ABA Business Advisory & Consulting 2 — Questions and Answers
Question 1: A client's gross profit margin has declined from 42% to 34% over two years while revenue grew 15%. What is the most likely cause an advisor should investigate first?
- Increase in selling and administrative expenses
- Rising cost of goods sold outpacing revenue growth (Correct answer)
- Decline in accounts receivable turnover
- Higher depreciation charges on fixed assets
Correct answer: Rising cost of goods sold outpacing revenue growth
Gross profit margin only reflects revenue minus COGS, so a declining margin despite revenue growth indicates COGS rising faster than sales prices.
Question 2: When applying the Balanced Scorecard framework to a client, which perspective directly measures employee training and innovation capacity?
- Financial perspective
- Customer perspective
- Internal process perspective
- Learning and growth perspective (Correct answer)
Correct answer: Learning and growth perspective
The learning and growth perspective addresses human capital, information capital, and organizational capital, including employee skills and innovation.
Question 3: A manufacturer asks you to evaluate whether to make or buy a component. The relevant costs for the make option are $18/unit variable and $5/unit allocated fixed. The buy price is $22/unit. What is the correct advisory conclusion?
- Buy, because $22 is less than $23 total make cost
- Make, because variable cost of $18 is less than the buy price of $22 (Correct answer)
- Buy, because fixed costs are unavoidable either way
- Make, because total cost including fixed is lower
Correct answer: Make, because variable cost of $18 is less than the buy price of $22
In a make-or-buy decision, only relevant (avoidable) costs matter; since the $5 allocated fixed cost is unavoidable, the relevant make cost is $18, which is below the $22 buy price.
Question 4: During a strategic planning engagement, a client asks about the difference between core competencies and competitive advantages. Which statement is most accurate?
- Core competencies and competitive advantages are interchangeable terms
- A core competency becomes a competitive advantage only when customers value it and competitors cannot easily replicate it (Correct answer)
- Competitive advantages are internal capabilities; core competencies are market-facing strengths
- Core competencies are financial metrics that distinguish a firm from competitors
Correct answer: A core competency becomes a competitive advantage only when customers value it and competitors cannot easily replicate it
A core competency (internal capability) translates into a sustainable competitive advantage only when it delivers customer value and is rare, inimitable, and non-substitutable.
Question 5: A client wants to expand internationally and asks about transfer pricing. Which primary purpose does an arm's-length transfer price serve?
- Maximizing total corporate profit by allocating income to high-tax jurisdictions
- Ensuring intercompany transactions are priced as if between unrelated third parties for tax compliance (Correct answer)
- Reducing the need for intercompany contracts between subsidiaries
- Setting retail prices for goods sold in foreign markets
Correct answer: Ensuring intercompany transactions are priced as if between unrelated third parties for tax compliance
Arm's-length pricing mirrors what unrelated parties would charge, satisfying tax authority requirements and preventing artificial income shifting between jurisdictions.
Question 6: A business advisor is helping a client prepare for a bank loan. The lender requires a debt service coverage ratio (DSCR) of at least 1.25. If annual net operating income is $180,000 and total annual debt service is $160,000, what is the DSCR and will the loan likely be approved?
- DSCR = 0.89; loan will be denied
- DSCR = 1.13; loan will be denied
- DSCR = 1.125; loan will be denied (Correct answer)
- DSCR = 1.25; loan will be approved
Correct answer: DSCR = 1.125; loan will be denied
DSCR = $180,000 / $160,000 = 1.125, which is below the required 1.25 threshold, so the loan would likely be denied.
Question 7: When advising on a merger, which analytical tool best identifies whether the combined entity will achieve synergies by comparing pre- and post-merger cost structures?
- Porter's Five Forces analysis
- Horizontal integration analysis with pro forma financial statements (Correct answer)
- SWOT analysis of the target company only
- Payback period calculation on acquisition cost
Correct answer: Horizontal integration analysis with pro forma financial statements
Pro forma financial statements for the combined entity allow direct comparison of projected cost structures, quantifying expected synergies from the horizontal integration.
ABA Business Advisory & Consulting 2
A client's gross profit margin has declined from 42% to 34% over two years while revenue grew 15%.
What is the most likely cause an advisor should investigate first?