Appendix B Profitability Analysis: True/False Questions

Appendix B Profitability Analysis
True/False Questions
1. When a company does not have a constraint, the relative profitability of its business
segments should be measured by dividing their incremental profits by their total
revenues.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium
2. Relative profitability should be measured by dividing the incremental profit from a

segment by its market share.

3. The profitability index is computed by dividing the incremental profit from a segment
by the amount of the constrained resource required by the segment.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy
4. 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 market share of the
project.

5. A portrait painter has been asked to do far more portraits in the next three months than
she has time to paint during that time period. To rank the possible portraits in order of
their profitability, she should divide each portrait's estimated incremental profit by the
amount of she intends to charge for the portrait.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-3

6. 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 the
customer is charged for the daily meal.

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

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 unit contribution of each model by the amount of time an
artisan requires to make the model.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking

9. To encourage salespersons to sell the most profitable products, they should be paid
sales commissions based on product margins–revenues less fully allocated costs.

10. When a company has a production constraint, the selling price of any new product
should cover both its variable cost and the out-of-pocket cost of the constrained
resource.

AICPA FN: Reporting LO: 3 Level: Hard
B-4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

11. 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 most profitable current product.

AICPA FN: Reporting LO: 3 Level: Hard
12. Absolute profitability is determined by subtracting a segment's fully allocated costs

from its revenues.

13. Measuring relative profitability makes sense only when a constraint exists that forces
trade-offs among segments.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking

Multiple Choice Questions
14. The profitability index in a volume trade-off decision should be computed by:
A) dividing each product's contribution margin by the amount of the constrained
resource used by the product.
B) dividing each product's contribution margin by its selling price.
C) dividing each product's selling price by the amount of the constrained resource
used by the product.
D) dividing each product's variable cost by its selling price.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking

15. The absolute profitability of a business segment is determined by:

A) subtracting the variable costs of the business segment from its revenue.
B) subtracting the avoidable costs of the business segment from its revenue.
C) subtracting the full costs, including allocations of common fixed costs, of the
business segment from its revenue.
D) finding the larger of the segments full costs or its revenues.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking


16. Needles 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
V42J:
Revenue........................................................................ $186,200
Avoidable cost............................................................. 111,720
Incremental profit......................................................... $ 74,480
Amount of the constrained resource used by the job... 380 hours
What is the profitability index for job V42J?

A) $294 per hour
B) 0.40
C) $196 per hour
D) $490 per hour
Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Solution:
Amount of
Constrained
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
V42J........... $74,480 380 $196
17. Bridgewater Corporation would like to determine the relative profitability of a number
of jobs. For example, the revenue from Job R48D is $78,000 and its avoidable costs
amount to $70,200, resulting in an incremental profit of $7,800. Furthermore, the job
requires 150 hours of the constrained resource. What is the profitability index for job
R48D?
A) 0.10
B) $468 per hour
C) $52 per hour
D) $520 per hour


Solution:
Amount of
Constrained
R48D.......... $7,800 150 $52
18. Farace 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
P13K:
Revenue.............................. $112,000
Avoidable cost................... 78,400
Incremental profit............... $ 33,600
Amount of the constrained resource used by the job........................ 280 hours

Percentage of the total company profit for the period from the job.. 32%
What is the profitability index for job P13K?

A) $400 per hour
B) 0.30
C) $120 per hour
D) 0.32

Solution:
Amount of
Constrained
P13K.......... $33,600 280 $120

19. Vielmas Corporation would like to determine the relative profitability of a number of
jobs. For example, job Q89G has revenues of $170,500 and avoidable costs of
$102,300, resulting in an incremental profit of $68,200. The job requires 310 hours of
the constrained resource. The job is responsible for 11% of the company's total profit
for the period. What is the profitability index for job Q89G?
A) 0.11
B) $550 per hour
C) $220 per hour
D) 0.40

Solution:
Amount of
Constrained
Q89G.......... $68,200 310 $220
20. Papelian 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 M75A:
Selling price................................... $240.00

Variable cost per unit..................... 168.00
Unit contribution margin................ $ 72.00
Amount of the constrained resource used by the job... 12 minutes

Monthly unit sales........................................................ 3,800 units
What is the profitability index for product M75A?

