Appendix B, Profitability Analysis

LO2: Volume trade-off decisions

Professional Exam Adapted

LO1: Profitability index

LO3: Other decisions

Difficulty
Question Type ID Origin CMA/CPA origin
1 T/F E x EN, 3/3/2004, A11 E.N.
2 T/F M x EN, 3/3/2004, A19 E.N.
3 T/F E x EN, 3/3/2004, A22 E.N.
4 T/F M x EN, 3/3/2004, A17 E.N.
5 T/F M x EN, 3/3/2004, A30 E.N.
6 T/F M x EN, 3/3/2004, A34 E.N.
7 T/F M x EN, 3/3/2004, A39 E.N.
8 T/F H x EN, 3/3/2004, A45 E.N.
9 T/F E EN, 3/3/2004, A05 E.N.
10 T/F M EN, 3/3/2004, A08 E.N.
11 Conceptual M/C M x EN, 3/3/2004, B06 E.N.
12 Conceptual M/C M EN, 3/3/2004, B02 E.N.
13 M/C E x Single MC A3 E.N.
14 M/C E x Single MC B3 E.N.
15 M/C E x Single MC C3 E.N.
16 M/C E x Single MC D3 E.N.
17 M/C E x Single MC E3 E.N.
18 M/C E x Single MC F3 E.N.
19 M/C E x Single MC G3 E.N.
20 M/C E x Single MC H3 E.N.
21 M/C E x Single MC I3 E.N.
22 M/C E x Single MC J3 E.N.
23 M/C M x Single MC K3 E.N.
24 M/C E x 11/2/2004 Single MC L3 E.N.
25 M/C E x 11/2/2004 Single MC M3 E.N.
26 M/C E x 11/.2/2004 Single MC N3 E.N.
27 M/C E x 11/2/2004 Single MC O3 E.N.
B-1 28-31 Multipart M/C M x x Multi MC A3 E.N.
B-2 32-35 Multipart M/C M x x Multi MC B3 E.N.
B-3 36-39 Multipart M/C M x x Multi MC C3 E.N.
B-4 40-41 Multipart M/C M x x Multi MC G3 E.N.
B-5 42-43 Multipart M/C M x x Multi MC H3 E.N.
B-6 44-45 Multipart M/C M x x Multi MC I3 E.N.
B-7 46-47 Multipart M/C M x x Multi MC J3 E.N.
B-8 48-49 Multipart M/C M x x Multi MC K3 E.N.
B-9 50-51 Multipart M/C M x x Multi MC L3 E.N.
B-10 52-53 Multipart M/C M x Multi MC D3 E.N.
B-11 54-55 Multipart M/C M x Multi MC E3 E.N.

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 Appendix B, Profitability Analysis
B-12 56-57 Multipart M/C M x Multi MC F3 E.N.
B-13 58-59 Multipart M/C E x 11/2/2004 Multi MC M3 E.N.
B-14 60-61 Multipart M/C E x 11/2/2004 Multi MC N3 E.N.
62 Problem E x Problem A3 E.N.
63 Problem E x Problem B3 E.N.
64 Problem E x Problem C3 E.N.
65 Problem M x x Problem F3 E.N.
66 Problem M x x Problem G3 E.N.
67 Problem E x Problem D3 E.N.
68 Problem E x Problem E3 E.N.
69 Problem E x 11/2/2004 Problem H3 E.N.
70 Problem E x 11/2/2004 Problem I3 E.N.
71 Problem E x 11/2/2004 Problem J3 E.N.
72 Problem E x 11/2/2004 Problem K3 E.N.

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 Appendix B, Profitability Analysis
 

True / False Questions

 

1. Relative profitability should be measured by dividing the incremental profit from a segment
by the amount of the constrained resource required by that segment. 
True    False

2. 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. 
True    False

3. 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. 
True    False

4. 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 net present value of a project by the expected total revenues from the project. 
True    False

5. 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 selling price of the
product. 
True    False

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 Appendix B, Profitability Analysis

6. 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
selling price of each model by the amount of time an artisan requires to make the model. 
True    False

7. When a company has a production constraint, the selling price of any new product should
cover both its variable cost and the opportunity cost involved in using the constrained
resource. 
True    False

8. 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 company's least profitable product--
even if none of that product is currently being made. 
True    False

9. Relative profitability is concerned with ranking business segments for the purpose of
making trade-offs among the segments. 
True    False

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

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 Appendix B, Profitability Analysis
 

Multiple Choice Questions

 

11. 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 best selling product.
B. the profitability index for the product whose production would be cut back if necessary.
C. the profitability index of the product with the fastest growing sales.
D. the profitability index of the company's most profitable product.

