CAF-5 · Chapter 15

Decision Making Techniques MCQs with Answers

10 multiple-choice questions on Decision Making Techniques for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   When a manufacturing company is operating at full capacity and faces a single scarce resource (such as limited machine hours or raw materials), in what order should it rank its products to maximize overall profitability?

   • A) By highest selling price per unit
   • B) By highest contribution margin per unit
   • C) By highest contribution margin per unit of the limiting factor
   • D) By lowest variable production cost per unit
   Show answer & explanation

   Answer: C) By highest contribution margin per unit of the limiting factor

   The study text highlights that when a single limiting factor (like machine hours or material) restricts production, the profit-maximizing production plan is established by ranking the products based on the contribution margin they generate per unit of the limiting factor consumed.

2. Question 2

   In a "Make or Buy" (outsourcing) decision, which of the following costs is generally considered relevant when calculating the financial impact of manufacturing the component in-house?

   • A) General allocated administrative overheads
   • B) Depreciation of the existing factory machinery used to make the component
   • C) Variable production costs and directly attributable avoidable fixed costs
   • D) The sunk cost of the raw materials already in general inventory
   Show answer & explanation

   Answer: C) Variable production costs and directly attributable avoidable fixed costs

   In a make-or-buy decision, the relevant costs of manufacturing in-house are those that would be saved if the item were outsourced. This includes variable costs and any specific fixed costs (like hiring a specific supervisor) that are directly attributable and avoidable. General overheads and depreciation are irrelevant.

3. Question 3

   According to short-term decision-making principles, under what specific circumstance should a company shut down a product line or a department?

   • A) If the product's total sales revenue is less than its total apportioned general overheads.
   • B) If the specific, directly attributable fixed costs saved by closing the department exceed the lost contribution margin.
   • C) If the product is generating a net loss after absorbing all head office fixed costs.
   • D) If the product has a lower gross profit margin than the company's average.
   Show answer & explanation

   Answer: B) If the specific, directly attributable fixed costs saved by closing the department exceed the lost contribution margin.

   The text states that a product or department should be withdrawn if the savings from closure exceed the benefits of continuing. Therefore, if the avoidable fixed costs saved are greater than the contribution margin that will be lost, the department should be shut down.

4. Question 4

   When a company produces joint products and is deciding whether to sell a product at the split-off point or to process it further, which of the following represents the correct financial rule?

   • A) The product should be processed further if its total sales revenue exceeds the total joint costs.
   • B) The product should be processed further if the incremental revenue from further processing exceeds the incremental cost of further processing.
   • C) The joint costs incurred prior to the split-off point must be treated as relevant costs in the further processing decision.
   • D) The product must always be processed further if the final selling price is higher than the split-off selling price.
   Show answer & explanation

   Answer: B) The product should be processed further if the incremental revenue from further processing exceeds the incremental cost of further processing.

   Joint costs incurred before the split-off point are sunk and irrelevant. A further processing decision relies entirely on comparing the extra (incremental) revenue generated by further processing against the extra (incremental) costs of that further processing.

5. Question 5

   A company manufactures multiple products using a scarce machine hour resource. It cannot meet total market demand and must outsource the production of one of its products to an external supplier. What is the optimal strategy for determining which product to outsource first?

   • A) Outsource the product with the highest variable cost.
   • B) Outsource the product with the lowest total contribution margin.
   • C) Outsource the product that has the lowest extra cost of external purchase per scarce machine hour saved.
   • D) Outsource the product with the highest external purchase price.
   Show answer & explanation

   Answer: C) Outsource the product that has the lowest extra cost of external purchase per scarce machine hour saved.

   When dealing with a limiting factor and a make-or-buy option, the company must evaluate the cost penalty of buying externally versus making internally. The optimal ranking for outsourcing is based on finding the lowest extra cost incurred per unit of the limiting factor saved.

6. Question 6

   A company has spare manufacturing capacity and receives a special one-off order at a price slightly below its normal selling price. Which of the following statements is true regarding the financial evaluation of this order?

