Exam 18: Profitability Analysis

Macha Corporation has four different 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. 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?

Relative profitability measures should only be used when:

Wang Corporation would like to determine the relative profitability of a number of jobs. For example, the revenue from Job Q86D is $105,300 and its avoidable costs amount to $63,180, resulting in an incremental profit of $42,120. Furthermore, the job requires 270 hours of the constrained resource. What is the profitability index for job Q86D?

Hofbauer Corporation's two products have the following characteristics: The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product M73O requires 6 minutes on this machine and each unit of product M26B requires 8 minutes on this machine. -What is the maximum contribution margin the company can earn per month?

In the absence of a constraint, all business segments that are relatively profitable should be retained.

The management of Cerruto Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 9,600 minutes each month. -How many units of product U87D should be produced each month?

The constrained resource at Schiller 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 F57 requires 15 ounces of the constrained resource; product I66 requires 5 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?

When long-term investment funds are the constraint and the company is choosing from among potential long-term projects, the profitability index should be computed by dividing the total expected revenues from the project by the amount of long-term investment funds required by the project.

Blomstrom Products Inc. makes two products-N81W and V55S. Product N81W's selling price is $20.00 and its unit variable cost is $12.00. Product V55S's selling price is $108.00 and its unit variable cost is $97.20. The monthly demand is 3,940 units for product N81W and 1,140 units for V55S. The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product N81W requires 2 minutes on this machine and each unit of product V55S requires 6 minutes on this machine. -What is the maximum contribution margin the company can earn per month?

Vanstraten Corporation has provided the following data concerning its two products: The profitability index for product Z63Z is closest to:

Ryce Corporation is about to announce a new product, C72, whose variable cost is $118.70 per unit and that would require 9.40 grams of a raw material that is the constrained resource in the company. The opportunity cost to use this constrained resource is $60.00 per gram. What is the minimum acceptable selling price for the new product?

The management of Radke Corporation has provided the following data concerning its two products-F74 and E50: The constrained resource is a particular machine that is available for 10,200 minutes each month. Each unit of product F74 requires 7 minutes on this machine. Each unit of product E50 requires 16 minutes on this machine. -The company is considering launching a new product that would have a variable cost of $90.00 per unit. It would require 16 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

Lilienthal Products Inc. makes two products-M38O and E34G. Product M38O's selling price is $145.00 and its unit variable cost is $87.00. Product E34G's selling price is $300.00 and its unit variable cost is $210.00. The monthly demand is 1,590 units for product M38O and 640 units for E34G. The constrained resource is a particular machine that is available for 10,100 minutes each month. Each unit of product M38O requires 5 minutes on this machine and each unit of product E34G requires 10 minutes on this machine. -What is the maximum contribution margin the company can earn per month?

The same constrained resource is used by four different products at Porraz Corporation. Data concerning those products appear below: The company does not have enough of the constrained resource to satisfy for demand of all four products. -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?

Foshie Corporation is about to launch a new product, H16, whose variable cost is $104.30 per unit and that would require 6.00 centiliters of a key raw material that is the company's constrained resource. The opportunity cost of this raw material is $54.00 per centiliter used. Required: What advice would you give to the company concerning the price that should be charged for the new product H16?

Mcbee Products Inc. makes two products-C38S and V81Z. Product C38S's selling price is $91.00 and its unit variable cost is $72.80. Product V81Z's selling price is $200.00 and its unit variable cost is $180.00. The monthly demand is 890 units for product C38S and 680 units for V81Z. The constrained resource is a particular machine that is available for 10,000 minutes each month. Each unit of product C38S requires 7 minutes on this machine and each unit of product V81Z requires 10 minutes on this machine. -The company is considering launching a new product that would have a variable cost of $191.00 per unit and no avoidable fixed costs. It would require 4 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

Rognstad Corporation would like to determine the relative profitability of a number of jobs. For illustration purposes, the company has provided the following data for job M38S: What is the profitability index for job M38S?

Leeth Corporation is considering the following six long-term projects: Only $50,100 is available for investment in these projects. Required: a. Determine which projects should be accepted. b. Determine the total net present value of all of the accepted projects if your plan from part (a) above is adopted.

If a company is considering accepting a number of jobs, but there is insufficient production capacity to do all of them, then the profitability index can be used to rank the jobs and decide which should be accepted.

Lilienthal Products Inc. makes two products-M38O and E34G. Product M38O's selling price is $145.00 and its unit variable cost is $87.00. Product E34G's selling price is $300.00 and its unit variable cost is $210.00. The monthly demand is 1,590 units for product M38O and 640 units for E34G. The constrained resource is a particular machine that is available for 10,100 minutes each month. Each unit of product M38O requires 5 minutes on this machine and each unit of product E34G requires 10 minutes on this machine. -How many units of product E34G should be produced each month?