12. Relative profitability measures should only be used when: 

A. absolute profitability measures fail to provide a decision.
B. absolute profitability measures cannot be used.
C. a constraint forces a trade-off among segments.
D. market shares are falling.

13. Tevlin 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 H90X:

   

What is the profitability index for job H90X? 

A. $224 per hour
B. $560 per hour
C. $336 per hour
D. 0.40

B-5
 Appendix B, Profitability Analysis

14. 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? 
A. 0.40
B. $234 per hour
C. $156 per hour
D. $390 per hour

15. 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? 

A. $360 per hour
B. 0.20
C. 0.40
D. $144 per hour

16. Mccraig Corporation would like to determine the relative profitability of a number of jobs.
For example, job S35A has revenues of $52,000 and avoidable costs of $36,400, resulting in
an incremental profit of $15,600. The job requires 260 hours of the constrained resource. The
job is responsible for 8% of the company's total profit for the period. What is the profitability
index for job S35A? 
A. $60 per hour
B. $200 per hour
C. 0.30
D. 0.08

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 Appendix B, Profitability Analysis

17. Letze 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 I69Y:

   

What is the profitability index for product I69Y? 

A. $109,120
B. 0.20
C. $22.00 per minute
D. $4.40 per minute

18. Dombrowski 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 V48Q is $150.00, its unit variable cost is $135.00, and its unit
contribution margin is $15.00. One unit of the product requires 6 minutes of the constrained
resource. Monthly sales are 5,800 units. What is the profitability index for product V48Q? 
A. $2.50 per minute
B. 0.10
C. $25.00 per minute
D. $87,000

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 Appendix B, Profitability Analysis

19. Alberding 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 S06K:

   

What is the profitability index for product S06K? 

A. $6.00 per gram
B. $2.40 per gram
C. 0.40
D. $367,200

20. Manchester 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 G94T is $304.00 and its unit variable cost is $243.20. One unit of the
product requires 16 ounces of the constrained resource. Monthly sales are 9,300 units. What is
the profitability index for product G94T? 
A. $565,440
B. 0.20
C. $3.80 per ounce
D. $19.00 per ounce

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 Appendix B, Profitability Analysis

21. Vanstraten Corporation has provided the following data concerning its two products:

   

The profitability index for product Z63Z is closest to: 

A. $4.20 per gram
B. 0.53
C. 0.20
D. 0.57

22. Deemer Corporation has provided the following data concerning its two products:

   

The profitability index for product T57U is closest to: 

A. 0.06
B. 0.20
C. $11.00 per ounce
D. $2.20 per ounce

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 Appendix B, Profitability Analysis

23. Kiefert Corporation has provided the following data concerning its two products–A70 and
O48:

   

The total amount of the constrained resource available each month is 54,800 grams. Each unit
of product A70 requires 8 grams of the constrained resource and each unit of product O48
requires 18 grams. What is the maximum contribution margin the company can earn per
month? 
A. $447,680
B. $508,160
C. $424,500
D. $413,120

24. The same constrained resource is used by four different products at Debruin 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. R400
B. R300
C. R100
D. R200

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 Appendix B, Profitability Analysis

25. 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? 
A. N400
B. N300
C. N200
D. N100

26. Larsen Corporation has designed a new product, J57, whose variable cost is $61.80 per
unit and that requires 3.30 minutes of the constrained resource. The opportunity cost is $31.00
per minute used of the constrained resource. What is the minimum acceptable selling price for
the new product? 
A. $92.80
B. $61.80
C. $102.30
D. $164.10

27. 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? 
A. $564.00
B. $178.70
C. $682.70
D. $118.70

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 Appendix B, Profitability Analysis

 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.

28. How many units of product U87D should be produced each month? 

A. 500
B. 250
C. 988
D. 0

29. What is the maximum contribution margin the company can earn per month? 
A. $144,270
B. $114,045
C. $107,781
D. $101,370

30. 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. $120.90 per minute
B. $9.30 per minute
C. $13.20 per minute
D. $66.00 per minute

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 Appendix B, Profitability Analysis

31. The company is considering launching a new product that would have a variable cost of
$117.00 per unit. It would require 6 minutes of the constrained resource. The absolute
minimum acceptable selling price for the new product should be: 
A. $126.30
B. $172.80
C. $117.00
D. $196.20

 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.

