IMANET Certified Management Accountant CMA Exam Questions

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Total 1336 questions
Question 1

The degree of operating leverage for Carlisle Company is



Answer : B

Operating leverage is the percentage change in operating income resulting from a percentage change in sales. It measures how a change in volume affects profits. Companies with larger investments and greater fixed costs ordinarily have higher contribution margins and more operating leverage. The degree of operating leverage measures the extent to which fixed assets are used in the production process. A company with a high percentage of fixed costs is more risky than a firm in the same industry that relies more on variable costs to produce. Based on a contribution margin of $.1 6 per unit ($1 --- $.84 variable cost), the degree of operating leverage is (400,000 x $16)[(400,000 x $.16)---28,000] = 1.78.

Carlisle Company currently sells 400,000 bottles of perfume each year. Each bottle costs $84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year. and a 40% tax rate. Carlisle uses the following formulas to determine the company's leverage:

Where: Q = Quantity

FC = Fixed cost

VC = Variable cost

S = Selling price

= Interest expense

P = Preferred dividends

T = Tax rate

EBIT = Earnings before interest and taxes


Question 2

A firm's dividend policy may treat dividends either as the residual part of a financing decision or as an active policy strategy. Treating dividends as the residual part of a financing decision assumes that



Answer : A

According to the residual theory of dividends, the amount (residual) of earnings paid as dividends depends on the available investment opportunities and the debt-equity ratio at which cost of capital is minimized. The rational investor should prefer reinvestment of retained earnings when the return exceeds what the investor could earn on investments of equal risk. However, the firm may prefer to pay dividends when investment opportunities are poor and the use of internal equity financing would move the firm away from its ideal capital structure.


Question 3

An important concept in decision making is described as ''the contribution to income that is forgone by not using a limited resource in its best alternative use.'' This concept is called



Answer : D

An opportunity cost is the maximum benefit sacrificed by employing a scarce productive resource in a specified manner. In other words, it is the value or worth of that resource in its next best alternative use.


Question 4

Which of the following factors is not typical of an industry that faces intense competitive rivalry?



Answer : D

Rivalry among existing firms will be intense when an industry has many strong competitors. Inelastic demand exists when quantity purchased is not greatly affected by price changes. Thus, price cutting does not increase sales for the industry and is therefore a typical of an intensely competitive industry.


Question 5

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



Answer : C

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


Question 6

A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales will be 5% less if the proposed new credit policy is implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.



Answer : C

If sales are $50 million, 70% of which are on credit1 total credit sales will be $35 million. The receivables turnover equals 4.8 times per year (360 days + 75-day collection period). Receivables turnover equals net credit sales divided by average receivables. Accordingly, average receivables equal $7,291 ,667 ($35,000,000 + 4.8). Under the new policy, sales will be $47.5 million ($50,000,000 x 95%), and credit sales will be $28.5 million ($47,500,000 x 60%). The collection period will be reduced to 50 days, resulting in a turnover of 7.2 times per year (360 + 50). The average receivables balance will therefore be $3,958,333 ($28,500,000 + 7.2), a reduction of $3,333,334_($7,291,667 --- $3,958,333).


Question 7

During the year, Mason Compass current assets increased by $120, current liabilities decreased by $50, and net working capital



Answer : D

Net working capital is the excess of current assets over current liabilities. An increase in current assets oar decrease in current liabilities increases working capital. Thus, networking capital increased by $170 ($120 + $50).


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Total 1336 questions