Deck 2: Profitability Analysis

Question 1

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

Answer 1

True

Question 2

When a company has a production constraint, the selling price of any new product should cover both its fully allocated cost--including common fixed costs--and the opportunity cost involved in using the constrained resource.

Answer 2

False

Question 3

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 cost per unit of the most profitable product.

Answer 3

False

Question 4

Dorich 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 P86M: $$\begin{array} { l r } \text { Revenue..................... } & \$ 98,600 \\\text { Avoidable cost ............. } & \underline { 69,020 } \\\text { Incremental profit....... } & \$ 29,580\end{array}$$ The amount of the constrained resource used by the job is 340 hours. What is the profitability index for job P86M?

A)$87 per hour
B)$290 per hour
C)$203 per hour
D)0.30

Question 5

The opportunity cost of using a unit of the constrained resource in a volume trade-off decision is determined by the profitability index of the product whose production would be cut back as a result of using the constrained resource.

Question 6

Relative profitability should be measured by dividing a segment's market share by its revenues.

Question 7

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 dividing the unit contribution of each model by the selling price of the model.

Question 8

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

Question 9

If a company is considering accepting a number of jobs, but there is insufficient production capacity to do all of them, then the jobs that require the greatest amount of the production capacity should be rejected.

Question 10

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?

A)$108 per hour
B)$540 per hour
C)0.13
D)0.20

Question 11

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: $\begin{array}{lr}\text {Revenue }&\$72,500\\\text {Avoidable cost }&58,000\\\text { Incremental profit}&\$14,500\\\\\text {Amount of the constrained resource used by the job. }&\text {250 hours }\\\text { Percentage of the total company profit for the period from the job}&30\%\\\end{array}$
What is the profitability index for job C54V?

A)$290 per hour
B)$58 per hour
C)0.30
D)0.20

Question 12

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.

Question 13

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?

A)$315 per hour
B)$35 per hour
C)$350 per hour
D)0.10

Question 14

The absolute profitability of a business segment is determined by:

A)subtracting the variable costs of the business segment from its revenue.
B)subtracting the avoidable costs of the business segment from its revenue.
C)subtracting the full costs, including allocations of common fixed costs, of the business segment from its revenue.
D)finding the larger of the segments full costs or its revenues.

Question 15

The profitability index is computed by dividing the incremental profit from a segment by the sales of the segment.

Question 16

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

Question 17

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

A)dividing each product's contribution margin by the amount of the constrained resource used by the product.
B)dividing each product's contribution margin by its selling price.
C)dividing each product's selling price by the amount of the constrained resource used by the product.
D)dividing each product's variable cost by its selling price.

Question 18

To encourage salespersons to sell the most profitable products, they should be paid sales commissions based on the profitability index and the amount of constraint time sold rather than on sales revenue.

Question 19

A portrait painter has been asked to do far more portraits in the next three months than she has time to paint during that time period. To rank the possible portraits in order of their profitability, she should divide each portrait's estimated incremental profit by the amount of time she estimates it will take to paint the portrait.

Question 20

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

Question 21

Dills Corporation has provided the following data concerning its two products--O24 and C50: $\begin{array}{lrr} & \text { O24 } &{\text { C50 }} \\\text { Monthly unit demand } & 1,500 & 7,300 \\\text { Selling price } & \$ 425.00 & \$ 130.00 \\\text { Unit variable cost } & \$ 297.50 & \$ 78.00\end{array}$ The total amount of the constrained resource available each month is 49,250 grams. Each unit of product O24 requires 17 grams of the constrained resource and each unit of product C50 requires 5 grams. What is the maximum contribution margin the company can earn per month?

A)$570,850
B)$475,225
C)$453,457
D)$438,250

Question 22

Ebright 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 H25Z is $50.00 and its unit variable cost is $30.00. One unit of the product requires 2 ounces of the constrained resource. Monthly sales are 6,300 units. What is the profitability index for product H25Z?

A)$126,000
B)$25.00 per ounce
C)0.40
D)$10.00 per ounce

Question 23

Reetz 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 A25H: $\begin{array}{lr}\text {Selling price }&\$ 58.00 \\\text {Variable cost per unit }&\$ 46.40 \\\text { Amount of the constrained resource required by one unit.}&\text {2 grams }\\\text {Monthly unit sales }&\text {4,100 units }\\\end{array}$
What is the profitability index for product A25H?

