CFA Practice Question

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CFA Practice Question

Desert Corporation spent $320,000 on a significant amount of raw materials inventory for a new product that it was manufacturing. The raw material was the only material the new product needed. Later on, the corporation used all the raw materials and sold the new product for $800,000. It paid a total of $180,000 to its engineers, workers, and sales agents as their salaries, wages and commissions. Then it paid $120,000 rent and $30,000 interest on borrowed funds for this project. The net profit was $100,000 after tax ($50,000). This was the only project the company took during the year. How much did Desert Corporation added to GDP?
A. $800,000, since this was the final product's price.
B. $700,000, since this was the company's total cost (including tax) before net profit ($100,000).
C. $480,000, since this was the net price difference between the raw material and final products.
Explanation: By purchasing the raw material for $320,000 and selling the final product for $800,000, Desert Corporation added a value of $480,000 (the income created at a stage of production). It is the difference between the firm's revenue and the value of its purchases of resources from other firms.

User Contributed Comments 6

User Comment
alki good q
MikeRuz only net added value is going to GDP
Profache GDP calculation using the value added approach
farhan92 hmm so if bob sold the raw materials to desert corp he would add 320,000 to GDP?
GBolt93 damn, was thinking of how much did overall GDP increase not how much directly from Desert Corporation.
shneerson I guess the key bit is "How much did Desert Corp add to GDP", telling us it's the value-add approach that is needed
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