   • A) The order should be rejected immediately to protect the normal market price.
   • B) General fixed production overheads must be fully absorbed into the special order to calculate its true profitability.
   • C) The order should be accepted if the incremental revenue exceeds the incremental variable costs and any specific fixed costs caused directly by the order.
   • D) The spare capacity has an opportunity cost that must always be charged to the order.
   Show answer & explanation

   Answer: C) The order should be accepted if the incremental revenue exceeds the incremental variable costs and any specific fixed costs caused directly by the order.

   When there is spare capacity, no regular sales are displaced (no opportunity cost). Fixed costs remain unchanged and are therefore irrelevant. The order should be accepted if the extra revenue covers the extra (variable and specific fixed) costs, yielding a positive incremental contribution.

7. Question 7

   Product X sells for Rs. 150 per unit and has a variable cost of Rs. 90 per unit. It takes 3 direct labour hours to produce one unit of Product X. If direct labour hours are the company's single limiting factor, what is the contribution per limiting factor for Product X?

   • A) Rs. 150 per hour
   • B) Rs. 60 per hour
   • C) Rs. 30 per hour
   • D) Rs. 20 per hour
   Show answer & explanation

   Answer: D) Rs. 20 per hour

   Contribution Margin per unit = Selling Price (Rs. 150) - Variable Cost (Rs. 90) = Rs. 60. Limiting factor = 3 labour hours per unit. Contribution per limiting factor = Rs. 60 / 3 hours = Rs. 20 per hour.

8. Question 8

   Component Z can be manufactured in-house with a variable cost of Rs. 45 per unit. An external supplier has offered to provide Component Z for Rs. 50 per unit. If the company completely outsources the component, it can avoid Rs. 30,000 in specific fixed overheads. What is the net financial impact of outsourcing 5,000 units of Component Z?

   • A) Net loss of Rs. 25,000
   • B) Net savings of Rs. 5,000
   • C) Net savings of Rs. 30,000
   • D) Net loss of Rs. 5,000
   Show answer & explanation

   Answer: B) Net savings of Rs. 5,000

   Cost to Make internally = Variable costs (5,000 units × Rs. 45) + Specific Fixed Costs (Rs. 30,000) = Rs. 255,000. Cost to Buy externally = 5,000 units × Rs. 50 = Rs. 250,000. Since buying costs Rs. 250,000 and making costs Rs. 255,000, outsourcing results in a net savings of Rs. 5,000.

9. Question 9

   Department M generates a total contribution margin of Rs. 100,000 but reports a net loss of Rs. 20,000 after absorbing Rs. 120,000 of fixed costs. If Department M is shut down, Rs. 90,000 of these fixed costs will continue to be incurred (unavoidable apportioned general costs). From a purely financial perspective, should Department M be shut down?

   • A) Yes, because it is making an accounting net loss of Rs. 20,000.
   • B) Yes, because shutting it down will save Rs. 120,000 in fixed costs.
   • C) No, because shutting it down will cause the company's overall profit to decrease by Rs. 70,000.
   • D) No, because shutting it down will cause the overall profit to decrease by Rs. 100,000.
   Show answer & explanation

   Answer: C) No, because shutting it down will cause the company's overall profit to decrease by Rs. 70,000.

   Contribution margin lost if closed = Rs. 100,000. Fixed costs saved if closed = Total fixed costs (120,000) - Unavoidable costs (90,000) = Rs. 30,000 avoidable fixed costs. Net financial impact = 100,000 lost contribution - 30,000 saved fixed costs = Rs. 70,000 net decrease in total company profit.

10. Question 10

    In the context of decision-making, what is a "sunk cost"?

    • A) A future cost that can be avoided by choosing a different alternative.
    • B) A cost that has already been incurred as a result of past decisions and cannot be altered by future decisions.
    • C) The benefit forgone when one course of action is chosen over another.
    • D) A fixed cost that increases step-by-step with production volume.
    Show answer & explanation

    Answer: B) A cost that has already been incurred as a result of past decisions and cannot be altered by future decisions.

    Sunk costs are historical costs that have already been paid or committed to. Because they cannot be changed by any current or future decision, they are always totally irrelevant in short-term decision-making scenarios.