Deck 21: Profitability Analysis

Question 1

Relative profitability measures should be used only when the company is not faced with a constraint.

Answer 1

False

Question 2

Lachapelle Corporation would like to determine the relative profitability of the company's products for purposes of making volume trade-off decisions. The company has provided the following data for product A97B: What is the profitability index for product A97B?

A)$8.10 per minute
B)$1,270,080
C)0.30
D)$27.00 per minute

Answer 2

A

Question 3

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.

Answer 3

False

Question 4

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

Question 5

A company that makes horsehair cowboy belts cannot meet the demand for belts due to a limited supply of artisans who know how to make the belts. To determine which models of the cowboy belts should be emphasized, the company should rank the models by the amount of time an artisan requires to make the model.

Question 6

Ockerman Corporation would like to determine the relative profitability of the company's products for purposes of making volume trade-off decisions. For example, the selling price of product A31N is $144.00 and its unit variable cost is $115.20. One unit of the product requires 6 ounces of the constrained resource. Monthly sales are 5,700 units. What is the profitability index for product A31N?

A)$24.00 per ounce
B)$164,160
C)0.20
D)$4.80 per ounce

Question 7

Heilmann Corporation would like to determine the relative profitability of a number of jobs. For example, job S96T has revenues of $68,000 and avoidable costs of $54,400, resulting in an incremental profit of $13,600. The job requires 170 hours of the constrained resource. The job is responsible for 10% of the company's total profit for the period. What is the profitability index for job S96T?

A)0.20
B)$400 per hour
C)$80 per hour
D)0.10

Question 8

To encourage salespersons to sell the most profitable products, they should be paid sales commissions as straight percentage of the selling price of each product.

Question 9

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.

Question 10

Omoyosi 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 V66L: What is the profitability index for job V66L?

A)0.30
B)$111 per hour
C)$370 per hour
D)$259 per hour

Question 11

Beatie Corporation would like to determine the relative profitability of the company's products for purposes of making volume trade-off decisions. For illustration, the company has provided the following data for product K56L: What is the profitability index for product K56L?

A)0.40
B)$28.00 per gram
C)$11.20 per gram
D)$1,256,640

Question 12

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 expected market share of the project by the amount of long-term investment funds required by the project.

Question 13

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?

A)0.30
B)$310 per hour
C)$93 per hour
D)$217 per hour

Question 14

The opportunity cost of using one unit of the constrained resource in a volume trade-off decision is equal to:

A)the profitability index for the company's most profitable existing product.
B)the profitability index for the company's least profitable product-even if none of the product is currently being made.
C)the profitability index for the product whose production would be cut back if necessary.
D)the profitability index of the product with the greatest sales.

Question 15

When a company has a production constraint, the opportunity cost of using the constrained resource can be determined by multiplying the amount of the constrained resource used by the opportunity cost per unit of the constrained resource.

Question 16

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.

Question 17

Bruck 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 D25Y: What is the profitability index for job D25Y?

A)$108 per hour
B)0.20
C)$540 per hour
D)0.28

Question 18

Armster Corporation has provided the following data concerning its two products: The profitability index for product B10E is closest to:

A)0.61
B)$12.40 per ounce
C)0.40
D)$31.00 per ounce

Question 19

If sales revenues are used in the denominator in the profitability index for a product then:

A)the company has no constraint.
B)total sales should be the company's constraint.
C)the selling price of the product in question is the company's constraint.
D)selling effort should be the company's constraint.

Question 20

Esquerra Corporation has provided the following data concerning its two products-T85 and G34: The total amount of the constrained resource available each month is 146,300 grams. Each unit of product T85 requires 19 grams of the constrained resource and each unit of product G34 requires 11 grams. What is the maximum contribution margin the company can earn per month?

A)$1,337,600
B)$1,145,320
C)$1,178,760
D)$1,170,400

Question 21

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

A)$110,736
B)$75,744
C)$83,222
D)$90,000

Question 22

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?

A)$117.80
B)$124.60
C)$86.60
D)$204.40

Question 23

The same constrained resource is used by four different products at Swaim 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. 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?

A)P400
B)P300
C)P100
D)P200

Question 24

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:

A)$160.00
B)$168.10
C)$343.60
D)$305.80

Question 25

How many units of product L33Y should be produced each month?

A)0
B)2,868
C)712
D)1,500

Question 26

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?

A)$22.00 per minute
B)$2.20 per minute
C)$17.60 per minute
D)$8.80 per minute

Question 27

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

A)$64,536
B)$41,464
C)$37,560
D)$45,428

Question 28

Tork Corporation is about to announce a new product, J82, whose variable cost is $113.70 per unit and that would require 6.40 grams of a raw material that is the constrained resource in the company. The opportunity cost to use this constrained resource is $43.00 per gram. What is the minimum acceptable selling price for the new product?