32. How many units of product M26B should be produced each month? 

A. 0
B. 280
C. 2,000
D. 980

33. What is the maximum contribution margin the company can earn per month? 
A. $43,805
B. $47,232
C. $67,392
D. $40,512

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 Appendix B, Profitability Analysis

34. 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. $28.80 per minute
C. $28.80 per minute
D. $4.80 per minute

35. 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 16 minutes of the constrained
resource. The absolute minimum acceptable selling price for the new product should be: 
A. $226.60
B. $245.80
C. $169.00
D. $172.60

 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.

36. How many units of product V55S should be produced each month? 

A. 420
B. 1,140
C. 2,453
D. 0

37. What is the maximum contribution margin the company can earn per month? 
A. $30,968
B. $43,832
C. $36,056
D. $26,552

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 Appendix B, Profitability Analysis

38. 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. $4.00 per minute
B. $1.80 per minute
C. $8.00 per minute
D. $10.80 per minute

39. The company is considering launching a new product that would have a variable cost of
$155.00 per unit and no avoidable fixed costs. It would require 5 minutes of the constrained
resource. The absolute minimum acceptable selling price for the new product should be: 
A. $175.00
B. $156.80
C. $164.00
D. $155.00

 The management of Dando Corporation has provided the following data concerning its two
products:

   

The constrained resource is a particular machine that is available for 10,100 minutes each
month.

40. How many units of product Y43L should be produced each month? 

A. 0
B. 700
C. 1,328
D. 382

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 Appendix B, Profitability Analysis

41. 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. $40.00 per minute
B. $8.00 per minute
C. $4.00 per minute
D. $32.00 per minute

 Fontana Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 9,800 minutes each
month. Each unit of product S83E requires 16 minutes on this machine and each unit of
product G29P requires 5 minutes on this machine.

42. How many units of product S83E should be produced each month? 

A. 923
B. 0
C. 460
D. 150

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. $3.20 per minute
B. $2.40 per minute
C. $16.00 per minute
D. $38.40 per minute

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 Appendix B, Profitability Analysis

 Wakeman Products Inc. makes two products–W28H and Z28D. Product W28H's selling price
is $27.00 and its unit variable cost is $21.60. Product Z28D's selling price is $170.00 and its
unit variable cost is $153.00. The monthly demand is 2,030 units for product W28H and 730
units for Z28D. The constrained resource is a particular machine that is available for 9,500
minutes each month. Each unit of product W28H requires 3 minutes on this machine and each
unit of product Z28D requires 10 minutes on this machine.

44. How many units of product Z28D should be produced each month? 

A. 341
B. 730
C. 0
D. 1,339

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. $17.00 per minute
B. $1.70 per minute
C. $1.80 per minute
D. $5.40 per minute

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 Appendix B, Profitability Analysis
 

 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.

46. What is the maximum contribution margin the company can earn per month? 
A. $70,472
B. $52,088
C. $54,272
D. $49,592

47. 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: 
A. $90.00
B. $162.00
C. $94.50
D. $182.80

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 Appendix B, Profitability Analysis

 Demeester Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 9,900 minutes each
month. Each unit of product Y56G requires 10 minutes on this machine and each unit of
product K46X requires 3 minutes on this machine.

48. What is the maximum contribution margin the company can earn per month? 
A. $23,100
B. $25,020
C. $31,500
D. $21,420

49. The company is considering launching a new product that would have a variable cost of
$79.00 per unit. It would require 14 minutes of the constrained resource. The absolute
minimum acceptable selling price for the new product should be: 
A. $79.00
B. $118.20
C. $80.80
D. $104.20

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 Appendix B, Profitability Analysis

 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.

50. What is the maximum contribution margin the company can earn per month? 
A. $21,920
B. $29,798
C. $23,738
D. $22,869

51. 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: 
A. $191.00
B. $199.00
C. $193.00
D. $201.40

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 Appendix B, Profitability Analysis

 The management of Schacher Corporation has provided the following data concerning its two
products:

   

The constrained resource is a particular machine that is available for 10,300 minutes each
month.

52. How many units of product J35V should be produced each month? 

A. 240
B. 0
C. 957
D. 510

53. What is the maximum contribution margin the company can earn per month? 
A. $91,820
B. $99,920
C. $133,940
D. $96,138

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 Appendix B, Profitability Analysis

 Florez Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 10,000 minutes each
month. Each unit of product U98W requires 19 minutes on this machine and each unit of
product M01S requires 7 minutes on this machine.

