CPP Costing and Profitability Analysis 2 — Questions and Answers
Question 1: A company uses activity-based costing (ABC). Which of the following is the BEST cost driver for a machine setup activity?
- Number of units produced
- Number of setups (Correct answer)
- Direct labor hours
- Machine hours
Correct answer: Number of setups
Number of setups directly drives setup costs in ABC, making it the most accurate driver for that cost pool.
Question 2: Which costing method treats fixed manufacturing overhead as a period cost rather than a product cost?
- Absorption costing
- Standard costing
- Variable costing (Correct answer)
- Job-order costing
Correct answer: Variable costing
Variable (direct) costing expenses fixed manufacturing overhead in the period incurred, while absorption costing includes it in product cost.
Question 3: A firm's operating profit margin is 12% and its total asset turnover is 2.5. What is its return on assets (ROA)?
- 4.8%
- 30% (Correct answer)
- 14.5%
- 20.8%
Correct answer: 30%
ROA = Operating Profit Margin × Asset Turnover = 12% × 2.5 = 30%.
Question 4: When calculating the cost-to-serve for a customer segment, which of the following costs should be INCLUDED?
- Corporate headquarters rent
- CEO compensation
- Order processing and delivery costs specific to the segment (Correct answer)
- R&D expenditures
Correct answer: Order processing and delivery costs specific to the segment
Cost-to-serve includes only the incremental costs directly attributable to serving a specific customer or segment.
Question 5: A product has a selling price of $80, variable cost of $50, and allocated fixed overhead of $20. At what minimum price should the company accept a special one-time order if capacity is available?
- Any price above $80
- Any price above $70
- Any price above $50 (Correct answer)
- Any price above $30
Correct answer: Any price above $50
With available capacity, only variable costs are relevant for a special order; any price above $50 contributes positively to profit.
Question 6: Which metric measures the profit generated per unit of a scarce resource (constraint)?
- Gross margin per unit
- Contribution margin per unit of constrained resource (Correct answer)
- Net profit margin
- Return on investment
Correct answer: Contribution margin per unit of constrained resource
Theory of Constraints uses contribution margin per unit of constrained resource to prioritize product mix decisions.
Question 7: A customer generates $500,000 in revenue with a 35% gross margin but requires $200,000 in selling and service costs. What is the customer's net profitability?
- $175,000 profit
- $125,000 profit
- -$25,000 loss (Correct answer)
- $300,000 profit
Correct answer: -$25,000 loss
Gross profit = $500,000 × 35% = $175,000; Net profitability = $175,000 − $200,000 = −$25,000.
CPP Costing and Profitability Analysis 2
A company uses activity-based costing (ABC).
Which of the following is the BEST cost driver for a machine setup activity?