A)$156.70
B)$275.20
C)$388.90
D)$113.70

Question 29

The company is considering launching a new product that would have a variable cost of $181.00 per unit. It would require 14 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$206.20
B)$181.00
C)$182.50
D)$202.00

Question 30

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

A)$17,280
B)$15,600
C)$20,520
D)$16,632

Question 31

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:

A)$51.00
B)$54.40
C)$118.20
D)$98.60

Question 32

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?

A)$54.00 per minute
B)$6.40 per minute
C)$10.80 per minute
D)$57.60 per minute

Question 33

How many units of product A19D should be produced each month?

A)760
B)0
C)1,449
D)400

Question 34

How many units of product I90J should be produced each month?

A)1,460
B)0
C)760
D)280

Question 35

The company is considering launching a new product that would have a variable cost of $53.00 per unit. It would require 4 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$59.40
B)$53.00
C)$96.20
D)$78.60

Question 36

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?

A)$19.20 per minute
B)$6.40 per minute
C)$25.50 per minute
D)$5.10 per minute

Question 37

Efford Corporation would like to determine the relative profitability of the company's products for purposes of making volume trade-off decisions. For example, the selling price of product I14H is $36.00, its unit variable cost is $28.80, and its unit contribution margin is $7.20. One unit of the product requires 6 minutes of the constrained resource. Monthly sales are 1,700 units. What is the profitability index for product I14H?

A)$1.20 per minute
B)$6.00 per minute
C)0.20
D)$12,240

Question 38

Saska 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?

A)B100
B)B300
C)B200
D)B400

Question 39

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

A)$85,188
B)$95,940
C)$90,571
D)$137,412

Question 40

Heiskell Corporation has provided the following data concerning its two products: The profitability index for product F78P is closest to:

A)0.74
B)0.30
C)$6.00 per gram
D)0.59

Question 41

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?

A)X300
B)X400
C)X100
D)X200

Question 42

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

A)$27,722
B)$26,195
C)$37,619
D)$29,408

Question 43

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

A)$97,257
B)$142,203
C)$97,935
D)$96,507

Question 44

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?

A)P300
B)P200
C)P100
D)P400

Question 45

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

A)$35,680
B)$34,396
C)$33,000
D)$52,296

Question 46

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?

A)P200
B)P300
C)P100
D)P400

Question 47

The company is considering launching a new product that would have a variable cost of $169.00 per unit and no avoidable fixed costs. It would require 15 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$169.00
B)$211.00
C)$171.80
D)$277.00

Question 48

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

A)$60,720
B)$72,816
C)$41,712
D)$50,695

Question 49

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

A)510
B)979
C)0
D)175

Question 50

How many units of product H98V should be produced each month?

A)0
B)831
C)170
D)440

Question 51

How many units of product E01W should be produced each month?

A)450
B)2,151
C)0
D)1,130

Question 52

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?

A)$44.80 per minute
B)$14.40 per minute
C)$7.20 per minute
D)$2.80 per minute

Question 53

How many units of product O85D should be produced each month?

A)0
B)820
C)1,768
D)265

Question 54

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?

A)X400
B)X100
C)X300
D)X200

Question 55

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:

A)$178.70
B)$158.00
C)$160.30
D)$186.80

Question 56

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?

A)$1.30 per minute
B)$10.00 per minute
C)$2.50 per minute
D)$23.40 per minute

Question 57

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

A)$22,568
B)$25,676
C)$24,010
D)$35,000

Question 58

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

A)889
B)0
C)150
D)420

Question 59

How many units of product K36L should be produced each month?

A)192
B)430
C)905
D)0

Question 60

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?

A)$3.20 per minute
B)$25.60 per minute
C)$2.30 per minute
D)$34.50 per minute

Question 61

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?

Question 62

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?

Question 63

Kleppe Corporation has two products that use the same constrained resource-a critical raw material. The total amount of the constrained resource available is 10,000 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 $106 and that requires 7 grams of the constrained resource. What is the minimum selling price for the new product?

Question 64

Reddinger Corporation is about to launch a new product, Z49, whose variable cost is $143.70 per unit and that would require 5.80 centiliters of a key raw material that is the company's constrained resource. The opportunity cost of this raw material is $69.00 per centiliter used.
Required:
What advice would you give to the company concerning the price that should be charged for the new product Z49?

Question 65

Tuell 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. The managing partner's time is the constraint in the firm. Only 113 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.

Question 66

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?

Question 67

The management of Kezar 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: 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?

Question 68

Wholey Corporation has designed a new product, I00, whose variable cost is $139.70 per unit and that requires 7.90 minutes of the constrained resource. The opportunity cost is $51.00 per minute used of the constrained resource.
Required:
What advice would you give to the company concerning the price that should be charged for the new product I00?

Question 69

Huddleston Corporation is considering the following six long-term projects: Only $63,800 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.

Question 70

Halama Corporation is considering six jobs for the upcoming period. Those jobs are listed below, along with relevant data. The total amount of the constrained resource that is available during the upcoming period is 75 hours.
Required:
a. Determine which jobs 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.

Question 71

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?