54. How many units of product U98W should be produced each month? 

A. 180
B. 0
C. 390
D. 736

55. What is the maximum contribution margin the company can earn per month? 
A. $22,822
B. $31,928
C. $23,948
D. $21,554

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 Appendix B, Profitability Analysis

 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.

56. How many units of product E34G should be produced each month? 

A. 0
B. 1,435
C. 640
D. 215

57. What is the maximum contribution margin the company can earn per month? 
A. $149,820
B. $105,448
C. $111,570
D. $100,520

B-23
 Appendix B, Profitability Analysis

 Kuchler 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.

58. 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. U300
B. U200
C. U100
D. U400

59. 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. U400
B. U200
C. U300
D. U100

B-24
 Appendix B, Profitability Analysis

 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.

60. 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. Y400
B. Y200
C. Y100
D. Y300

61. 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. Y200
B. Y300
C. Y100
D. Y400

 
 

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 Appendix B, Profitability Analysis

Essay Questions
 

62. Righter 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
66 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. 

 
 

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 Appendix B, Profitability Analysis

63. Schlaefer 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. 

 
 

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 Appendix B, Profitability Analysis

64. 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. 

 
 

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 Appendix B, Profitability Analysis

65. Podkowka Corporation has two products that use the same constrained resource–a critical
raw material.

   

The total amount of the constrained resource available is 10,400 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 $112 and that
requires 10 grams of the constrained resource. What is the minimum selling price for the new
product? 

 
 

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 Appendix B, Profitability Analysis

66. The constraint at Angstadt 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, B03 and
P22, appear below:

   

Each unit of product B03 requires 6 ounces of the constrained raw material; each unit of
product P22 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 $158 and that
requires 14 ounces of the constrained resource. What is the minimum acceptable selling price
for the new product? 

 
 

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 Appendix B, Profitability Analysis

67. Sabat Corporation has two products–S94 and T88–that use the same constrained resource–
a critical raw material. Data concerning those products follow:

   

The total amount of the constrained resource available is 10,400 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? 

 
 

B-31
 Appendix B, Profitability Analysis

68. 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? 

 
 

B-32
 Appendix B, Profitability Analysis

69. Llano 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? 

 
 

B-33
 Appendix B, Profitability Analysis

70. The management of Trachte 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? 

 
 

B-34
 Appendix B, Profitability Analysis

71. Attleson Corporation has designed a new product, R94, whose variable cost is $122.90 per
unit and that requires 6.70 minutes of the constrained resource. The opportunity cost is $58.00
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 R94? 

 
 

72. 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? 

 
 

B-35
 Appendix B, Profitability Analysis Key

True / False Questions

 

1. Relative profitability should be measured by dividing the incremental profit from a segment
by the amount of the constrained resource required by that segment. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

2. 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. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
 

3. 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. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-36
 Appendix B, Profitability Analysis Key

4. 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 net present value of a project by the expected total revenues from the project. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
 

5. 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 selling price of the
product. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

6. 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
selling price of each model by the amount of time an artisan requires to make the model. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-37
 Appendix B, Profitability Analysis Key

7. When a company has a production constraint, the selling price of any new product should
cover both its variable cost and the opportunity cost involved in using the constrained
resource. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

8. 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 company's least profitable product--
even if none of that product is currently being made. 
FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard
 

9. Relative profitability is concerned with ranking business segments for the purpose of
making trade-offs among the segments. 
TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy
 

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

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium
 

B-38
 Appendix B, Profitability Analysis Key

Multiple Choice Questions

 

11. 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 best selling product.
B. the profitability index for the product whose production would be cut back if necessary.
C. the profitability index of the product with the fastest growing sales.
D. the profitability index of the company's most profitable product.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

12. Relative profitability measures should only be used when: 

A. absolute profitability measures fail to provide a decision.
B. absolute profitability measures cannot be used.
C. a constraint forces a trade-off among segments.
D. market shares are falling.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium
 

B-39
 Appendix B, Profitability Analysis Key

13. Tevlin 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 H90X:

   

What is the profitability index for job H90X? 

A. $224 per hour
B. $560 per hour
C. $336 per hour
D. 0.40

Profitability Index = Incremental profit Amount of constrained resource required = $67,200

300 hours = $224 per hour

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

14. 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? 
A. 0.40
B. $234 per hour
C. $156 per hour
D. $390 per hour

Profitability Index = Incremental profit Amount of constrained resource required = $42,120

270 hours = $156 per hour

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-40
 Appendix B, Profitability Analysis Key

15. 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? 

