CMA Part 2 Complete Review Guide 2026–2027

4. Unit mix: a virtual bundle of2A and1B, with unit contributions 12 and 18, contributes 42. Fixed costs 25,200 require 600 bundles, or1,200A and600B. A bundle is an analytical tool rather than a requirement to sell a physical package. (OpenStax3.4)
5. Revenue mix: if60% of revenue comes fromA at a30% contribution ratio and the remainder fromB at50%, the weighted ratio is38%. Fixed costs 19,000 require revenue 50,000. Do not directly use unit weights to average revenue-based ratios. (OpenStax3.4; weighted arithmetic on the stated base)
6. Safety margin = actual sales - break-even sales; its ratio = margin / actual sales. Sales 200,000 and break-even150,000 give 50,000 or25%. It is the modeled sales decline before loss, not a statistical loss probability. (OpenStax3.5)
7. DOL = contribution / operating profit at a specific volume. Contribution 90,000 and profit 30,000 give 3. A4% volume rise with unchanged price and cost behavior within range implies 12% profit growth. At zero profit the ratio is undefined. (OpenStax3.5)
8. Sensitivity isolates an input’s effect; a scenario combines coherent assumptions. Do not raise modeled price while assuming unchanged demand without justification. If volume needs another plant, re-estimate fixed costs rather than extend the old line beyond its range. (OpenStax3.3;3.5)
9. Relevant cost is future and differs between alternatives. A sunk cost has already occurred and cannot change. However, an asset’s current resale value or alternative capacity use may matter even when its book value is sunk. Separate labels from actual cash effects. (OpenStax10.1)
10. Opportunity cost: if using a machine forX forgoesY contribution of8,000, include 8,000 as an opportunity cost ofX even without an invoice. Do not add a cost twice if it is already included in the lost contribution. (OpenStax10.1)
11. With one bottleneck, rank contribution per scarce-resource unit, subject to demand. A contributes 40 and needs 4 hours; B contributes 24 and needs 2. A gives 10 per hour andB12. With 100 hours andB demand capped at30 units, allocate 60 hours toB, then 40 toA, producing 10 units. (OpenStax3.4;10.1, limited resources and opportunity cost)
12. A special order with idle capacity: compare extra revenue with every changing cost. An order of500 at price 22 and variable cost 16, plus extra setup 1,000, adds 2,000. If it displaces regular sales, include forgone contribution and examine effects on existing customers. (OpenStax10.2)
13. Make or buy: for 1,000 units, avoidable manufacturing cost is9 each plus 2,000 cancelable dedicated fixed cost, versus purchase 12 each. Relevant making cost 11,000 versus 12,000 saves 1,000 before alternative use or quality/delivery differences. Continuing common fixed costs do not become savings through reallocation. (OpenStax10.3)
14. Segment closure impact = avoidable fixed costs - lost contribution ± other effects. Contribution 50,000 and avoidable fixed costs 35,000 mean closure reduces profit 15,000, even if allocated headquarters costs make the report show a loss. Include closure costs and complementary-sales effects. (OpenStax10.4)
15. Further processing: compare added revenue with added processing and opportunity costs. Split-off sale 28,000 versus processed sale 45,000 at added cost 12,000 gives 5,000 benefit. Joint cost already incurred before split-off does not differ between these alternatives; it may matter to starting an uncommitted production run. (OpenStax10.5)
16. After tax: a10,000 pretax profit difference gives 7,000 after tax if all effects face 30% tax and any tax benefit is usable. Do not assume every item is deductible or every tax shield realizable when the problem says otherwise. Separate cash and timing for longer decisions. (OpenStax10.1; IMA LOS C.2.m; tax arithmetic under the stated assumption)
17. Three pricing starting points: cost-based pricing begins with company expenditure, comparables with equivalent market alternatives, and value-based pricing with customer benefits and willingness to pay. Compare warranty, service and quality before treating a price difference alone as a reason to cut price. (OpenStax Marketing 12.3)
18. Cost markup and sales margin differ. Cost 60 with 25% markup gives 75; a25% sales margin gives 60 /0.75=80. The first bases profit on cost; the second on revenue. (OpenStax Marketing 12.3; ACCA Target Costing)
19. Target-return price = full unit cost + (investment × target return) / volume. Cost 20, investment 200,000, return 15% and volume 10,000 give 23. The calculated price still needs testing against market acceptance and assumed volume. (OpenStax Marketing 12.3, Target Return; allocation of the profit target)
20. Target cost starts with an acceptable price and subtracts profit. Price 90 and a20% sales margin give target cost 72; estimated cost 78 leaves a gap 6. Do not automatically close the gap by raising price beyond willingness to pay. (ACCA Target costing and life-cycle costing, Target Costing)
21. Value engineering reduces the cost of delivering functions customers value. Remove unhelpful complexity and preventable rework while preserving safety, functionality and perceived value. Life-cycle analysis includes design, manufacture, warranty and disposal rather than factory cost alone. (ACCA, Value Engineering and Life-cycle Costing)
22. Absolute midpoint elasticity = |(Q2 - Q1) / averageQ| / |(P2 - P1) / averageP|. Moving from P30,Q100 to P27,Q130 gives approximately 2.48. Above 1 is elastic, below 1 inelastic and equal to1 unit elastic. Averages give the same magnitude when direction is reversed. (OpenStax Economics 5.1)
23. Revenue = P × Q. Locally, a price cut raises revenue with elastic demand and lowers it with inelastic demand, all else equal. Profit deducts costs; a cut can raise revenue without improving profit if costs rise more. Check actual quantities rather than extrapolate constant responsiveness over a large change. (OpenStax Economics 5.3)
24. Interior profit maximization balancesMR andMC under the model’s conditions. In perfect competitionMR=P; for a monopolyMR differs fromP, so chooseQ and then readP from demand. P=80-Q, MR=80-2Q andMC20 giveQ30 andP50. Do not automatically set monopoly price equal toMC. (OpenStax Economics 8.2;9.2)
25. Monopolistic competition has many differentiated sellers; oligopoly has a few strategically interdependent firms. A cartel restricts output to raise price, but individual members may have incentives to exceed quotas; economic description is not legal permission. (OpenStax Economics 10, Key Terms;10.2)
26. Pricing horizon matters: a temporary price may contribute to fixed costs with idle capacity, but continuation needs resource coverage and a sustainable return. Product stages are introduction, growth, maturity and decline. Skimming may fit a differentiated product with less-sensitive early demand; penetration needs a case about scale and competition. Do not assume one strategy fits every stage. (OpenStax Marketing 9.3;12.3;Chapter 12 Summary)

Common mistakes in this chapter

• ✕ Confusing revenue with contribution or net profit.
• ✕ Confusing a virtual bundle with physical unit count or revenue weights.
• ✕ Failing to gross up an after-tax profit target.
• ✕ Treating DOL as constant at every volume, even beyond capacity.
• ✕ Charging a decision with a sunk or unchanged common cost.
• ✕ Treating salary as avoidable when the employee is reassigned at the same pay.
• ✕ Choosing highest contribution per product rather than per scarce resource.
• ✕ Omitting forgone contribution or counting it twice.
• ✕ Comparing a supplier price with full cost including continuing allocations.
• ✕ Treating any revenue increase as sufficient reason for further processing.
• ✕ Applying a sales-margin percentage as if it were cost markup.
• ✕ Starting target costing with current cost and imposing its price on the market.
• ✕ Confusing elasticity’s sign with magnitude, or maximum revenue with maximum profit.
• ✕ Ignoring competitors’ responses or price effects on demand.