Question 1

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: $\begin{array}{lrr}
&\text { B08 } & {O05} \
\text { Demand (units) }&1,040 & 1,550 \
\text { Selling price }&\$ 102.00 & \$ 124.00 \
\text { Variable cost }&\$ 61.20 & \$ 86.80
\end{array}$ 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?

Accepted Answer

The answer of The constrained resource at Nealen Corporation is...

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A) I100 
B) I200 
C) I300 
D) I400

Question 4

The absolute profitability of a business segment is determined by:

Accepted Answer

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 5

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

Accepted Answer

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 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

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

Question 8

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:

Accepted Answer

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

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

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

Question 12

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:

Accepted Answer

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

Question 13

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?

Accepted Answer

A) H100 
B) H400 
C) H300 
D) H200

Question 14

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:

Accepted Answer

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

Question 15

Tansley Corporation has two products that use the same constrained resource--a critical raw material. $\begin{array}{lrr}
&\text { B99 } & \text { V94 } \
\text { Selling price }&\$ 322.00 & \$ 152.00 \
\text { Variable cost }&\$ 257.60 & \$ 106.40 \
\text { Constrained resource required per unit (grams) }&14 & 8 \
\text { Demand (units) }&460 & 890
\end{array}$ 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?

Accepted Answer

The answer of Tansley Corporation has two products that use...

Question 16

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. $\begin{array}{l}
&&\text { Amount of Constrained }\
&\text { Incremental Profit } & \text { Resource Required (hours) } \
\text {Project 1 }&\$ 4,654 & 13 \
\text {Project 2 }&\$ 7,110 & 18 \
\text {Project 3 }&\$ 8,814 & 26 \
\text {Project 4 }&\$ 4,997 & 19 \
\text {Project 5 }&\$ 7,750 & 31 \
\text { Project 6}&\$ 6,030 & 30
\end{array}$ 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.

Accepted Answer

The answer of Jendro LLC is a consulting firm that...

Question 17

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?

Accepted Answer

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

Question 18

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: $\begin{array}{lrrrr}
&\text { R100 } & \text { R200 } &{\text { R300 }} & \text { R400 } \
\text { Unit selling price. }&\$ 36.40 & \$ 20.20 & \$ 12.40 & \$ 36.70 \
\text { Unit variable cost }&\$ 17.10 & \$ 6.90 & \$ 2.70 & \$ 20.20 \
\text { Amount of the constrained resource required. }&0.43 & 0.35 & 0.23 & 0.58
\end{array}$ 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?

Accepted Answer

The answer of The management of Lantieri Corporation is reviewing...

Question 19

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

Accepted Answer

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

Question 20

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?

Accepted Answer

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

Exam 2: Profitability Analysis

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?

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

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:

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:

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