Certified Supply Chain Professional (CSCP) Practice Exam

Reducing elements in COGS can lead to what effect on profit?

1. Decrease in profit

2. No change to profit

3. Increase in profit

4. Unpredictable profit changes

The correct answer is: Increase in profit

Reducing elements in the Cost of Goods Sold (COGS) directly impacts the profitability of a business. COGS reflects the direct costs attributable to the production of the goods sold by a company. This includes costs for materials, labor, and overhead associated with manufacturing. When elements of COGS are reduced, it means that the company is spending less on producing or acquiring its products. Since profit is calculated as revenue minus expenses, if the expense represented by COGS decreases while revenue remains stable or increases, the overall profit will increase. Therefore, a reduction in COGS leads to an improved bottom line, as the company retains more of its revenue after covering the costs associated with producing goods. In practice, companies often seek ways to optimize their supply chain and production processes to lower COGS, which can enhance profitability.