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

Quizplus · Accepted Answer

The profitability index in a volume trade-off decision should be computed by dividing each product's contribution margin by the amount of the constrained resource used by the product. This will give the manager an idea of which product will provide the highest profitability per unit of constrained resource used. Option B divides by selling price which is not useful in volume trade off decision. Option C, dividing selling price by resource used, is also not effective as it does not consider the contribution margin. Option D is not applicable as variable cost is not useful in volume trade off decision.

The Profitability Index in a Volume Trade-Off Decision Should Be