energy equal to an additional 30% of capacity, it can be assumed that the increase in total variable costs will be half of the variable costs for 60% of capacity, or $180,000. Also, allocating $21,000,000 over 14 years results in an annual depreciation of $1,500,000. Of this amount, 30% will relate to the capacity sold. Thus, the depreciation charge to Quigley is $450,000 ($1,500,000 x 30%). The total charge is $630,000 ($450,000 depreciation + $180,000 VC).

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QUESTION: 154 Topic 3: Part 3 Sec Three (106 to 176)

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Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant will provide the company's power needs for the next 20 years. Hermo will use only 60% of the power output annually. At this level of capacity', Hermo's annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of capacity'. This would reduce the estimated life of the plant to 14 years. The maximum amount Quigley would be willing to pay Hermo annually for the power is

$600,000
$1,050,000
$1,200,000
Some amount other than those given.

Answer(s): C

Explanation:

Since Quigley is currently paying $1,200,000, it would not want to pay any more for the same service.

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QUESTION: 155 Topic 3: Part 3 Sec Three (106 to 176)

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Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools. A handle is used in three different tools. The unit cost budget for 201000 handles is

R&M Steel has offered to supply 20,000 handles to Cohasset for $1.25 each, delivered. If Cohasset currently has idle capacity that cannot be used, accepting the offer will

Decrease the handle unit cost by $05.
Increase the handle unit cost by $ .15.
Decrease the handle unit cost by $15.
Increase the handle unit cost by $.05.

Answer(s): B

Explanation:

Since the fixed cost will be incurred whether the company makes or buys the part, the relevant unit cost of making the part is the $1 .10 variable cost ($1 .30 -- $20 fixed overhead). The existence of idle capacity indicates that the firm has no opportunity cost to be considered in the calculation. Thus, accepting the offer would increase costs by$.15 per unit.

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Financial CMA Exam (page: 34) Financial Certified Management Accountant Updated on: 16-Feb-2026

QUESTION: 151 Topic 3: Part 3 Sec Three (106 to 176)

Explanation:

QUESTION: 152 Topic 3: Part 3 Sec Three (106 to 176)

Explanation:

QUESTION: 153 Topic 3: Part 3 Sec Three (106 to 176)

Explanation:

QUESTION: 154 Topic 3: Part 3 Sec Three (106 to 176)

Explanation:

QUESTION: 155 Topic 3: Part 3 Sec Three (106 to 176)

Explanation:

Financial CMA Exam (page: 34)
Financial Certified Management Accountant
Updated on: 16-Feb-2026