CMA Part 2 - Financial Decision Making Examination Practice Questions
1. A company sells two products: Sparta and Volta. Volta is manufactured by a third party supplier, which charges the company a contractual price for each unit of Volta manufactured. A summary of revenue and costs assumptions for each product is as follows.
Planned sales units prior to promotion Unit selling price Unit variable cost Fixed costs
Sparta 100,000 $10 $3 $500,000
Volta 20,000 $20 $10 0
The company has the opportunity to spend an additional $10,000 in promotional expenditures on either Sparta or Volta, anticipating a 10% increase in unit sales volume as a result. Both product lines have idle capacity and can support the increase in unit volume. The company should spend the additional promotional expenditure on a. Sparta, because it would generate an additional $10,000 in operating profit. b. Sparta, because it would generate an additional $60,000 in operating profit. c. Volta, because it would generate an additional $20,000 in operating profit. d. Volta, because it would generate an additional $10,000 in operating profit.
2. A profit-maximizing company is considering a price increase on a particular product. After extensive market research, the company has determined that demand for the product is price inelastic. Assuming all other factors remain constant, determine what course of action the company should take and the resulting impact on quantity demanded. a. b. c. d.
Do not increase price; quantity demanded will decrease significantly. Do not increase price; minimal impact on quantity demanded. Increase price; minimal impact on quantity demanded. Increase price; quantity demanded will increase significantly.
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