Certified Supply Chain Professional (CSCP) Practice Exam

Which of the following statements regarding profit is true?

1. High profit margins are solely derived from sales

2. Reducing COGS can enhance profit levels

3. Profit is irrelevant to inventory management

4. Profit only depends on revenue generation, not costs

The correct answer is: Reducing COGS can enhance profit levels

The statement that reducing the Cost of Goods Sold (COGS) can enhance profit levels is accurate because profit is calculated by subtracting total costs from total revenues. When COGS is lowered, this directly reduces the total costs associated with generating sales, thereby resulting in a higher profit margin if revenues remain constant or increase. For example, a company may implement strategies such as negotiating better pricing with suppliers, improving production efficiency, or reducing waste in the manufacturing process. These actions can lower COGS, allowing the company to either maintain pricing levels while enjoying higher profits or possibly reduce prices to increase market share while still achieving profit gains. The incorrect choices reflect misunderstandings about profit. High profit margins come not only from sales volume but also from managing costs effectively, so attributing them solely to sales overlooks essential aspects of costing. Similarly, profit does have significant relevance to inventory management because efficient inventory practices can help reduce COGS and connect directly to profitability. Concerning the relationship between profit and cost, profit depends on both revenue generation and managing costs effectively; thus, focusing solely on revenue without considering costs does not capture the complete profit picture.