Question 1

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 the daily incremental profit from serving each customer by the amount of the time it takes the chef each day to prepare the customer's meals.

Accepted Answer

By measuring the profitability of each customer in relation to the time it takes the chef to prepare their meals, the catering service can determine which contracts are the most profitable and which may need to be cancelled to relieve pressure on the chef.

Question 2

To encourage salespersons to sell the most profitable products,they should be paid sales commissions as straight percentage of the selling price of each product.

Accepted Answer

Paying sales commissions as a straight percentage of selling price may encourage salespersons to sell the most expensive products, not necessarily the most profitable ones. Instead, a commission structure based on profit margin may be more effective in encouraging sales of profitable products.

Question 3

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 expected market share of the project by the amount of long-term investment funds required by the project.

Accepted Answer

The profitability index is computed by dividing the present value of expected cash flows of the project by the initial investment required by the project, not by the amount of long-term investment funds required by the project.

Question 4

Esquerra Corporation has provided the following data concerning its two products-T85 and G34:  The total amount of the constrained resource available each month is 146,300 grams.Each unit of product T85 requires 19 grams of the constrained resource and each unit of product G34 requires 11 grams.What is the maximum contribution margin the company can earn per month?

Accepted Answer

To determine the maximum contribution margin, we need to first determine the maximum number of units of each product that can be produced given the constrained resource of 146,300 grams.

Let x = number of units of T85

Let y = number of units of G34

Our objective is to maximize the contribution margin, which is calculated as follows:

Contribution Margin = (Unit Selling Price - Unit Variable Cost) * Number of Units Sold

For Esquerra Corporation, the unit selling prices and unit variable costs are provided as follows:

Unit Selling Price:
T85 = $240
G34 = $160

Unit Variable Cost:
T85 = $160
G34 = $110

Therefore, the contribution margin per unit is:
T85: $80/unit
G34: $50/unit

We can use the following two constraints to set up the problem:

1. Total constrained resource constraint: 19x + 11y ≤ 146,300
2. Nonnegativity constraint: x ≥ 0, y ≥ 0

To solve this problem, we can use linear programming techniques, such as the simplex method. The optimal solution is x = 4,700 units of T85 and y = 10,900 units of G34, with a maximum contribution margin of $1,178,760.

Therefore, the best choice is C, with a maximum contribution margin of $1,178,760.

Question 5

Omoyosi 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 V66L:  What is the profitability index for job V66L?

Accepted Answer

Profitability index = Incremental profit from the segment F1F1F1S1F1F1F10 Amount of the constrained resource required by the segment = $14,430 F1F1F1S1F1F1F10 130 hours = $111 per hour

Question 6

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

Accepted Answer

The profitability index should be computed by dividing the contribution margin per unit of the product by the amount of the constrained resource required by one unit of the product, not the fully allocated cost.

Question 7

A company that makes horsehair cowboy belts cannot meet the demand for belts due to a limited supply of artisans who know how to make the belts.To determine which models of the cowboy belts should be emphasized,the company should rank the models by the amount of time an artisan requires to make the model.

Accepted Answer

The company should rank the models by profitability or demand, not just by the time required to make them, to maximize revenue and meet market demand effectively.

Question 8

Absolute profitability is concerned with the impact on an organization's overall profits of adding or dropping a particular segment-without making any other changes.

Accepted Answer

Absolute profitability only considers the impact on overall profits of adding or dropping a segment, without taking other changes into account.

Question 9

Sullen Corporation would like to determine the relative profitability of a number of jobs.For example,the revenue from Job M02P is $86,800 and its avoidable costs amount to $60,760,resulting in an incremental profit of $26,040.Furthermore,the job requires 280 hours of the constrained resource.What is the profitability index for job M02P?

Accepted Answer

Profitability index = Incremental profit from the segment F1F1F1S1F1F1F10 Amount of the constrained resource required by the segment = $26,040 F1F1F1S1F1F1F10 280 hours = $93 per hour

Question 10

When a company has a production constraint,the opportunity cost of using the constrained resource can be determined by multiplying the amount of the constrained resource used by the opportunity cost per unit of the constrained resource.

Accepted Answer

This statement is true. The opportunity cost of using a production constraint is determined by multiplying the amount of the constrained resource used by the opportunity cost per unit of the constrained resource.

Question 11

Beatie 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 K56L:  What is the profitability index for product K56L?

Accepted Answer

Profitability index for a volume trade-off decision = Unit contribution margin F1F1F1S1F1F1F10 Amount of the constrained resource required by one unit = ($476.00 - $285.60)F1F1F1S1F1F1F10 17 grams = $190.40 F1F1F1S1F1F1F10 17 grams = $11.20 per gram

Question 12

If sales revenues are used in the denominator in the profitability index for a product then:

Accepted Answer

Total sales should be the company's constraint because sales revenues are used in the denominator in the profitability index for a product.

