IIA IIA Certifications IIA-CIA-PART4 Questions & Answers

• Question 201:

  A manufacturing company produces plastic utensils for a particular segment at the lowest possible cost. The company is pursuing a cost:

  A. Leadership strategy.

  B. Focus strategy.

  C. Differentiation strategy.

  D. Containment strategy.

  Correct Answer: B

  A cost focus strategy aims at cost leadership in a particular segment, such as a regional market or a specialty product line. The rationale for a focus strategy is that the narrower market can be better served.

• Question 202:

  If the price elasticity of demand for a normal good is estimated to be 2.5, a 5% reduction in its price causes:

  A. Total revenue to fall by 5%.

  B. Total revenue to fall by 12.5%.

  C. Quantity demanded to rise by 12.5%.

  D. Quantity demanded to decrease by 5%.

  Correct Answer: C

  Price elasticity is the percentage change in quantity demanded divided by the percentage change in price. An elasticity of 2.5 means that the change in demand will increase by 250% of any change in price measured in absolute terms (the minus sign is ignored). Hence, a 5% price reduction increases demand by 12.5% (2.5 5%).

• Question 203:

  If the demand for a product is inelastic,

  A. A price decrease causes total revenue to increase.

  B. A price increase causes total revenue to increase.

  C. A price decrease leaves total revenue unchanged.

  D. A price increase leaves total revenue unchanged.

  Correct Answer: B

  If the demand for a product is inelastic, the coefficient of price elasticity of demand (percentage change in quantity demanded - percentage change in price) is less than 1.0. The relationship between price changes and total revenue (TR) changes is TR = price x quantity. The result is that a price increase causes total revenue to increase.

• Question 204:

  Rivalry among existing firms in an industry is more likely to be strong when:

  A. The industry is in the rapid growth stage.

  B. Investment intensity is low.

  C. A few firms are dominant.

  D. Capacity must be expanded in large increments.

  Correct Answer: D

  The intensity of rivalry and the threat of entry may vary with the extent of capacity expansion dictated by the need to achieve economics of scale. If it must be made in large increments to achieve economics of scale, competition will be more intense. The need for large-scale expansion to achieve production efficiency may result in an excess of industry capacity over demand. However, if capacity may be expanded in small increments, industry capacity is less likely to be excessive, the supply-demand balance is less likely to be upset, and price cutting is less likely to be necessary.

• Question 205:

  Which factor increases the threat of entry into an industry?

  A. Economies of scale are significant.

  B. Capital requirements are high.

  C. An industry leader may retaliate against a new entrant.

  D. Exit barriers are low.

  Correct Answer: D

  The most favorable condition for the attractiveness of an industry is the existence of high entry barriers and low exit barriers. When the threat of new entrants is minimal and exit is not difficult, returns are high, and risk is reduced in the event of poor performance. Low entry barriers keep long-term profitability low because new firms can enter the industry, increasing competition and lowering prices and the market shares of existing firms. Exit barriers are reasons for a firm to remain in an industry despite poor (or negative) profits.

• Question 206:

  Michael E Porter's competitive strategies model includes an analysis of the competitive forces that determine the attractiveness of an industry. These forces include:

  I. The stage of the industry life cycle

  II. Threats of, and barriers to, entry

  III. Threat of substitutes

  IV.

  The threat of suppliers' bargaining power

  A.

  I and II only.

  B.

  I and Ill only.

  C.

  II, Ill, and IV only.

  D.

  I, II, Ill, and IV.

  Correct Answer:

  Michael E. Porter, a leader in the field of strategic management, has developed a comprehensive model of the structure of industries and competition. One feature is his analysis of the five competitive forces that determine long-term

  profitability measured by long-term return on investment. This analysis determines the attractiveness of an industry.

  The five forces are (1) the degree of rivalry among existing firms; (2) threats of, and barriers to, entry; (3) the threat of substitute products or services; (4) the threat of buyers' bargaining power; and (5) the threat of suppliers' bargaining power.

• Question 207:

  X and Y are substitute products. If the price of product Y increases, the immediate impact on product Xis that its:

  A. Price will increase.

  B. Quantity demanded will increase.

  C. Quantity supplied will increase.

  D. Price, quantity demanded, and supplies will increase.

  Correct Answer: B

  By definition, if two goods are substitutes, the price of one and the demand for the other are directly related. For example, if the price of Y increases, the quantity demanded of X will increase.

• Question 208:

  Which basic force(s) drive(s) industry competition and the ultimate profit potential of the industry?

  I. Threat of new entrants

  II. Bargaining power of suppliers

  III. Favorable access to raw materials and labor

  IV.

  Product differentiation

  A.

  I only.

  B.

  I and II only.

  C.

  Ill and IV.

  D.

  I, II, III, and IV.

  Correct Answer: B

  Threat of new entrants and bargaining power of suppliers are among the five basic forces that drive industry competition and the ultimate profit potential in the industry. This potential is measured in terms of long-term return on invested capital. The other three forces are rivalry among existing firms, threat of substitutes, and threat of buyers' bargaining power.

• Question 209:

  Which of the following is a favorable condition for a firm competing in a profitable, expanding industry?

  A. The firm does not have a strong customer base.

  B. A few suppliers who can restrict supply.

  C. Competitors find it difficult to acquire the firm's customers.

  D. The firm has high costs relative to other firms in the industry.

  Correct Answer: C

  A firm that has successfully differentiated its products through developing a desirable image, better services, cost leadership, the features of the product, or other means is in a favorable competitive position. Competitors find it difficult to acquire the firm's customers, for example, by price cutting. The reason is that the firm's products are perceived to have few substitutes, and brand loyalty is high. Furthermore, barriers to entry are favorable to the firm. These barriers deter competitors from entering the market. Existing firms can increase market share and emphasize cutting costs and increasing value.

• Question 210:

  Which factor most likely encourages entry into an existing market?

  A. Governmental subsidies for new investors.

  B. High product differentiation, principally produced by trademarks.

  C. Knowledge of the industry, with high investments in development. D Low fixed exit costs.

  Correct Answer: A

  Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify competition. Government policy also may affect competition via regulations that encourage or discourage substitutes or affect costs, that govern competitive behavior, or that limit growth. Government also may be a buyer or supplier.