A) $273,600
B) 0.30
C) $20.00 per minute
D) $6.00 per minute
Ans: D AACSB: Analytic AICPA BB: Critical Thinking


Solution:
Computation of the profitability index:

M75A
Selling price.............................................................. $240.00
Variable cost............................................................. 168.00
Unit contribution margin........................................... $ 72.00
Constrained resource required per unit (minutes)..... 12
Profitability index (per minute)................................ $6.00
21. Trosper 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 Y82U is $264.00, its unit variable cost is $237.60, and its unit
contribution margin is $26.40. One unit of the product requires 11 minutes of the
constrained resource. Monthly sales are 5,200 units. What is the profitability index for
product Y82U?
A) $2.40 per minute
B) 0.10
C) $137,280
D) $24.00 per minute

Solution:

Y82U
Selling price.............................................................. $264.00
Variable cost............................................................. 237.60
Constrained resource required per unit (minutes)..... 11
Profitability index (per minute)................................ $2.40

22. Sept 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 A58E:
Selling price.......................................................................... $253.00

Variable cost per unit............................................................ $177.10
Amount of the constrained resource required by one unit.... 11 grams
Monthly unit sales................................................................. 2,300 units
What is the profitability index for product A58E?

A) $6.90 per gram
B) $23.00 per gram
C) 0.30
D) $174,570

Solution:

A58E
Selling price.............................................................. $253.00
Variable cost............................................................. 177.10
Constrained resource required per unit (grams)........ 11
Profitability index (per gram)................................... $6.90
23. Mckendrick 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 X99M is $144.00 and its unit variable cost is $100.80. One
unit of the product requires 6 ounces of the constrained resource. Monthly sales are
7,400 units. What is the profitability index for product X99M?
A) $319,680
B) 0.30
C) $7.20 per ounce
D) $24.00 per ounce


Solution:

X99M
Selling price.............................................................. $144.00
Variable cost............................................................. 100.80
Constrained resource required per unit (ounces)...... 6
Profitability index (per ounce).................................. $7.20
24. Claywell Corporation has provided the following data concerning its two products:
L41M R62D
Selling price.................................................................... $98.00 $480.00
Unit variable cost............................................................ 58.80 432.00
Unit contribution margin................................................. $39.20 $ 48.00
Amount of the constrained resource required for one

unit of the product (grams).......................................... 7 16
Monthly unit demand...................................................... 4,600 8,400
The profitability index for product L41M is closest to:

A) 0.40
B) 0.45
C) 0.31
D) $5.60 per gram

Solution:

L41M
Selling price........................................................... $98.00
Variable cost.......................................................... 58.80
Unit contribution margin........................................ $39.20
Constrained resource required per unit (grams)..... 7
Profitability index (per gram)................................ $5.60

25. Delle Corporation has provided the following data concerning its two products:
Z31X L25X
Selling price.................................................................... $87.00 $64.00
Unit variable cost............................................................ $52.20 $38.40
Amount of the constrained resource required for one
unit of the product (ounces)......................................... 3 2
Monthly unit demand...................................................... 6,600 6,700
The profitability index for product Z31X is closest to:

A) $29.00 per ounce
B) $11.60 per ounce
C) 0.57
D) 0.40

Solution:

Z31X
Selling price........................................................... $87.00
Variable cost.......................................................... 52.20
Unit contribution margin........................................ $34.80
Constrained resource required per unit (ounces)... 3
Profitability index (per ounce)............................... $11.60

26. Bynum Corporation has provided the following data concerning its two products–U68
and R64:
U68 R64
Monthly unit demand.................. 2,000 3,900
Selling price................................ $30.00 $216.00
Unit variable cost........................ $24.00 $194.40
The total amount of the constrained resource available each month is 33,200 grams.
Each unit of product U68 requires 2 grams of the constrained resource and each unit of
product R64 requires 8 grams. What is the maximum contribution margin the
company can earn per month?
A) $90,840
B) $96,240
C) $90,772
D) $90,240


Solution:

U68 R64
Selling price........................................................... $30.00 $216.00
Variable cost.......................................................... 24.00 194.40
Unit contribution margin........................................ $ 6.00 $ 21.60
Constrained resource required per unit (grams)..... 2 8
Profitability index (per gram)................................ $3.00 $2.70
According to the profitability index, the most profitable product is U68.
Total constrained resource available................................................. 33,200