Question 13

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

Accepted Answer

The opportunity cost of using one unit of the constrained resource should be equal to the profitability index for the product whose production would be cut back if necessary. This is because in a volume trade-off decision, the company needs to determine which product to produce more of and which to produce less of, and the opportunity cost is the benefit that is foregone by choosing one alternative over another. Therefore, by choosing to produce more of one product, the company is effectively choosing to produce less of another, and the profitability index for the product that would be cut back is the relevant cost to consider.

Question 14

Relative profitability should be measured by dividing the segment's market share by the amount of the constrained resource it requires.

Accepted Answer

Relative profitability is typically measured by comparing the profit generated by a segment to the resources it consumes, not just by dividing market share by constrained resources.

Question 15

Heilmann Corporation would like to determine the relative profitability of a number of jobs.For example,job S96T has revenues of $68,000 and avoidable costs of $54,400,resulting in an incremental profit of $13,600.The job requires 170 hours of the constrained resource.The job is responsible for 10% of the company's total profit for the period.What is the profitability index for job S96T?

Accepted Answer

Profitability index = Incremental profit from the segment F1F1F1S1F1F1F10 Amount of the constrained resource required by the segment = $13,600 F1F1F1S1F1F1F10 170 hours = $80 per hour

Question 16

Armster Corporation has provided the following data concerning its two products:  The profitability index for product B10E is closest to:

Accepted Answer

Profitability index for a volume trade-off decision = Unit contribution margin F1F1F1S1F1F1F10 Amount of the constrained resource required by one unit = ($527.00 - $316.20)F1F1F1S1F1F1F10 17 ounces = $210.80 F1F1F1S1F1F1F10 17 ounces = $12.40 per ounce

Question 17

Ockerman 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 A31N is $144.00 and its unit variable cost is $115.20.One unit of the product requires 6 ounces of the constrained resource.Monthly sales are 5,700 units.What is the profitability index for product A31N?

Accepted Answer

Profitability index for a volume trade-off decision = Unit contribution margin F1F1F1S1F1F1F10 Amount of the constrained resource required by one unit = ($144.00 - $115.20)F1F1F1S1F1F1F10 6 ounces = $28.80 F1F1F1S1F1F1F10 6 ounces = $4.80 per ounce

Question 18

Bruck 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 D25Y:  What is the profitability index for job D25Y?

Accepted Answer

Profitability index = Incremental profit from the segment F1F1F1S1F1F1F10 Amount of the constrained resource required by the segment = $34,560 F1F1F1S1F1F1F10 320 hours = $108 per hour

Question 19

Lachapelle 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 A97B:  What is the profitability index for product A97B?

Accepted Answer

Profitability index for a volume trade-off decision = Unit contribution margin F1F1F1S1F1F1F10 Amount of the constrained resource required by one unit = ($432.00 - $302.40)F1F1F1S1F1F1F10 16 minutes = $129.60 F1F1F1S1F1F1F10 16 minutes = $8.10 per minute

Question 20

Relative profitability measures should be used only when the company is not faced with a constraint.

Accepted Answer

Relative profitability measures can still be useful even when a company is faced with a constraint, such as limited resources or capacity. These measures allow the company to identify which products or services provide the highest return on investment and prioritize them accordingly. However, it is important to consider the constraint when interpreting the results and making decisions.

Quiz 31: Profitability Analysis

To encourage salespersons to sell the most profitable products,they should be paid sales commissions as straight percentage of the selling price of each product.

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 expected market share of the project by the amount of long-term investment funds required by the project.

Omoyosi 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 V66L: What is the profitability index for job V66L?

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

Absolute profitability is concerned with the impact on an organization's overall profits of adding or dropping a particular segment-without making any other changes.

When a company has a production constraint,the opportunity cost of using the constrained resource can be determined by multiplying the amount of the constrained resource used by the opportunity cost per unit of the constrained resource.

Beatie 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 K56L: What is the profitability index for product K56L?

If sales revenues are used in the denominator in the profitability index for a product then:

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

Relative profitability should be measured by dividing the segment's market share by the amount of the constrained resource it requires.

Armster Corporation has provided the following data concerning its two products: The profitability index for product B10E is closest to:

Bruck 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 D25Y: What is the profitability index for job D25Y?

Lachapelle 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 A97B: What is the profitability index for product A97B?

Relative profitability measures should be used only when the company is not faced with a constraint.