A. $360 per hour
B. 0.20
C. 0.40
D. $144 per hour

Profitability Index = Incremental profit Amount of constrained resource required = $44,640

310 hours = $144 per hour

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

16. Mccraig Corporation would like to determine the relative profitability of a number of jobs.
For example, job S35A has revenues of $52,000 and avoidable costs of $36,400, resulting in
an incremental profit of $15,600. The job requires 260 hours of the constrained resource. The
job is responsible for 8% of the company's total profit for the period. What is the profitability
index for job S35A? 
A. $60 per hour
B. $200 per hour
C. 0.30
D. 0.08

Profitability Index = Incremental profit Amount of constrained resource required = $15,600

260 hours = $60 per hour

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-41
 Appendix B, Profitability Analysis Key

17. Letze 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 I69Y:

   

What is the profitability index for product I69Y? 

A. $109,120
B. 0.20
C. $22.00 per minute
D. $4.40 per minute

Profitability Index = Incremental profit Amount of constrained resource required = $17.60

4 minutes = $4.40 per minute

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

18. Dombrowski 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 V48Q is $150.00, its unit variable cost is $135.00, and its unit
contribution margin is $15.00. One unit of the product requires 6 minutes of the constrained
resource. Monthly sales are 5,800 units. What is the profitability index for product V48Q? 
A. $2.50 per minute
B. 0.10
C. $25.00 per minute
D. $87,000

Profitability Index = Incremental profit Amount of constrained resource required = $15.00

6 minutes = $2.50 per minute

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-42
 Appendix B, Profitability Analysis Key

19. Alberding 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 S06K:

   

What is the profitability index for product S06K? 

A. $6.00 per gram
B. $2.40 per gram
C. 0.40
D. $367,200

Profitability Index = Incremental profit Amount of constrained resource required = $40.80*

17 grams = $2.40 per gram
$40.80 = $102.00 - $61.20

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-43
 Appendix B, Profitability Analysis Key

20. Manchester 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 G94T is $304.00 and its unit variable cost is $243.20. One unit of the
product requires 16 ounces of the constrained resource. Monthly sales are 9,300 units. What is
the profitability index for product G94T? 
A. $565,440
B. 0.20
C. $3.80 per ounce
D. $19.00 per ounce

Profitability Index = Incremental profit Amount of constrained resource required = $60.80*

16 ounces = $3.80 per ounce
* $60.80 = $304.00 - $243.20

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-44
 Appendix B, Profitability Analysis Key

21. Vanstraten Corporation has provided the following data concerning its two products:

   

The profitability index for product Z63Z is closest to: 

A. $4.20 per gram
B. 0.53
C. 0.20
D. 0.57

Profitability Index = Incremental profit Amount of constrained resource required = $67.20

16 grams = $4.20 per gram

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-45
 Appendix B, Profitability Analysis Key

22. Deemer Corporation has provided the following data concerning its two products:

   

The profitability index for product T57U is closest to: 

A. 0.06
B. 0.20
C. $11.00 per ounce
D. $2.20 per ounce

Profitability Index = Incremental profit Amount of constrained resource required = $17.60

8 ounces = $2.20 per ounce

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-46
 Appendix B, Profitability Analysis Key

23. Kiefert Corporation has provided the following data concerning its two products–A70 and
O48:

   

The total amount of the constrained resource available each month is 54,800 grams. Each unit
of product A70 requires 8 grams of the constrained resource and each unit of product O48
requires 18 grams. What is the maximum contribution margin the company can earn per
month? 
A. $447,680
B. $508,160
C. $424,500
D. $413,120

Computation of the profitability index:

According to the profitability index, the most profitable product is A70.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-47
 Appendix B, Profitability Analysis Key

24. The same constrained resource is used by four different products at Debruin 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. R400
B. R300
C. R100
D. R200

Produce the product with the highest profitability index:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-48
 Appendix B, Profitability Analysis Key

25. 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? 
A. N400
B. N300
C. N200
D. N100

Produce the product with the highest profitability index:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-49
 Appendix B, Profitability Analysis Key

26. Larsen Corporation has designed a new product, J57, whose variable cost is $61.80 per
unit and that requires 3.30 minutes of the constrained resource. The opportunity cost is $31.00
per minute used of the constrained resource. What is the minimum acceptable selling price for
the new product? 
A. $92.80
B. $61.80
C. $102.30
D. $164.10

Minimum selling price = Variable cost + Constrained resource opportunity cost = $61.80 +
$102.30* = $164.10
*(3.3 minutes x $31.00)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

27. 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? 
A. $564.00
B. $178.70
C. $682.70
D. $118.70

Minimum selling price = Variable cost + Constrained resource opportunity cost = $118.70 +
$564* = $682.70
*(9.4 grams x $60.00)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-50
 Appendix B, Profitability Analysis Key

 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.

