Exam 21: Profitability Analysis

A catering service has contracts with a number of customers to supply lunches on a daily basis. The chef has complained of the long hours she must work to prepare all of these lunches and has threatened to quit. It would be very difficult, if not impossible, to replace the chef. To reduce the pressure on the chef, some contracts may have to be cancelled. (The catering service can cancel any contract with seven days notice.) To help make this decision, the profitability of each customer should be measured by dividing the daily incremental profit from serving each customer by the amount of the time it takes the chef each day to prepare the customer's meals.

From the standpoint of the entire company, if it is a choice between sales of one unit of one product versus another, which product should the salespersons emphasize?

The constrained resource at Calabria Corporation is a key raw material. A total of 9,900 ounces of the constrained resource are available. Data concerning the company's two products follow: Product S28 requires 2 ounces of the constrained resource; product M16 requires 13 ounces. Required: a. Which product is most profitable, given the company's constraint? b. How much of each product should be produced? c. What is the total contribution margin if your plan in part (b) above is followed?

Relative profitability should be measured by dividing the segment's market share by the amount of the constrained resource it requires.

Vanscoter Corporation has designed a new product, R83, whose variable cost is $86.60 per unit and that requires 3.10 minutes of the constrained resource. The opportunity cost is $38.00 per minute used of the constrained resource. What is the minimum acceptable selling price for the new product?

Sullen Corporation would like to determine the relative profitability of a number of jobs. For example, the revenue from Job M02P is $86,800 and its avoidable costs amount to $60,760, resulting in an incremental profit of $26,040. Furthermore, the job requires 280 hours of the constrained resource. What is the profitability index for job M02P?

What is the maximum contribution margin the company can earn per month?

Coltey Corporation has four products that use the same constrained resource. Data concerning those products appear below: The company does not have enough of the constrained resource to satisfy for demand of all four products. Required: a. If salespersons are paid commissions that are a set percentage of sales, which product would they prefer to sell? In other words, if it is a choice between selling one unit of one product and one unit of another, which product would they prefer to sell? b. From the standpoint of the entire company, if it is a choice between sales of one unit of one product versus another, which product should the salespersons emphasize?

The company is considering launching a new product that would have a variable cost of $160.00 per unit and no avoidable fixed costs. It would require 18 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

If salespersons are paid commissions that are a set percentage of sales, which product would they prefer to sell? In other words, if it is a choice between selling one unit of one product and one unit of another, which product would they prefer to sell?

The profitability index for a volume trade-off decision involving products should be computed by dividing the fully allocated cost of a product by the amount of the constrained resource required by one unit of the product.

The company is considering launching a new product that would have a variable cost of $51.00 per unit. It would require 14 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

The company is considering launching a new product that would have a variable cost of $158.00 per unit and no avoidable fixed costs. It would require 9 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

How many units of product U29D should be produced each month?

Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?

How many units of product H08L should be produced each month?

Absolute profitability is concerned with the impact on an organization's overall profits of adding or dropping a particular segment-without making any other changes.

What is the maximum contribution margin the company can earn per month?

The constraint at Frayer Inc. is a key raw material. A total of 9,700 ounces of this constrained resource are available. Data concerning the company's two products, Z78 and D87, appear below: Each unit of product Z78 requires 5 ounces of the constrained raw material; each unit of product D87 requires 2 ounces. Required: a. In the present circumstances, which product is most profitable? b. How much of each product should be produced? c. The company is considering launching a new product whose variable cost is $157 and that requires 26 ounces of the constrained resource. What is the minimum acceptable selling price for the new product?

Fanion Corporation has two products, A33 and U39, that use the same constrained resource-a critical raw material. Data concerning those products follow: The total amount of the constrained resource available is 10,100 grams. Required: a. Which product is most profitable, given the company's constraint? b. How much of each product should be produced? c. What is the total contribution margin if your plan in part (b) above is followed?