1. Relative profitability should be measured by dividing the segment’s market share by the
amount of the constrained resource it requires.
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
expected market share of the project by the amount of long-term investment funds required by
the project.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
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.
9. Relative profitability measures should be used only when the company is not faced with a
constraint.
10. If sales revenues are used in the denominator in the profitability index for a product then:
11. The opportunity cost of using one unit of the constrained resource in a volume trade–off
decision is equal to:
12. 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?
13. 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?
14. 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?
15. 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?
16. 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?
17. 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?
18. Armster Corporation has provided the following data concerning its two products:
The profitability index for product B10E is closest to:
19. 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?
20. 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?
21. Heiskell Corporation has provided the following data concerning its two products:
The profitability index for product F78P is closest to:
22. Efford 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 I14H is $36.00, its unit variable cost is $28.80, and its unit contribution margin is $7.20.
One unit of the product requires 6 minutes of the constrained resource. Monthly sales are 1,700
units. What is the profitability index for product I14H?
23. The same constrained resource is used by four different products at Swaim 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?
24. Saska 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?
25. Tork Corporation is about to announce a new product, J82, whose variable cost is $113.70
per unit and that would require 6.40 grams of a raw material that is the constrained resource in
the company. The opportunity cost to use this constrained resource is $43.00 per gram. What is
the minimum acceptable selling price for the new product?
App B-19
26. Vanscoter Corporation has designed a new product, R83, whose variable cost is $86.60
per unit and that requires 3.10 minutes of the constrained resource. The opportunity cost is
$38.00 per minute used of the constrained resource. What is the minimum acceptable selling
price for the new product?
Whitacre Products Inc. makes two products—P32W and I90J. Product P32W’s selling price
is $44.00 and its unit variable cost is $26.40. Product I90J’s selling price is $220.00 and its unit
variable cost is $198.00. The monthly demand is 3,500 units for product P32W and 760 units for
I90J. The constrained resource is a particular machine that is available for 9,800 minutes each
month. Each unit of product P32W requires 2 minutes on this machine and each unit of product
I90J requires 10 minutes on this machine.
27. How many units of product I90J should be produced each month?