Question 1

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.

Accepted Answer

The opportunity cost of using one unit of the constrained resource is the cost of forgoing the production of another product that could have been produced with that unit. Therefore, the profitability index for the product whose production would be cut back if necessary is the most relevant in this trade-off decision.

Question 2

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $60.80* F1F1F1S1F1F1F10 16 ounces = $3.80 per ounce
* $60.80 = $304.00 - $243.20

Question 3

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $15,600 F1F1F1S1F1F1F10 260 hours = $60 per hour

Question 4

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

Accepted Answer

The answer of In the absence of a constraint,all business...

Question 5

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $17.60 F1F1F1S1F1F1F10 4 minutes = $4.40 per minute

Question 6

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $67,200 F1F1F1S1F1F1F10 300 hours = $224 per hour

Question 7

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.

Accepted Answer

The answer of When long-term investment funds are the constraint...

Question 8

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.

Accepted Answer

The answer of A company that makes horsehair cowboy belts...

Question 9

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.

Accepted Answer

The answer of The opportunity cost of using a unit...

Question 10

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

Accepted Answer

This statement is true. By measuring the incremental profit of a segment and dividing it by the amount of the constrained resource required by that segment, you can determine the relative profitability of each segment in terms of the resource used.

Question 11

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.

Accepted Answer

The profitability index should be computed by dividing the net present value of a project by the initial investment, not the expected total revenues.

Question 12

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.

Accepted Answer

The profitability index is computed by dividing the present value of future cash flows by the initial investment. It is not computed by dividing the unit contribution margin by the selling price of a product.

Question 13

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $40.80* F1F1F1S1F1F1F10 17 grams = $2.40 per gram
$40.80 = $102.00 - $61.20

Question 14

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $44,640 F1F1F1S1F1F1F10 310 hours = $144 per hour

Question 15

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.

Accepted Answer

If a company has a production constraint, it means there is a limited resource that limits the amount of output the company can produce. Therefore, when introducing a new product, the selling price should cover not only the variable cost but also the opportunity cost involved in using the constrained resource. This ensures that the company maximizes its profits and optimizes the use of its limited resources.

Question 16

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $42,120 F1F1F1S1F1F1F10 270 hours = $156 per hour

Question 17

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.

Accepted Answer

The profitability index is a tool used to determine the potential profitability of a project or investment by comparing the present value of its expected future cash flows to the initial investment. In the scenario given, if there is insufficient production capacity to do all of the jobs, the profitability index can be used to determine which jobs will bring in the most profits and should therefore be accepted.

Question 18

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.

Accepted Answer

Relative profitability measures, such as contribution margin ratio and return on investment, are useful when a constraint, such as limited resources, forces a company to make trade-offs among different segments or products. This allows the company to identify which segments provide the greatest return on investment and allocate resources accordingly. When there are no constraints or absolute profitability measures can be used, it is generally better to focus on absolute profitability measures such as net income or gross margin. Falling market shares do not necessarily indicate a need to use relative profitability measures.

Question 19

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

Accepted Answer

Relative profitability analysis helps to identify the most profitable business segments and prioritize them over less profitable ones when making decisions on resource allocation and investment.

Question 20

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

Accepted Answer

Profitability Index = Incremental profit F1F1F1S1F1F1F10 Amount of constrained resource required = $15.00 F1F1F1S1F1F1F10 6 minutes = $2.50 per minute

Quiz 15: Profitability Analysis

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

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

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?

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?