A)$47,560
B)$29.00 per gram
C)$5.80 per gram
D)0.20

Question 24

How many units of product O24M should be produced each month?

A)0
B)276
C)1,304
D)620

Question 25

Coviello 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 C98I is $368.00, its unit variable cost is $257.60, and its unit contribution margin is $110.40. One unit of the product requires 16 minutes of the constrained resource. Monthly sales are 4,400 units. What is the profitability index for product C98I?

A)0.30
B)$23.00 per minute
C)$485,760
D)$6.90 per minute

Question 26

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

A)$27,820
B)$30,376
C)$29,155
D)$41,452

Question 27

Nations Corporation has designed a new product, K48, whose variable cost is $56.70 per unit and that requires 3.10 minutes of the constrained resource. The opportunity cost is $39.00 per minute used of the constrained resource. What is the minimum acceptable selling price for the new product?

A)$177.60
B)$95.70
C)$56.70
D)$120.90

Question 28

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

A)$70,476
B)$108,108
C)$78,540
D)$74,890

Question 29

How many units of product L06K should be produced each month?

A)975
B)500
C)0
D)175

Question 30

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

A)0.87
B)0.40
C)$18.00 per ounce
D)$7.20 per ounce

Question 31

Hoop Corporation has four different products that use the same constrained resource. Data concerning those products appear below: $\begin{array}{lrrrr}&\mathrm{H} 100 & \mathrm{H} 200 & \mathrm{H} 300 & \mathrm{H} 400 \\\text { Unit selling price}&\$ 35.50 & \$ 29.10 & \$ 14.70 & \$ 36.20 \\\text {Unit variable cost }&\$ 15.30 & \$ 7.60 & \$ 3.80 & \$ 23.20 \\\text {Amount of the constrained resource required. }&0.46 & 0.34 & 0.25 & 0.51\end{array}$ 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)H100
B)H400
C)H300
D)H200

Question 32

The company is considering launching a new product that would have a variable cost of $134.00 per unit and no avoidable fixed costs. It would require 16 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$175.60
B)$185.20
C)$136.60
D)$134.00

Question 33

Hamed 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 U57S: $\begin{array}{lr}\text {Selling price }&\$ 28.00 \\\text {Variable cost per unit. }&16.80 \\\text {Unit contribution margin. }&\$ 11.20 \\\hline\text {Amount of the constrained resource used by the job }&&\text { 4 minutes }\\\text {Monthly unit sales. }&&\text {3,700 units }\end{array}$ What is the profitability index for product U57S?

A)$41,440
B)0.40
C)$7.00 per minute
D)$2.80 per minute

Question 34

The same constrained resource is used by four different products at Rodrigez Corporation. Data concerning those products appear below: $\begin{array}{lrrr}&Z 100 & Z 200 & Z 300 & Z 400 \\\text { Unit selling price }&\$ 31.80 & \$ 29.60 & \$ 15.90 & \$ 35.80 \\\text { Unit variable cost }&\$ 15.90 & \$ 6.80 & \$ 3.00 & \$ 24.30 \\\text { Amount of the constrained resource required. }&0.44 & 0.34 & 0.28 & 0.53\end{array}$ 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)Z300
B)Z400
C)Z200
D)Z100

Question 35

How many units of product G92X should be produced each month?

A)0
B)1,655
C)820
D)390

Question 36

Eon Corporation has provided the following data concerning its two products: $\begin{array}{lc}&\text { Z94K } & \text { R82C } \\\text {Selling price. }&\$ 63.00 & \$ 261.00 \\\text { Unit variable cost}&50.40 & 208.80 \\\text {Unit contribution margin. }& \$ 12.60 & \$ 52.20\\\\\text {amount of the constrained resource required for one }\\\text { unit of the constrained (grams)}&3&9\\\text {monthly unit demand }&2,100&4,300\end{array}$ The profitability index for product Z94K is closest to:

A)$4.20 per gram
B)0.19
C)0.11
D)0.20

Question 37

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

A)$28,908
B)$36,476
C)$25,124
D)$26,999

Question 38

How many units of product G16F should be produced each month?

