Problem B-5 (continued)
5. The selling price for the new product should at least cover its variable
cost and opportunity cost:
Selling price of Variable cost of
+
the new product the new product
Opportunity cost Amount of the constrained
per unit of the × resource required by a unit
constrained resource of the new product
Se
lling price of $820 + $59 per hour × 10 hours
the new product
= $820 + $590 = $1,410
6. Salespersons who are paid a commission of 5% of gross revenues will
naturally prefer to sell a customer a pallet of anything other than cinder
Traditional
Brick
Textured
Facing
Cinder
Block
Roman
Brick
Gross revenues per
pallet ……………………
$756
$1,356
$589
$857
Ranking based on gross
revenues……………….
3
1
4
2
Profitability index ………..
$59
$79
$94
$88
Ranking based on
profitability index ……
4
3
1
2
To align the salespersons’ incentives with the interests of the company,
the sales.
Problem B-6 (45 minutes)
1. The relative profitability of segments should be measured by the
profitability index as follows:
Incremental profit from the segment
Profitability index= Amount of the constrained resource
used by the segment
Segment margin
Profitability= Segment revenue
allocated costs include avoidable costs
plus
other costs that are not
segment were eliminated.
Including unavoidable costs in the numerator of the profitability
2. It is appropriate to use the segment revenue in the denominator of the
measuring the relative profitability of segments.
When would total revenue be the organization’s constraint? In truth,
it is difficult to imagine situations in which total revenue would be the
However, this situation would rarely arise.
12 Managerial Accounting for Managers, 4th Edition
Problem B-6 (continued)
the case that relative profitability should
not
be measured using
segment revenues in the denominator.
Solutions Manual, Profitability Analysis Appendix 13
Problem B-7 (60 minutes)
1. This problem can be solved by first computing the profitability index of
each customer and then ranking the customers based on that
profitability index:
Customer
Incremental
Profit
(A)
Regina’s
Time
Required
(B)
Profitability
Index
(A) ÷ (B)
Afonso ……
$195
5
$39
Carloni ……
$259
7
$37
Cullins ……
$105
3
$35
Frese ……..
$170
5
$34
Gerst ……..
$117
3
$39
Jelovich ….
$124
4
$31
Klarr ………
$192
6
$32
Melby …….
$144
4
$36
Rideau ……
$150
5
$30
Towner …..
$256
8
$32
Customer
Profitability
Index
Regina’s
Time
Required
Cumulative
Amount of
Regina’s Time
Required
Afonso ……
$39
5
5
Gerst ……..
$39
3
8
Carloni ……
$37
7
15
Melby …….
$36
4
19
Cullins ……
$35
3
22
Frese ……..
$34
5
27
Klarr ………
$32
6
33
Towner …..
$32
8
41
Jelovich ….
$31
4
45
Rideau ……
$30
5
50
their reservations have to be cancelled.
14 Managerial Accounting for Managers, 4th Edition
Problem B-7 (continued)
2. The total profit on wedding cakes for the weekend after canceling the
four reservations would be:
Afonso ……
$195
Gerst ……..
117
Carloni ……
259
Melby……..
144
Cullins …….
105
Frese ……..
170
Total ………
$990
Notes:
Both Regina’s time and the cakes would have to be
very
carefully
decorating do not include hours that have been set aside as a buffer to
3. To avoid disappointing customers, reservations should probably not be
accepted for any particular week after 27 hours of Regina’s time have
June. This cutoff may need to be adjusted upward or downward over
time—the cakes that were reserved for the first week in June may not
overbooked or profitable cake orders are turned away, then the cutoff
should be adjusted upward.
Solutions Manual, Profitability Analysis Appendix 15
Problem B-7 (continued)
4. Ms. Therau should consider changing the way prices are set so that they
include a charge for Regina’s time. On average, the prices may be the
Because Regina will not be working more than 27 hours per week, if
another cake reservation is accepted, some other cake reservation will
5. Making Regina happy involves not asking her to work more than 27
hours per week decorating cakes. Making customers happy involves not
Ms. Therau should make sure that none of Regina’s time is wasted on
Ms. Therau should make sure that none of Regina’s time is wasted on
tasks that can be done by other persons. For example, an assistant
Ms. Therau should consider assigning an apprentice to Regina. The
decorating capacity.
Ms. Therau might consider subcontracting some of the less
Case B-8 (45 minutes)
Unit contribution margin
Profitability index for =
a volume trade-off decision Amount of the constrained
resource used by one unit
The operating expenses are all fixed.
Selling price
– Sales commission
– Cost of sales
Profitability index for =
a volume trade-off decision Amount of the constrained
resource used by one unit
The case states that management wants “to redirect the effort of
salespersons towards the more profitable products.” Therefore, the
available information, the best measure of relative profitability for purposes
of redirecting salespersons’ efforts would be:
Selling price
– Sales commission
– Cost of sales
Profitability index for =
a volume trade-off decision Sales commission
Solutions Manual, Profitability Analysis Appendix 17
Case B-8 (continued)
in the case.