28. How many units of product U87D should be produced each month? 

A. 500
B. 250
C. 988
D. 0

B-51
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

29. What is the maximum contribution margin the company can earn per month? 
A. $144,270
B. $114,045
C. $107,781
D. $101,370

According to the profitability index, the most profitable product is E50V.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-52
 Appendix B, Profitability Analysis Key

30. 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. $120.90 per minute
B. $9.30 per minute
C. $13.20 per minute
D. $66.00 per minute

The most that the company should be willing to pay is $9.30 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

31. The company is considering launching a new product that would have a variable cost of
$117.00 per unit. It would require 6 minutes of the constrained resource. The absolute
minimum acceptable selling price for the new product should be: 
A. $126.30
B. $172.80
C. $117.00
D. $196.20

Minimum selling price = Variable cost + Constrained resource opportunity cost = $117.00 +
$55.80* = $172.80
*(6 minutes x $9.30)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

B-53
 Appendix B, Profitability Analysis Key

 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.

32. How many units of product M26B should be produced each month? 

A. 0
B. 280
C. 2,000
D. 980

Computation of the profitability index:

According to the profitability index, the most profitable product is M73O.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-54
 Appendix B, Profitability Analysis Key

33. What is the maximum contribution margin the company can earn per month? 
A. $43,805
B. $47,232
C. $67,392
D. $40,512

Computation of the profitability index:

According to the profitability index, the most profitable product is M73O.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-55
 Appendix B, Profitability Analysis Key

34. 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. $28.80 per minute
C. $28.80 per minute
D. $4.80 per minute

The most that the company should be willing to pay is $3.60 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

35. 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 16 minutes of the constrained
resource. The absolute minimum acceptable selling price for the new product should be: 
A. $226.60
B. $245.80
C. $169.00
D. $172.60

Minimum selling price = Variable cost + Constrained resource opportunity cost = $169.00 +
$57.60* = $226.60
*(16 minutes x $3.60)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

B-56
 Appendix B, Profitability Analysis Key

 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.

36. How many units of product V55S should be produced each month? 

A. 420
B. 1,140
C. 2,453
D. 0

According to the profitability index, the most profitable product is N81W.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-57
 Appendix B, Profitability Analysis Key

37. What is the maximum contribution margin the company can earn per month? 
A. $30,968
B. $43,832
C. $36,056
D. $26,552

According to the profitability index, the most profitable product is N81W.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-58
 Appendix B, Profitability Analysis Key

38. 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. $4.00 per minute
B. $1.80 per minute
C. $8.00 per minute
D. $10.80 per minute

The most that the company should be willing to pay is $1.80 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

39. The company is considering launching a new product that would have a variable cost of
$155.00 per unit and no avoidable fixed costs. It would require 5 minutes of the constrained
resource. The absolute minimum acceptable selling price for the new product should be: 
A. $175.00
B. $156.80
C. $164.00
D. $155.00

Minimum selling price = Variable cost + Constrained resource opportunity cost = $155.00 +
$9.00* = $164.00
*(5 minutes x $1.80)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

B-59
 Appendix B, Profitability Analysis Key

 The management of Dando Corporation has provided the following data concerning its two
products:

   

The constrained resource is a particular machine that is available for 10,100 minutes each
month.

40. How many units of product Y43L should be produced each month? 

A. 0
B. 700
C. 1,328
D. 382

According to the profitability index, the most profitable product is R70X.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-60
 Appendix B, Profitability Analysis Key

41. 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. $40.00 per minute
B. $8.00 per minute
C. $4.00 per minute
D. $32.00 per minute

The most that the company should be willing to pay is $4.00 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Learning Objective: 3
Level: Medium
 

B-61
 Appendix B, Profitability Analysis Key

 Fontana Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 9,800 minutes each
month. Each unit of product S83E requires 16 minutes on this machine and each unit of
product G29P requires 5 minutes on this machine.

