CPP Financial Analysis & Planning 3 — Questions and Answers
Question 1: 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?
- $18
- $48 (Correct answer)
- $90
- $30
Correct answer: $48
Contribution margin = Selling price - Variable cost = $120 - $72 = $48; fixed costs are not deducted for contribution margin.
Question 2: What is the primary purpose of a sensitivity analysis in pricing financial models?
- To determine the optimal discount rate
- To assess how changes in key assumptions affect outcomes (Correct answer)
- To calculate the net present value of a product line
- To forecast competitor pricing moves
Correct 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.
Question 3: Which pricing scenario would most likely improve Return on Investment (ROI) without a volume change?
- Increasing fixed overhead allocation
- Reducing the selling price by 10%
- Decreasing variable cost per unit (Correct answer)
- Expanding the sales force
Correct answer: Decreasing variable cost per unit
Reducing variable cost per unit increases contribution margin and profit without requiring additional revenue, improving ROI.
Question 4: A company's target costing approach sets the product cost as:
- Actual manufacturing cost plus a markup
- Market price minus desired profit margin (Correct answer)
- Full cost plus variable overhead
- Standard cost plus allocated fixed expenses
Correct 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.
Question 5: Which variance indicates that actual revenue differs from budgeted revenue due to a difference in selling price?
- Volume variance
- Mix variance
- Price variance (Correct answer)
- Efficiency variance
Correct answer: Price variance
Price variance isolates the revenue impact attributable solely to differences between actual and budgeted selling prices.
Question 6: How does the concept of 'sunk cost' most directly affect pricing decisions?
- Sunk costs should set the price floor for all products
- Sunk costs are irrelevant and should be excluded from forward-looking pricing decisions (Correct answer)
- Sunk costs determine the minimum acceptable margin
- Sunk costs must be recovered through the current pricing strategy
Correct 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.
Question 7: A company earns $500,000 net profit on $4,000,000 in assets. What is its Return on Assets (ROA)?
- 8%
- 12.5% (Correct answer)
- 20%
- 6.25%
Correct answer: 12.5%
ROA = Net Profit / Total Assets = $500,000 / $4,000,000 = 12.5%.
CPP Financial Analysis & Planning 3
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?