Financial Analysis & Planning Flashcards

A product has a selling price of $120, variable cost of $72, and allocated fixed cost of $30. What is the product's contribution margin per unit?

Answer: $48

Contribution margin = Selling price - Variable cost = $120 - $72 = $48; fixed costs are not deducted for contribution margin.

What is the primary purpose of a sensitivity analysis in pricing financial models?

Answer: To assess how changes in key assumptions affect outcomes

Sensitivity analysis tests how variations in key input assumptions (e.g., price, volume, costs) affect the model's output.

Which pricing scenario would most likely improve Return on Investment (ROI) without a volume change?

Answer: Decreasing variable cost per unit

Reducing variable cost per unit increases contribution margin and profit without requiring additional revenue, improving ROI.

A company's target costing approach sets the product cost as:

Answer: Market price minus desired profit margin

Target costing works backward from the competitive market price minus the required profit to establish the maximum allowable cost.

Which variance indicates that actual revenue differs from budgeted revenue due to a difference in selling price?

Answer: Price variance

Price variance isolates the revenue impact attributable solely to differences between actual and budgeted selling prices.

How does the concept of 'sunk cost' most directly affect pricing decisions?

Answer: Sunk costs are irrelevant and should be excluded from forward-looking pricing decisions

Sunk costs are past expenditures that cannot be recovered and are irrelevant to future pricing or investment decisions.

A company earns $500,000 net profit on $4,000,000 in assets. What is its Return on Assets (ROA)?

Answer: 12.5%

ROA = Net Profit / Total Assets = $500,000 / $4,000,000 = 12.5%.