CPM P&L Ownership & Cost Reduction 3 — Questions and Answers
Question 1: A plant's fixed costs total $900,000 per month and variable cost per unit is $15. If the selling price is $30 per unit, what is the monthly break-even volume?
- 30,000 units
- 45,000 units
- 60,000 units (Correct answer)
- 20,000 units
Correct answer: 60,000 units
Break-even = Fixed Costs ÷ Contribution Margin per Unit = $900,000 ÷ ($30 – $15) = 60,000 units.
Question 2: When evaluating a make-vs-buy decision for a component currently produced in-house, which cost should be EXCLUDED from the analysis?
- Direct material cost of the component
- Avoidable overhead that would be eliminated if production stopped
- Sunk cost of equipment already purchased and fully depreciated (Correct answer)
- Opportunity cost of freed-up capacity
Correct answer: Sunk cost of equipment already purchased and fully depreciated
Sunk costs are irrelevant to forward-looking decisions because they cannot be recovered regardless of the choice made.
Question 3: A plant manager is reviewing the spending variance for indirect labor. This variance is best described as:
- The difference between actual indirect labor hours and budgeted hours at the standard rate
- The difference between actual indirect labor cost and the budgeted cost for actual output (Correct answer)
- The difference between standard and actual direct labor hours multiplied by the standard wage
- The difference between actual and budgeted headcount multiplied by the average annual salary
Correct answer: The difference between actual indirect labor cost and the budgeted cost for actual output
A spending variance compares what was actually spent on indirect labor against what was budgeted to be spent for the actual level of output, isolating cost control performance.
Question 4: Total Productive Maintenance (TPM) primarily reduces which P&L line item?
- Selling and distribution costs
- Manufacturing overhead and maintenance expense within COGS (Correct answer)
- Research and development expense
- Corporate allocated charges
Correct answer: Manufacturing overhead and maintenance expense within COGS
TPM reduces unplanned downtime and maintenance costs, which are captured in manufacturing overhead—a component of COGS.
Question 5: A plant manager is asked to achieve a 10% reduction in material costs. Supplier consolidation and volume leverage is already maximized. The NEXT most effective lever is typically:
- Increasing safety stock to buffer price volatility
- Design-to-cost engineering to reduce material content or substitute less expensive materials (Correct answer)
- Hiring additional procurement staff
- Reclassifying material costs as capital expenditures
Correct answer: Design-to-cost engineering to reduce material content or substitute less expensive materials
Design-to-cost (value engineering) attacks material costs at the specification level, enabling substitutions or reduction in content that procurement negotiations alone cannot achieve.
Question 6: Which statement about contribution margin is CORRECT in the context of plant P&L management?
- Contribution margin equals revenue minus total fixed costs
- A positive contribution margin always means the plant is profitable
- Contribution margin equals revenue minus total variable costs and represents coverage for fixed costs (Correct answer)
- Contribution margin and gross margin are interchangeable terms
Correct answer: Contribution margin equals revenue minus total variable costs and represents coverage for fixed costs
Contribution margin (revenue minus variable costs) shows how much each unit contributes toward covering fixed costs and generating profit once fixed costs are covered.
Question 7: A plant's actual scrap cost for the month is $85,000 against a standard of $40,000. Which management action is most appropriate?
- Revise the standard upward to $85,000 to eliminate the variance
- Initiate a formal corrective action process to identify and eliminate scrap root causes (Correct answer)
- Absorb the variance quietly since it is less than 1% of revenue
- Transfer the excess scrap cost to the SG&A budget
Correct answer: Initiate a formal corrective action process to identify and eliminate scrap root causes
A scrap variance more than double the standard warrants a structured root-cause investigation and corrective action to prevent recurrence and restore cost performance.
CPM P&L Ownership & Cost Reduction 3
A plant's fixed costs total $900,000 per month and variable cost per unit is $15.
If the selling price is $30 per unit, what is the monthly break-even volume?