42. How many units of product S83E should be produced each month? 

A. 923
B. 0
C. 460
D. 150

According to the profitability index, the most profitable product is G29P.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-62
 Appendix B, Profitability Analysis Key

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. $3.20 per minute
B. $2.40 per minute
C. $16.00 per minute
D. $38.40 per minute

The most that the company should be willing to pay is $2.40 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Learning Objective: 3
Level: Medium
 

B-63
 Appendix B, Profitability Analysis Key

 Wakeman Products Inc. makes two products–W28H and Z28D. Product W28H's selling price
is $27.00 and its unit variable cost is $21.60. Product Z28D's selling price is $170.00 and its
unit variable cost is $153.00. The monthly demand is 2,030 units for product W28H and 730
units for Z28D. The constrained resource is a particular machine that is available for 9,500
minutes each month. Each unit of product W28H requires 3 minutes on this machine and each
unit of product Z28D requires 10 minutes on this machine.

44. How many units of product Z28D should be produced each month? 

A. 341
B. 730
C. 0
D. 1,339

According to the profitability index, the most profitable product is W28H.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-64
 Appendix B, Profitability Analysis Key

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. $17.00 per minute
B. $1.70 per minute
C. $1.80 per minute
D. $5.40 per minute

The most that the company should be willing to pay is $1.70 per minute, which is the
profitability index of the least profitable product.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Learning Objective: 3
Level: Medium
 

B-65
 Appendix B, Profitability Analysis Key

 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.

46. What is the maximum contribution margin the company can earn per month? 
A. $70,472
B. $52,088
C. $54,272
D. $49,592

According to the profitability index, the most profitable product is F74

B-66
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

47. 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: 
A. $90.00
B. $162.00
C. $94.50
D. $182.80

Minimum selling price = Variable cost + Constrained resource opportunity cost = $90.00 +
$72.00* = $162.00
*(16 minutes x $4.50)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

B-67
 Appendix B, Profitability Analysis Key

 Demeester Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 9,900 minutes each
month. Each unit of product Y56G requires 10 minutes on this machine and each unit of
product K46X requires 3 minutes on this machine.

48. What is the maximum contribution margin the company can earn per month? 
A. $23,100
B. $25,020
C. $31,500
D. $21,420

According to the profitability index, the most profitable product is K46X

B-68
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

49. The company is considering launching a new product that would have a variable cost of
$79.00 per unit. It would require 14 minutes of the constrained resource. The absolute
minimum acceptable selling price for the new product should be: 
A. $79.00
B. $118.20
C. $80.80
D. $104.20

Minimum selling price = Variable cost + Constrained resource opportunity cost = $79.00 +
$25.20* = $104.20
*(14 minutes x $1.80)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

B-69
 Appendix B, Profitability Analysis Key

 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.

50. What is the maximum contribution margin the company can earn per month? 
A. $21,920
B. $29,798
C. $23,738
D. $22,869

According to the profitability index, the most profitable product is C38S.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-70
 Appendix B, Profitability Analysis Key

51. 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: 
A. $191.00
B. $199.00
C. $193.00
D. $201.40

Minimum selling price = Variable cost + Constrained resource opportunity cost = $191.00 +
$8.00* = $199.00
*(4 minutes x $2.00)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium
 

 The management of Schacher Corporation has provided the following data concerning its two
products:

   

The constrained resource is a particular machine that is available for 10,300 minutes each
month.

B-71
 Appendix B, Profitability Analysis Key

52. How many units of product J35V should be produced each month? 

A. 240
B. 0
C. 957
D. 510

According to the profitability index, the most profitable product is R36A.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-72
 Appendix B, Profitability Analysis Key

53. What is the maximum contribution margin the company can earn per month? 
A. $91,820
B. $99,920
C. $133,940
D. $96,138

According to the profitability index, the most profitable product is R36A.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-73
 Appendix B, Profitability Analysis Key

 Florez Corporation's two products have the following characteristics:

   

The constrained resource is a particular machine that is available for 10,000 minutes each
month. Each unit of product U98W requires 19 minutes on this machine and each unit of
product M01S requires 7 minutes on this machine.

54. How many units of product U98W should be produced each month? 

A. 180
B. 0
C. 390
D. 736

According to the profitability index, the most profitable product is M01S.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-74
 Appendix B, Profitability Analysis Key

55. What is the maximum contribution margin the company can earn per month? 
A. $22,822
B. $31,928
C. $23,948
D. $21,554

According to the profitability index, the most profitable product is M01S.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-75
 Appendix B, Profitability Analysis Key

 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.

