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Costing and Profitability Analysis Flashcards

7 cards from real CPP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Costing and Profitability Analysis flashcards as text

  1. A company wants a 20% return on $5,000,000 invested in a product line expected to sell 100,000 units. Total cost per unit is $30. What target ROI price achieves this goal?

    Answer: $40

    Target ROI price = Cost + (Target Return × Investment ÷ Units) = $30 + (0.20 × $5,000,000 ÷ 100,000) = $30 + $10 = $40.

  2. Which statement about throughput contribution in the Theory of Constraints is CORRECT?

    Answer: It equals revenue minus totally variable costs (typically direct materials only)

    In the Theory of Constraints, throughput = Revenue − Truly Variable Costs (usually only direct materials), treating almost all other costs as operating expenses.

  3. A retailer has cost of goods sold of $2.4M and average inventory of $400,000. What is its inventory turnover ratio?

    Answer: 6 times

    Inventory Turnover = COGS ÷ Average Inventory = $2,400,000 ÷ $400,000 = 6 times.

  4. A product's price elasticity of demand is −2.5. If the company reduces price by 4%, what is the expected change in unit volume?

    Answer: 10% increase

    % Change in Quantity = Elasticity × % Change in Price = −2.5 × (−4%) = +10% increase in units.

  5. Which of the following BEST illustrates a cost of quality in the prevention category?

    Answer: Statistical process control training

    Prevention costs are incurred to avoid defects before they occur; SPC training and employee quality programs are classic examples.

  6. A company earns $80M in revenue with a 40% contribution margin ratio and $22M in fixed costs. What is its degree of operating leverage (DOL)?

    Answer: 3.20

    Contribution Margin = $80M × 40% = $32M; Operating Income = $32M − $22M = $10M; DOL = $32M ÷ $10M = 3.20.

  7. When analyzing profitability by channel, a company finds its e-commerce channel has a lower gross margin but higher net margin than its retail channel. The MOST likely explanation is:

    Answer: E-commerce has significantly lower cost-to-serve and selling expenses

    Lower selling expenses and cost-to-serve in e-commerce (no retailer markups, lower logistics) can convert a lower gross margin into a higher net margin.