CPIM Practice Exam

When calculating net profit, which method can be used for an option involving new plant investment?

1. Sales Revenue - Operating Expenses

2. (Sales Revenue - True Variable Costs) - Operating Expenses

3. Revenue Benchmarking - Costs

4. Actual Costs - Projected Revenue

The correct answer is: (Sales Revenue - True Variable Costs) - Operating Expenses

The correct choice for calculating net profit, particularly in the context of a new plant investment, is the method that involves sales revenue minus true variable costs and then subtracting operating expenses. This approach effectively captures the core profit derived from the business activity by focusing on the costs that fluctuate with production levels. Using true variable costs ensures that you're accounting only for those expenses that are directly tied to the production process, providing a clearer picture of the contribution margin. After determining this contribution, subtracting operating expenses gives you the net profit, highlighting the operational efficiency of the investment. Considering the other methods: simply subtracting operating expenses from sales revenue may overlook crucial cost elements, leading to an inflated profit figure. Revenue benchmarking also does not directly facilitate profit calculation as it compares revenue against certain standards instead of analyzing costs directly. Likewise, the method of actual costs minus projected revenue tends to be less relevant for ongoing profitability, focusing more on variance rather than net profitability from ongoing operations.