IMANET Exam CMA Topic 1 Question 87 Discussion

Actual exam question for IMANET's CMA exam

Question #: 87
Topic #: 1

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BE&H Manufacturing is considering dropping a product line. It currently produces a multi-purpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate of $3.50 a unit and will continue whether or not production ceases. Depreciation on the special equipment amounts to $20,000 a year. If production of the clamp is stopped, the special equipment can be sold for $18,000; if production continues, however, the equipment will be useless for further production at the end of 1 year and will have no salvage value. The clamp has a selling price of $10 a unit. Ignoring tax effects, the minimum number of units that would have to be sold in the current year to break even on a cash flow basis is

A4,500 units.

B5,000 units.

C20.000 units.

D36,000 units.

Show Suggested Answer

Suggested Answer: D

The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Pauley can be calculated as follows:

Pauley's total after-tax operating cash inflow for each year of the project's life is thus $36,000 ($30,000 + $6,000). Ii the final year of the project, two additional cash flows must be taken into account, the after-tax proceeds from the disposal of the equipment purchased for the project, and the recovery of working capital devoted to the project. These two additional cash flows can be calculated as follows:

Pauley's total after-tax cash inflow for the final year of the project's life is thus $49,000

($36,000 + $13,000).

by Rodolfo at May 12, 2024, 04:32 PM

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Jamal

6 hours ago

Hmm, this is a tough one. Maybe the answer is to just drop the product line and sell the equipment for $18,000. That seems like the easiest way to break even, no?

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Corazon

4 days ago

I'm going with D) 36,000 units. The question mentions that the special equipment will have no salvage value if production continues, so we need to account for the full $20,000 in depreciation. That's a lot of units to break even!

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Celestina

25 days ago

I think the answer is B) 5,000 units. The variable costs are $6 per unit, and the fixed overhead is $3.50 per unit. With a selling price of $10 per unit, we need to sell at least 5,000 units to cover the fixed costs and depreciation.

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Tamar

1 months ago

This is a tricky one. We need to consider the variable costs, fixed overhead, and depreciation to determine the minimum number of units to break even on a cash flow basis.

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