Unit 1: Business Analysis

• Topic 01

  Financial Statement Analysis

  15 questions
• Topic 02

  Forecasting and Projections

  15 questions
• Topic 03

  Cost Behaviour and Cost-Volume-Profit Analysis

  15 questions
• Topic 04

  Variance Analysis

  15 questions
• Topic 05

  Capital Budgeting

  15 questions
• Topic 06

  Working Capital Management

  15 questions
• Topic 07

  Valuation Techniques

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. An organisation uses incremental budgeting, simply adding 5% to last year's actuals for each department. Over 10 years, overhead spending has grown from $2M to $3.3M (5% compounded). A consultant proposes switching to ZBB. The CFO is concerned about the cost of the transition. What framework should guide this decision?

   • A
     ZBB should be adopted in every organisation because it is theoretically superior to all other budgeting methods
   • B
     Compare the expected cost savings from eliminating inefficient spending identified through ZBB against the administrative cost of the ZBB process; ZBB is most beneficial in overhead-heavy departments with many discretionary expenditures
     Correct answer
   • C
     Incremental budgeting should be retained because ZBB is only suitable for companies with fewer than 50 employees
   • D
     The CFO is correct to resist; ZBB produces the same outcomes as incremental budgeting over time
   Explanation

   The decision to adopt ZBB requires a cost-benefit analysis: the administrative burden of ZBB (significant time from managers and analysts) must be weighed against the expected savings from identifying and eliminating wasteful spending. ZBB is most impactful in overhead-heavy, discretionary-spending functions where costs have never been rigorously challenged. The 5% annual growth in overhead over 10 years ($2M to $3.3M) suggests exactly the kind of compounding inefficiency ZBB is designed to address.

2. A firm has fixed costs of $180,000, selling price $60, and variable costs $36. Management raises the selling price to $72. How does this affect the break-even point in units, and what is the new break-even?

   • A
     Break-even falls to 5,000 units because the higher price increases CM per unit from $24 to $36
     Correct answer
   • B
     Break-even is unchanged because fixed costs and variable costs are unchanged
   • C
     Break-even rises to 10,000 units because the higher price reduces unit sales
   • D
     Break-even falls to 6,000 units because the CM ratio increases from 40% to 50%
   Explanation

   New CM per unit = $72 − $36 = $36. New break-even = $180,000 ÷ $36 = 5,000 units (down from 7,500). A price increase that is not offset by a decline in demand will lower the break-even point by increasing the contribution margin per unit. The CM ratio also improves: $36 ÷ $72 = 50% (up from 40%).

3. A company operates with 8 regional offices, each maintaining its own bank account with an average idle balance of $50,000. It implements a zero-balance account (ZBA) system. How does the transition affect total available cash, and what is the opportunity benefit?

   • A
     The transition has no effect on total available cash because funds are simply moved between accounts
   • B
     ZBAs increase total cash by generating interest on the zero-balance accounts themselves
   • C
     Up to $400,000 previously idle across 8 accounts is now concentrated in a single account; this cash can be invested or used to repay debt, reducing interest costs or earning investment returns
     Correct answer
   • D
     The company must maintain an additional reserve equal to 10% of total disbursements under ZBA arrangements
   Explanation

   Before ZBAs, 8 accounts × $50,000 = $400,000 is fragmented across regional banks, often idle. ZBAs funnel all receipts and fund all disbursements through a central concentration account, making the full $400,000 continuously available for investment or debt reduction. At even a 4% annual rate, $400,000 generates $16,000/year in additional income — a meaningful benefit from a purely structural cash management change.