Certified Financial Management Specialist Practice Exam

In financial analysis, economic profitability focuses on which of the following?

1. Tax benefits

2. Overall revenue

3. Opportunity costs

4. Market share

The correct answer is: Opportunity costs

Economic profitability is primarily concerned with the concept of opportunity costs, which represent the potential benefits that one could have achieved by choosing an alternative course of action. When assessing economic profitability, analysts look beyond just the accounting profits to consider the true economic advantage a decision brings when the best alternative use of resources is taken into account. This includes the costs of foregone alternatives, which provides a clearer picture of a project's effectiveness and overall financial health. Tax benefits, overall revenue, and market share do contribute to financial analysis but do not capture the full essence of opportunity costs in the context of economic profitability. While tax benefits can enhance profitability, they don't reflect the broader economic perspective. Similarly, overall revenue and market share may indicate success but do not take into consideration the costs associated with not pursuing the next best option. Understanding economic profitability through the lens of opportunity costs allows businesses to make more informed and strategic financial decisions.