CFA Practice Question

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CFA Practice Question

A company that employs a low-cost leadership strategy is associated with a ______.
A. high operating profit margin and high asset turnover
B. high operating profit margin and low asset turnover
C. low operating profit margin and high asset turnover
Explanation: A company that has a low-cost strategy generally tries to underprice competitors, resulting in a low margin. However, these companies attempt to make up for the low margin with a high volume of sales, which results in high asset turnover.

User Contributed Comments 6

User Comment
kalps Low cost providers: 1) Lower prfot margin 2) High asset turnover as T/O is generally higher due to its ompetitiveness
CoffeeGirl low cost strategy means underprice competitior, which lower the profit margin, and they will do it through high sales ( high product volume), which means higher asset turnover.
dimanyc Good question. Should've thought of Walmart!
serboc or Mcdonalds
gill15 Confused by this although I understand the logic.
Operating profit margin = R - COGS - Operating costs / R

It says higher profit margins are some combination of higher price and lower product costs. Which makes sense --- If you have low costs your COGS decreases and your operating profit margin increases...

farhan92 i went with A based on high op margin based on Gill's comment above. However, this was the wrong way to look at it because if the co tries undercutting competitors, the price will need to be low enough (in the short run) to price competitors out of the market. Therefore, margin wouldn't increase..
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