A)570
B)250
C)1,041
D)0

Question 39

Titzer Corporation is about to announce a new product, C02, whose variable cost is $134.80 per unit and that would require 5.90 grams of a raw material that is the constrained resource in the company. The opportunity cost to use this constrained resource is $68.00 per gram. What is the minimum acceptable selling price for the new product?

A)$401.20
B)$134.80
C)$202.80
D)$536.00

Question 40

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

A)$43,872
B)$42,428
C)$57,632
D)$41,120

Question 41

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

A)$82,940
B)$76,920
C)$80,023
D)$103,408

Question 42

How many units of product T62D should be produced each month?

A)0
B)372
C)730
D)1,398

Question 43

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)$3.60 per minute
B)$38.00 per minute
C)$57.60 per minute
D)$3.80 per minute

Question 44

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)$52.80 per minute
B)$25.00 per minute
C)$3.30 per minute
D)$5.00 per minute

Question 45

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)$33.60 per minute
B)$3.00 per minute
C)$4.80 per minute
D)$57.00 per minute

Question 46

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

A)$94,088
B)$66,080
C)$67,547
D)$69,192

Question 47

How many units of product E25Y should be produced each month?

A)520
B)0
C)982
D)218

Question 48

The company is considering launching a new product that would have a variable cost of $178.00 per unit and no avoidable fixed costs. It would require 3 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$184.80
B)$204.40
C)$178.00
D)$198.40

Question 49

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)$20.40 per minute
B)$3.60 per minute
C)$54.00 per minute
D)$6.80 per minute

Question 50

The company is considering launching a new product that would have a variable cost of $119.00 per unit. It would require 17 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$119.00
B)$180.20
C)$122.60
D)$183.60

Question 51

The company is considering launching a new product that would have a variable cost of $55.00 per unit. It would require 5 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

A)$87.00
B)$61.40
C)$55.00
D)$91.00

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)$6.80 per minute
B)$95.20 per minute
C)$44.00 per minute
D)$8.80 per minute

Question 53

How many units of product B27D should be produced each month?

A)390
B)200
C)0
D)784

Question 54

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

A)$35,155
B)$46,404
C)$34,852
D)$35,460

Question 55

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)$3.80 per minute
B)$7.20 per minute
C)$38.00 per minute
D)$14.40 per minute

Question 56

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

A)$19,788
B)$18,770
C)$28,950
D)$19,249

Question 57

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:

A)$89.80
B)$107.80
C)$110.00
D)$88.00

Question 58

How many units of product R94X should be produced each month?

A)490
B)275
C)0
D)951

Question 59

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

A)$52,806
B)$36,788
C)$32,742
D)$40,266

Question 60

How many units of product J45Z should be produced each month?

A)390
B)0
C)170
D)725

Question 61

Duhe Corporation is considering the following six long-term projects: Only $59,100 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.

Question 62

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)I400
B)I300
C)I200
D)I100

Question 63

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:

A)$168.00
B)$171.00
C)$211.20
D)$195.00

Question 64

Reigel Corporation is about to launch a new product, I51, whose variable cost is $106.00 per unit and that would require 5.50 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 I51?

Question 65

The constraint at Mirsch Inc. is a key raw material. A total of 9,600 ounces of this constrained resource are available. Data concerning the company's two products, B01 and P46, appear below: Each unit of product B01 requires 9 ounces of the constrained raw material; each unit of product P46 requires 12 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 $210 and that requires 9 ounces of the constrained resource. What is the minimum acceptable selling price for the new product?

Question 66

Dimuzio Corporation has designed a new product, V06, whose variable cost is $145.30 per unit and that requires 5.00 minutes of the constrained resource. The opportunity cost is $70.00 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 V06?

Question 67

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: 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

Corner 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 91 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 69

Minaya Corporation has two products, M20 and Y53, that use the same constrained resource--a critical raw material. Data concerning those products follow: The total amount of the constrained resource available is 9,900 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 70

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)I200
B)I100
C)I300
D)I400

Question 71

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)I200
B)I100
C)I400
D)I300

Question 72

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)I100
B)I200
C)I300
D)I400

Question 73

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: 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?

Question 74

Tansley Corporation has two products that use the same constrained resource--a critical raw material. 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?

Question 75

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. 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.

Question 76

Musial 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?