CPP Costing and Profitability Analysis 3

Question 1

Which of the following BEST describes the concept of 'economic profit' in pricing decisions?

Accepted Answer

Revenue minus all explicit and implicit (opportunity) costs

Answer

Economic profit subtracts both explicit costs and the opportunity cost of capital employed, providing a true measure of value creation.

Question 2

A pricing analyst wants to determine the point at which a new product recovers its development costs over time. This analysis is BEST described as:

Accepted Answer

Payback period analysis

Answer

Payback period analysis calculates how long it takes for cumulative cash inflows to recover the initial investment or development cost.

Question 3

Under the lifecycle costing concept, which phase typically incurs the HIGHEST cumulative costs over the entire product lifecycle?

Accepted Answer

Use and maintenance by the customer

Answer

Lifecycle costing shows that customer use and maintenance costs often dwarf production and purchase costs over the total ownership period.

Question 4

A company allocates overhead using a plantwide rate based on direct labor hours. An ABC analysis reveals Product X consumes far more machine setups than Product Y. Switching to ABC will MOST likely:

Accepted Answer

Increase Product X's cost and decrease Product Y's cost

Answer

ABC reveals that high-overhead-consuming products like Product X are undercosted under plantwide rates, while simpler products like Product Y are overcosted.

Question 5

Which of the following is a key limitation of using fully allocated cost as the basis for pricing decisions?

Accepted Answer

It can trigger a death spiral when volume declines raise unit costs

Answer

The cost-plus death spiral occurs when declining volume raises fixed cost per unit, forcing price increases that further reduce volume.

(CPP) Certified Pricing Professional Practice Test

(CPP) Certified Pricing Professional Practice Test

CPP Costing and Profitability Analysis 3