Exam 2: Profitability Analysis

The constrained resource at Nealen Corporation is a key raw material. A total of 9,800 ounces of the constrained resource are available. Data concerning the company's two products, B08 and O05, follow: B08 O05 Demand (units) 1,040 1,550 Selling price \ 102.00 \ 124.00 Variable cost \ 61.20 \ 86.80 Product B08 requires 6 ounces of the constrained resource; product O05 requires 4 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?

Absolute profitability refers to the process of deciding which products to drop when a constraint forces trade-offs.

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 absolute profitability of a business segment is determined by:

The profitability index in a volume trade-off decision should be computed by:

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

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

Redshaw Corporation has provided the following data concerning its two products: N43J I39F Selling price \ 288.00 \ 105.00 Unit variable cost. \ 172.80 \ 94.50 Amount of the constrained resource required for one unit of the product (ounces) 16 15 Monthly unit demand 5,100 8,400 The profitability index for product N43J is closest to:

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 amount the customer is charged by the amount of the time it takes the chef to prepare the customer's meals.

The absolute profitability of a segment is measured by subtracting the segment's avoidable costs from its revenues.

Francke Corporation would like to determine the relative profitability of a number of jobs. For example, job H29O has revenues of $86,400 and avoidable costs of $69,120, resulting in an incremental profit of $17,280. The job requires 160 hours of the constrained resource. The job is responsible for 13% of the company's total profit for the period. What is the profitability index for job H29O?

The company is considering launching a new product that would have a variable cost of $168.00 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:

Hoop Corporation has four different products that use the same constrained resource. Data concerning those products appear below: 100 200 300 400 Unit selling price \ 35.50 \ 29.10 \ 14.70 \ 36.20 Unit variable cost \ 15.30 \ 7.60 \ 3.80 \ 23.20 Amount of the constrained resource required. 0.46 0.34 0.25 0.51 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?

The company is considering launching a new product that would have a variable cost of $88.00 per unit. It would require 11 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

Tansley Corporation has two products that use the same constrained resource--a critical raw material. B99 V94 Selling price \ 322.00 \ 152.00 Variable cost \ 257.60 \ 106.40 Constrained resource required per unit (grams) 14 8 Demand (units) 460 890 The total amount of the constrained resource available is 9,500 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? d. The company is considering launching a new product whose variable cost is $167 and that requires 16 grams of the constrained resource. What is the minimum selling price for the new product?

Jendro LLC is a consulting firm that is considering six projects for the upcoming period. The six projects under consideration are listed below, along with relevant data. Amount of Constrained Incremental Profit Resource Required (hours) Project 1 \ 4,654 13 Project 2 \ 7,110 18 Project 3 \ 8,814 26 Project 4 \ 4,997 19 Project 5 \ 7,750 31 Project 6 \ 6,030 30 The managing partner's time is the constraint in the firm. Only 76 hours of this constrained resource are available during the upcoming period. Required: a. Determine which projects should be accepted for the upcoming period. b. Determine the total incremental profit for the upcoming period if your plan from part (a) above is adopted.

Hamelinck Corporation would like to determine the relative profitability of a number of jobs. For example, the revenue from Job W06Z is $77,000 and its avoidable costs amount to $69,300, resulting in an incremental profit of $7,700. Furthermore, the job requires 220 hours of the constrained resource. What is the profitability index for job W06Z?

The management of Lantieri Corporation is reviewing its policies concerning compensation of salespersons. The company has four products that use the same constrained resource. Data concerning those products appear below: R100 R200 R300 R400 Unit selling price. \ 36.40 \ 20.20 \ 12.40 \ 36.70 Unit variable cost \ 17.10 \ 6.90 \ 2.70 \ 20.20 Amount of the constrained resource required. 0.43 0.35 0.23 0.58 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?

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

Garbarino 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 C54V: Revenue \7 2,500 Avoidable cost 58,000 Incremental profit \1 4,500 Amount of the constrained resource used by the job. 250 hours Percentage of the total company profit for the period from the job 30\% What is the profitability index for job C54V?