CPA Business Environment and Concepts (BEC) : Make or Buy Analysis
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Example Questions
Example Question #1 : Operations Management: Budgeting
Which of the following statements is true regarding opportunity cost?
Opportunity cost is representative of actual dollar outlay
The potential benefit is not sacrificed when selecting an alternative
Idle space that has no alternative use has an opportunity cost of zero.
Opportunity cost is recorded in the accounts of an organization that has a full costing system
Idle space that has no alternative use has an opportunity cost of zero.
Opportunity cost is the potential benefit lost by selecting a particular course of action. If idle space has no alternative use, there is no benefit foregone, opportunity cost is zero.
Example Question #1 : Make Or Buy Analysis
Costs relevant to a make or buy decision include variable labor and variable materials as well as:
Avoidable fixed costs
Factory management costs
Property taxes
Depreciation
Avoidable fixed costs
Avoidable fixed costs attach to a specific decision and are incurred only if that decision is taken. They are relevant in marginal analysis.
Example Question #2 : Make Or Buy Analysis
An important concept in decision making is described as "the contribution to income that is foregone by not using a limited resource to its best alternative use." This concept is called:
Opportunity cost
Marginal cost
Irrelevant cost
Incremental cost
Opportunity cost
Opportunity cost is the contribution to income that is foregone by not using a limited resource for its best alternative use.
Example Question #3 : Make Or Buy Analysis
Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is:
Capital expenditure plan
Statement of cost of goods sold
Statement of cash flows
Income statement
Statement of cash flows
The statement of cash flows is the last pro forma statement prepared.
Example Question #2 : Make Or Buy Analysis
The cash receipts budget includes:
Funded depreciation
Interest expense
Loan proceeds
Extinguishment of debt
Loan proceeds
The cash receipts budget includes loan proceeds.
Example Question #6 : Make Or Buy Analysis
Which of the following factors would assist in a make or buy analysis?
Cash inflows
Both
Neither
Cash outflows
Both
In assessing how much a decision will cost, as well as how much cash that decision will bring in, a firm can accurately deduce which option is in their best interest.
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