56. How many units of product E34G should be produced each month? 

A. 0
B. 1,435
C. 640
D. 215

According to the profitability index, the most profitable product is M38O.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-76
 Appendix B, Profitability Analysis Key

57. What is the maximum contribution margin the company can earn per month? 
A. $149,820
B. $105,448
C. $111,570
D. $100,520

According to the profitability index, the most profitable product is M38O.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
 

B-77
 Appendix B, Profitability Analysis Key

 Kuchler 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.

58. 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. U300
B. U200
C. U100
D. U400

To maximize their commissions, the salespersons would want to sell the product with the
highest selling price per unit.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-78
 Appendix B, Profitability Analysis Key

59. 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. U400
B. U200
C. U300
D. U100

To maximize the company's profits, the company would want to sell the product the highest
profitability index.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-79
 Appendix B, Profitability Analysis Key

 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.

60. 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. Y400
B. Y200
C. Y100
D. Y300

To maximize their commissions, the salespersons would want to sell the product with the
highest selling price per unit.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-80
 Appendix B, Profitability Analysis Key

61. 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. Y200
B. Y300
C. Y100
D. Y400

Produce the product with the highest profitability index:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 
 

Essay Questions

62. Righter 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
66 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. 

B-81
 Appendix B, Profitability Analysis Key

a. Rank the segments on the basis of the profitability index:

   

b.

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-82
 Appendix B, Profitability Analysis Key

63. Schlaefer 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. 

B-83
 Appendix B, Profitability Analysis Key

a. Rank the projects on the basis of the profitability index:

   

b.

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-84
 Appendix B, Profitability Analysis Key

64. 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. 

B-85
 Appendix B, Profitability Analysis Key

a. Rank the projects on the basis of the profitability index:

   

b.

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
 

B-86
 Appendix B, Profitability Analysis Key

65. Podkowka Corporation has two products that use the same constrained resource–a critical
raw material.

   

The total amount of the constrained resource available is 10,400 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 $112 and that
requires 10 grams of the constrained resource. What is the minimum selling price for the new
product? 

B-87
 Appendix B, Profitability Analysis Key

   

According to the profitability index, the most profitable product is Z87.

   

d. Selling price of new product > $112.00 + ($1.80 per gram x 10 grams) = $112.00 + $18.00
= $130.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Learning Objective: 3
Level: Medium
 

B-88
 Appendix B, Profitability Analysis Key

66. The constraint at Angstadt 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, B03 and
P22, appear below:

   

Each unit of product B03 requires 6 ounces of the constrained raw material; each unit of
product P22 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 $158 and that
requires 14 ounces of the constrained resource. What is the minimum acceptable selling price
for the new product? 

   

Produce 3,440 units of P22 and 470 units of B03.

c. Selling price of new product > $158.00 + ($5.60 per ounce x 14 ounces) = $158.00 +
$78.40 = $236.40

B-89
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Learning Objective: 3
Level: Medium
 
67. Sabat Corporation has two products–S94 and T88–that use the same constrained resource–
a critical raw material. Data concerning those products follow:

   

The total amount of the constrained resource available is 10,400 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? 

B-90
 Appendix B, Profitability Analysis Key

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-91
 Appendix B, Profitability Analysis Key

68. 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? 

   

B-92
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
 

B-93
 Appendix B, Profitability Analysis Key

69. Llano 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? 

a. If the salespersons are paid commissions that are a set percentage of sales, then they will
favor the products with the highest selling prices. Since product C100 has the highest selling
price, it will be the product salespersons prefer to sell.

b. From the standpoint of the entire company, the products should be ranked on the basis of
the profitability index.

   

According to the profitability index, product C300 should be emphasized.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-94
 Appendix B, Profitability Analysis Key

70. The management of Trachte 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? 

a. If the salespersons are paid commissions that are a set percentage of sales, then they will
favor the products with the highest selling prices. Since product D100 has the highest selling
price, it will be the product salespersons prefer to sell.

b. From the standpoint of the entire company, the products should be ranked on the basis of
the profitability index.

   

According to the profitability index, product D200 should be emphasized.

B-95
 Appendix B, Profitability Analysis Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

71. Attleson Corporation has designed a new product, R94, whose variable cost is $122.90 per
unit and that requires 6.70 minutes of the constrained resource. The opportunity cost is $58.00
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 R94? 

The selling price of the new product must cover at least its variable cost and the opportunity
cost of using the constrained resource:

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-96
 Appendix B, Profitability Analysis Key

72. 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? 

The selling price of the new product must cover at least its variable cost and the opportunity
cost of using the constrained resource:

   

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
 

B-97