IMANET CMA Exam - Topic 5 Question 94 Discussion

Actual exam question for IMANET's CMA exam

Question #: 94
Topic #: 5

[All CMA Questions]

Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product for each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of $25 million. Company 2 is more automated, making its fixed costs 40% higher than those of Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of Company 1. By comparison, Company 1 will have the breakeven point in terms of dollar sales volume and will have the dollar profit potential once the indifference point in dollar sales volume is exceeded.

AOption A

BOption B

COption C

DOption D

Show Suggested Answer

Suggested Answer: B

If the 8% return exactly equals the present value of the future flows ., NPV is zero), then simply determine the present value of the future inflows. Thus, Hopkins Company's initial cash outlay is $19,090 [($2,500)(PVIFA at 8% for 10 periods) + ($5J00)(PVlF at 8% for 10 periods ($2,500)(6.710) + ($5,000)(.463)].

by Ming at Aug 07, 2024, 03:10 AM

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Stephaine

3 months ago

I think Company 1's breakeven point will be higher than Company 2's.

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Paris

3 months ago

Wait, how can Company 2 have a higher contribution margin but still be less profitable?

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Lashaun

3 months ago

Totally agree, Company 1's contribution margin is solid at 40%!

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Latanya

4 months ago

Company 2's fixed costs are $35 million, right?

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Carlee

4 months ago

Company 1 has fixed costs of $25 million.

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Beckie

4 months ago

I feel like I need to double-check the contribution margin ratios; if Company 2's is 30% greater, does that mean it could still have a higher profit potential despite the fixed costs?

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Adelaide

4 months ago

I think Company 2's higher fixed costs might complicate things, but I can't recall how that affects the profit potential after the indifference point.

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Rebeca

4 months ago

This question seems similar to one we practiced where we had to compare two companies' breakeven points. I think Company 1 will have a lower breakeven point due to its higher contribution margin ratio.

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Sheldon

5 months ago

I remember that the breakeven point is calculated using fixed costs divided by the contribution margin ratio, but I'm unsure about the exact numbers here.

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Wenona

5 months ago

Alright, let's do this. I think the first step is to calculate Company 1's breakeven point using the contribution margin ratio and fixed costs. Then we can compare that to Company 2's numbers to determine the profit potential.

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Linn

5 months ago

I'm not sure I fully understand the question. Can someone walk me through the process of solving this step-by-step? I want to make sure I approach it the right way.

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Son

5 months ago

I feel pretty confident about this one. I think the key is to use the contribution margin ratio and fixed costs to determine the breakeven point for Company 1, and then compare that to Company 2's higher contribution margin and fixed costs.

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Carey

5 months ago

Hmm, this seems like a tricky one. I'm a bit confused about how to calculate the breakeven point and profit potential with the different contribution margin ratios and fixed costs.

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Christiane

5 months ago

Okay, let's think this through step-by-step. We need to find the breakeven point and profit potential for Company 1 based on the given information.

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Chu

5 months ago

Wait, I'm a bit confused. Is this asking about the legal requirements for classifying jobs? Or is it about how pay grades can be used to justify paying some employees less? I'm not totally sure which angle they're going for here.

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Rosendo

9 months ago

Alright, let's do this! Time to put my economics knowledge to the test. I'm feeling confident I can crack this case.

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Eleonora

8 months ago

Yes, that's correct. Company 1 has a better profit potential compared to Company 2.

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Richelle

9 months ago

So, Company 1 will have higher dollar profit potential once the indifference point in dollar sales volume is exceeded, right?

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Tawanna

9 months ago

I agree, Company 1 has a lower fixed cost and a higher contribution margin ratio.

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Lynelle

9 months ago

I think Company 1 will have a lower breakeven point in terms of dollar sales volume.

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Thomasena

9 months ago

Ha, this is like a game of business strategy! Gotta love these kinds of questions that make you think. I'm gonna give it my best shot.

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Emerson

10 months ago

Hmm, this is a tough one. I'm not sure if I have all the information I need to answer this. Maybe I should draw out a diagram or do some calculations to see how the different factors play out.

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Sabine

8 months ago

User 3: Company 2 has a higher contribution margin ratio, so it might have higher profit potential.

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Bonita

8 months ago

User 2: Company 1 has lower fixed costs, so its breakeven point should be lower.

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Rhea

8 months ago

User 1: I think we need to calculate the breakeven point for both companies to compare.

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Alease

10 months ago

This question seems tricky, but I think I can figure it out. The key information is the contribution margin ratios and fixed costs of the two companies. If Company 2 has higher fixed costs and a higher contribution margin ratio, that should give it an advantage in terms of breakeven point and profit potential.

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