CPP Financial Analysis & Planning 2 — Questions and Answers
Question 1: A company's contribution margin ratio is 40% and fixed costs are $200,000. What is the break-even revenue?
- $500,000 (Correct answer)
- $400,000
- $800,000
- $300,000
Correct answer: $500,000
Break-even revenue = Fixed Costs / Contribution Margin Ratio = $200,000 / 0.40 = $500,000.
Question 2: Which metric best measures how efficiently a company converts revenue into profit after all expenses?
- Gross margin
- Operating margin
- Net profit margin (Correct answer)
- EBITDA margin
Correct answer: Net profit margin
Net profit margin reflects the percentage of revenue remaining after all expenses, taxes, and interest are deducted.
Question 3: A firm sells 10,000 units at $50 each with variable costs of $30 per unit. What is the total contribution margin?
- $200,000 (Correct answer)
- $500,000
- $300,000
- $150,000
Correct answer: $200,000
Contribution margin per unit = $50 - $30 = $20; total = 20 × 10,000 = $200,000.
Question 4: When a company uses absorption costing instead of variable costing, which cost is included in product cost?
- Selling expenses
- Fixed manufacturing overhead (Correct answer)
- Administrative overhead
- Marketing costs
Correct answer: Fixed manufacturing overhead
Absorption costing assigns fixed manufacturing overhead to each unit produced, unlike variable costing which expenses it in the period.
Question 5: What does a Price-to-Earnings (P/E) ratio primarily indicate to a pricing analyst?
- The company's debt load relative to equity
- Market expectations of future earnings growth (Correct answer)
- The ratio of price to variable costs
- Asset utilization efficiency
Correct answer: Market expectations of future earnings growth
A high P/E ratio signals that investors expect strong future earnings growth relative to current earnings.
Question 6: A price increase of 5% results in a 3% volume decline. What is the approximate net revenue impact?
- -2% revenue
- +1.85% revenue (Correct answer)
- +5% revenue
- +3% revenue
Correct answer: +1.85% revenue
Net revenue change ≈ (1.05 × 0.97) - 1 = 1.0185 - 1 = +1.85%, reflecting the combined volume and price effects.
Question 7: Which financial planning tool projects future cash inflows and outflows over a specific period to assess liquidity?
- Income statement
- Balance sheet
- Cash flow forecast (Correct answer)
- Capital expenditure budget
Correct answer: Cash flow forecast
A cash flow forecast projects future cash inflows and outflows, enabling management to identify potential liquidity shortfalls.
CPP Financial Analysis & Planning 2
A company's contribution margin ratio is 40% and fixed costs are $200,000.
What is the break-even revenue?