Exam 18: Profitability Analysis

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.

Attleson Corporation has designed a new product, R94, whose variable cost is $122.90 per unit and that requires 6.70 minutes of the constrained resource. The opportunity cost is $58.00 per minute used of the constrained resource. Required: What advice would you give to the company concerning the price that should be charged for the new product R94?

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?

Blomstrom Products Inc. makes two products-N81W and V55S. Product N81W's selling price is $20.00 and its unit variable cost is $12.00. Product V55S's selling price is $108.00 and its unit variable cost is $97.20. The monthly demand is 3,940 units for product N81W and 1,140 units for V55S. The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product N81W requires 2 minutes on this machine and each unit of product V55S requires 6 minutes on this machine. -Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?

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?

Kuchler Corporation has four 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. -If salespersons are paid commissions that are a set percentage of sales, which product would they prefer to sell? In other words, if it is a choice between selling one unit of one product and one unit of another, which product would they prefer to sell?

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

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

Blomstrom Products Inc. makes two products-N81W and V55S. Product N81W's selling price is $20.00 and its unit variable cost is $12.00. Product V55S's selling price is $108.00 and its unit variable cost is $97.20. The monthly demand is 3,940 units for product N81W and 1,140 units for V55S. The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product N81W requires 2 minutes on this machine and each unit of product V55S requires 6 minutes on this machine. -The company is considering launching a new product that would have a variable cost of $155.00 per unit and no avoidable fixed costs. It would require 5 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

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.

The same constrained resource is used by four different products at Debruin 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?

The management of Schacher Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 10,300 minutes each month. -What is the maximum contribution margin the company can earn per month?

Wakeman Products Inc. makes two products-W28H and Z28D. Product W28H's selling price is $27.00 and its unit variable cost is $21.60. Product Z28D's selling price is $170.00 and its unit variable cost is $153.00. The monthly demand is 2,030 units for product W28H and 730 units for Z28D. The constrained resource is a particular machine that is available for 9,500 minutes each month. Each unit of product W28H requires 3 minutes on this machine and each unit of product Z28D requires 10 minutes on this machine. -How many units of product Z28D should be produced each month?

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?

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?

The same constrained resource is used by four different products at Porraz 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?

Hofbauer Corporation's two products have the following characteristics: The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product M73O requires 6 minutes on this machine and each unit of product M26B requires 8 minutes on this machine. -The company is considering launching a new product that would have a variable cost of $169.00 per unit and no avoidable fixed costs. It would require 16 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:

The management of Schacher Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 10,300 minutes each month. -How many units of product J35V should be produced each month?

Demeester Corporation's two products have the following characteristics: The constrained resource is a particular machine that is available for 9,900 minutes each month. Each unit of product Y56G requires 10 minutes on this machine and each unit of product K46X requires 3 minutes on this machine. -What is the maximum contribution margin the company can earn per month?

The management of Cerruto Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 9,600 minutes each month. -The company is considering launching a new product that would have a variable cost of $117.00 per unit. It would require 6 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be: