Analyze Operational And Strategic Performance
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CPA Business Analysis and Reporting (BAR) › Analyze Operational And Strategic Performance
A company reports: net income $180,000, interest expense $40,000, income tax expense $60,000, depreciation $35,000, and amortization $15,000. What is EBITDA?
$290,000
$280,000
$330,000
$315,000
Explanation
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization = $180,000 + $40,000 + $60,000 + $35,000 + $15,000 = $330,000. EBITDA is a proxy for operating cash generation before financing and non-cash charges. Option A omits both D and A. Option B adds only depreciation but not amortization. Option D adds D&A but omits taxes or uses an incorrect subtotal.
A company reports: net income $250,000, depreciation $80,000, increase in net working capital $30,000, and capital expenditures $120,000. What is free cash flow?
$250,000
$180,000
$200,000
$130,000
Explanation
Operating cash flow = Net income + Depreciation - Increase in working capital = $250,000 + $80,000 - $30,000 = $300,000. Free cash flow = Operating cash flow - Capital expenditures = $300,000 - $120,000 = $180,000. Option A omits depreciation from the operating cash flow calculation. Option B omits the working capital adjustment. Option C reports net income without adjustments as a proxy for free cash flow.
A company reports annual revenue of $8,400,000 in a total addressable market estimated at $60,000,000. What is the company's market share?
7.1x
12.0%
14.0%
16.0%
Explanation
Market share = Company revenue / Total market size = $8,400,000 / $60,000,000 = 14.0%. Option B inverts the ratio, expressing market size as a multiple of company revenue. Option C uses an incorrect numerator. Option D applies an incorrect denominator to the calculation.
A manufacturing company's on-time delivery rate has declined from 96% to 81% over six months while revenue has grown 22%. Which strategic conclusion is most appropriate?
On-time delivery is a lagging indicator and no action is needed until customer complaints materialize
The company should scale back its sales effort since growth is creating operational strain
Operational infrastructure is likely not scaling with revenue growth, posing a service quality risk that may eventually threaten customer retention
Revenue growth validates the strategy and the delivery decline is a temporary growing pain
Explanation
A 15-percentage-point deterioration in on-time delivery while revenue grows 22% is a classic sign that operational capacity is not keeping pace with demand. If unaddressed, service quality failures lead to customer attrition, which would ultimately reverse the revenue gains. Option A dismisses a significant operational warning sign. Option B overcorrects by reducing sales rather than expanding operational capacity. Option C misclassifies on-time delivery; it is a leading indicator of customer satisfaction and future churn, not a lagging one.
A company reports total assets of $4,000,000 and current liabilities of $600,000. What is capital employed, calculated as total assets minus current liabilities?
$2,200,000
$3,600,000
$1,800,000
$3,400,000
Explanation
Capital employed = Total assets - Current liabilities = $4,000,000 - $600,000 = $3,400,000. This represents the long-term funding base (long-term debt plus equity) deployed in the business. Option B represents shareholders' equity only, which excludes long-term debt. Option C represents long-term debt alone. Option D results from an arithmetic error in the subtraction.
A production facility has actual output of 42,000 units against a practical capacity of 60,000 units. What is the capacity utilization rate?
42.0%
58.0%
60.0%
70.0%
Explanation
Capacity utilization = Actual output / Practical capacity = 42,000 / 60,000 = 70.0%. Option A reports actual output as a percentage of 100,000, an unstated base. Option C reports the practical capacity as a percentage rather than performing the utilization calculation. Option D results from dividing by an incorrect denominator.
Thornfield Co. operates at full capacity of 5,000 units per month. Variable costs are $18 per unit, fixed costs are $120,000 per month, and the selling price is $48 per unit. What is the contribution margin per unit and operating income at full capacity?
CM $30 per unit; operating income $150,000
CM $30 per unit; operating income $30,000
CM $22 per unit; operating income $50,000
CM $25 per unit; operating income $20,000
Explanation
Contribution margin per unit = Selling price - Variable cost = $48 - $18 = $30. Total contribution margin = $30 x 5,000 = $150,000. Operating income = Total CM - Fixed costs = $150,000 - $120,000 = $30,000. Option A uses an incorrect contribution margin of $22 and overstates operating income. Option B correctly calculates the per-unit CM and total CM but reports total CM as operating income without deducting fixed costs. Option C applies an incorrect per-unit CM and operating income.
A retail chain reports same-store sales growth (SSSG) of 2% while total revenue growth is 14%. The entire difference between these rates is attributable to new store openings. What is the most important strategic insight from this comparison?
Organic growth from existing locations is modest, indicating that revenue expansion is driven by store count rather than improved productivity at existing sites
The company should close underperforming stores to improve the SSSG figure
Total revenue growth of 14% demonstrates the strategy is effective and SSSG is not a meaningful metric
The combination of SSSG and total growth is consistent with best-in-class retail performance
Explanation
Same-store sales growth isolates the performance of established locations, stripping out the volume effect of new openings. A 2% SSSG alongside 14% total growth reveals that nearly all top-line momentum depends on unit expansion rather than improved productivity per location. This raises questions about the sustainability of growth if expansion slows or if new stores underperform. Option B dismisses a diagnostic metric that specifically measures organic performance quality. Option C is an overreaction without evidence of which stores are underperforming. Option D draws an unsupported conclusion without comparative benchmarks.
A company has a customer acquisition cost (CAC) of $120 and an average customer lifetime value (LTV) of $480. What is the LTV-to-CAC ratio?
0.25
2.5
4.0
8.0
Explanation
LTV/CAC = $480 / $120 = 4.0. An LTV/CAC ratio of 4.0 means the company generates $4 of lifetime customer value for every $1 spent on acquisition - generally considered a healthy benchmark in subscription and recurring-revenue businesses. Option A results from dividing by an incorrect figure. Option C inverts the ratio. Option D doubles the correct result.
A technology company reports an LTV/CAC ratio of 1.8, annual customer churn of 35%, and a CAC payback period of 22 months. Which statement best summarizes the strategic concern raised by these metrics together?
The company should immediately increase marketing spend to shorten the CAC payback period
Churn rate is irrelevant as long as the company continues to acquire new customers at the current pace
Performance is adequate because an LTV/CAC above 1.0 confirms customers generate positive lifetime value
The combination of low LTV/CAC, high churn, and a long payback period indicates a customer economics model that is difficult to sustain profitably
Explanation
These three metrics together paint a concerning picture: a 1.8 LTV/CAC ratio provides thin margin above acquisition cost, a 35% annual churn rate means the average customer stays less than three years, and a 22-month payback period means the company does not recover acquisition costs until nearly two years in. With high churn, many customers may leave before the company recoups its investment. Option A sets an insufficiently low bar; an LTV/CAC of 1.8 leaves little room for error. Option B is incorrect; churn directly determines LTV, and high churn makes the economic model fragile. Option D does not address the root problems of churn and thin lifetime value.