Strategic Management is the topic of Part 3 of the CMA® exam, which includes 110-multiple choice questions that a candidate must complete in three hours.
Similar to Parts 1 and 2, each question in Part 3 has four possible answer choices with only one correct answer. Questions are presented as either: (1) a complete sentence that concludes with a question mark; (2) an incomplete sentence, with the options representing conclusions to that sentence; (3) in the "except" or "not" format; or (4) in the "most/least/best" format.
To succeed on Part 3, a candidate needs expertise in areas such as strategic planning and marketing, corporate finance, and decision analysis. Questions on this part of the CMA exam cover the following topics:
Strategic Planning (15% of questions; Difficulty Level B**), including strategic and tactical planning, manufacturing paradigms, value chain analysis, benchmarking, and continuous improvement. Look for questions such as:
Antlers Inc. produces a single product that sells for $150 per unit. The product is processed through the Cutting and Finishing departments. Additional data for these departments are as follows:
| Cutting | Finishing |
Annual capacity (36,000 direct labor hours
available in each department) | 180,000 units | 135,000 units |
| Current production rate (annualized) | 108,000 units | 108,000 units |
| Fixed manufacturing overhead | $1,296,000 | $1,944,000 |
| Fixed selling and administrative expense | $864,000 | $1,296,000 |
| Direct materials cost per unit | $45 | $15 |
The current production rate is the budgeted rate for the entire year. Direct labor employees earn $20 per hour and the company has a "no layoff" policy in effect. What is the amount of the throughput contribution per unit as computed using the theory of constraints?
- $90.00
- $76.67
- $46.67
- $26.67
(The answer is "A." Sales revenue less direct materials for Cutting and Finishing departments: $150-($45+$15) = $90)
**Each topic is assigned a difficulty level of either A, B, or C. "A" level topics require the skills of knowledge and comprehension; "B" level topics require knowledge, comprehension, application, and analysis; "C" level topics require knowledge, comprehension, application, analysis, synthesis, and evaluation. Also, topics assigned "C" level may include "A," "B,' or "C" level questions, but a topic assigned "B" level will not include "C" level questions.
Strategic Marketing (15% of questions, Difficulty Level A), including the strategic role of marketing, market segmentation, managing products and services, pricing strategies, and distribution strategy. For example:
In marketing toothbrushes as its single product, Hollow Company uses one marketing mix, believing all toothbrush uses have similar needs. Such an approach to target marketing is called
- mass marketing.
- niche marketing.
- micromarketing.
- concentrated marketing.
(The answer is "A." Mass marketing is characterized by mass production, mass distribution, and mass promotion of a homogeneous product to all buyers.)
Corporate Finance (25% of questions, Difficulty Level B), including types and measures of risk, portfolio management, options and futures, factors influencing the optimum capital structure, cost of capital, dividend policy, and managing and financing working capital. Look for questions such as:
The Red Company has a revolving line of credit of $300,000 with a one-year maturity. The terms call for a 6% interest rate and a ½% commitment fee on the unused portion of the line of credit. The average loan balance during the year was $100,000. The annual cost of this financing arrangement is
- $6,000.
- $6,500.
- $7,000.
- $7,500.
(The answer is "C." Annual cost of the financing arrangement = Interest rate x Borrowed amount + (Credit line limit – Borrowed amount) x Commitment fee, which is (6% x $100,000) + [($300,000-$100,000) x ½%] = $7,000)
Decision Analysis (25% of questions, Difficulty Level C), including relevant data concepts, cost-based pricing, marginal analysis, cost-volume-profit analysis, and income tax implications for operational decision analysis. For example:
Romashka Inc. plans on introducing a new product. The marketing manager forecasts a unit selling price of $500. The variable cost per unit is estimated to be $100 per unit. In addition, there is a total of $110,000 fixed indirect manufacturing cost and $150,000 in fixed operating costs associated with these units.
What quantity will the company have to sell to break even?
- 220 units.
- 275 units.
- 520 units.
- 650 units.
(The answer is "D." Break even point = Fixed costs / Contribution margin = ($260,000)/($500-$100) = 650 units.)
Investment Decision Analysis (20% of questions, Difficulty Level C), including cash flow estimates, time value of money, internal rate of return, risk analysis, non-discounting analysis techniques, and income tax implications for investment decisions. For example:
Wilkinson Inc, which has a cost of capital of 12%, invested in a project with an internal rate of return (IRR) of 14%. The project is expected to have a useful life of four years and it will produce net cash inflows as follows:
|
| Year | Net Cash Inflows |
| 1 | $1,000 |
| 2 | $2,000 |
| 3 | $4,000 |
| 4 | $4,000 |
The initial cost of this project amounted to |
| a.$9,647. |
| b. $7,483. |
| c. $11,000. |
| d. $12,540. |
(The answer is "B." By definition, IRR is the rate of return where the initial investment (the present value of cash outflows) equals the present value of cash inflows over the useful life of an asset. Initial investment = (1,000 x 0.877) + (2,000 x 0.769) + (4,000 x 0.675) + (4,000 x 0.592) = $7,483.)
Study Tip: Advice on Changing Answers
One of the greatest myths about taking tests is that you should not change your answer on an objective examination, because the first answer that you come up with is usually correct. In fact, the admonition to stick with your original answer because you should trust your initial instincts is a misguided one.
Numerous studies have shown that, on average, when candidates change their responses to a test question, about 55% of the time the change is made from a wrong answer to a right one, thereby resulting in an increased score. Another 23% of the time, examinees will change their responses from a wrong answer to another wrong answer, resulting in no change to their scores. Only about 20% of the time will candidates change from a right answer to a wrong answer.
The net net? If you have good reason to believe that changing your answer is warranted, making such a change will more often than not lead to either a better score or, at worst, no change to your total score. The chances of negatively affecting your total score by making such changes are only likely to be one in five.
To learn more about the content of the CMA exam, visit the following links: CMA Exam Content Specifications and CMA Exam Learning Outcome Statements
In the next issue: The CMA Exam Process: What Can I Expect?