Less constrained resource required to produce 2,000 units of U68. . 4,000
Remaining constrained resource available........................................ 29,200
Less constrained resource required by 3,650 units of R64*............. 29,200
Remaining constrained resource available........................................ 0
*29,200 ÷ 8 grams per unit of R64 = 3,650 units of R64
U68 R64 Total

Unit contribution margin.... $6.00 $21.60
Volume (units)................... 2,000 3,650
Contribution margin........... $12,000 $78,840 $90,840

27. The same constrained resource is used by four different products at Coloma
Corporation. Data concerning those products appear below:
O100 O200 O300 O400

Unit selling price............................ $32.50 $27.90 $14.80 $41.80
Unit variable cost........................... $14.30 $5.60 $2.40 $21.70
Amount of the constrained
resource required........................ 0.47 0.40 0.29 0.58
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?
A) O100
B) O200
C) O300
D) O400

Solution:
From the standpoint of the entire company, the products should be ranked on the basis
of the profitability index.
O100 O200 O300 O400

Unit selling price........................................ $32.50 $27.90 $14.80 $41.80
Unit variable cost....................................... 14.30 5.60 2.40 21.70
Unit contribution margin............................ $18.20 $22.30 $12.40 $20.10
Amount of the constrained resource
required................................................... 0.47 0.40 0.29 0.58
Profitability index...................................... $38.72 $55.75 $42.76 $34.66
Ranking...................................................... 3 1 2 4
According to the profitability index, product O200 should be emphasized.

28. Byod Corporation has four different products that use the same constrained resource.
Data concerning those products appear below:
L100 L200 L300 L400

Unit selling price............................ $30.90 $28.20 $19.00 $36.60
Unit variable cost........................... $13.90 $10.70 $4.80 $19.80
Amount of the constrained
resource required........................ 0.40 0.34 0.20 0.50
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?
A) L300
B) L400
C) L200
D) L100

Solution:
L100 L200 L300 L400

required................................................... 0.40 0.34 0.20 0.50
Ranking...................................................... 3 2 1 4
According to the profitability index, product L300 should be emphasized.

29. Wortham Corporation has designed a new product, E71, whose variable cost is $87.90
per unit and that requires 2.10 minutes of the constrained resource. The opportunity
cost is $29.00 per minute used of the constrained resource. What is the minimum
acceptable selling price for the new product?
A) $87.90
B) $148.80
C) $60.90
D) $116.90

Solution:
The selling price of the new product must cover at least its variable cost and the
opportunity cost of using the constrained resource:
Variable cost per unit............................................................ $ 87.90

Opportunity cost of using the constrained resource:
Amount of constrained resource per unit (a)..................... 2.10
Opportunity cost per unit of the constrained resource (b). $29.00
Total opportunity cost (a) × (b).......................................... 60.90
Minimum selling price.......................................................... $148.80
30. Wesner Corporation is about to announce a new product, R58, whose variable cost is
$120.20 per unit and that would require 8.40 grams of a raw material that is the
constrained resource in the company. The opportunity cost to use this constrained
resource is $52.00 per gram. What is the minimum acceptable selling price for the new
product?
A) $557.00
B) $172.20
C) $436.80
D) $120.20


Solution:

Use the following to answer questions 31-34:
The management of Gotay Corporation has provided the following data concerning its two
products:
S14O L95I
Selling price............................................... $234.00 $240.00
Unit variable cost....................................... $163.80 $144.00
Constrained resource required for one unit
of the product (minutes)......................... 9 15
Monthly demand (units)............................. 700 490
The constrained resource is a particular machine that is available for 9,900 minutes each
month.

31. How many units of product L95I should be produced each month?
A) 240
B) 910
C) 0
D) 490

Solution:

S14O L95I
Selling price.............................................................. $234.00 $240.00
Variable cost............................................................. 163.80 144.00
Unit contribution margin........................................... $ 70.20 $ 96.00
Constrained resource required per unit (minutes)..... 9 15
Profitability index (per minute)................................ $7.80 $6.40
According to the profitability index, the most profitable product is S14O.

Less constrained resource required to produce 700 units of S14O... 6,300
Less constrained resource required by 240* units of L95I............... 3,600
*3,600 ÷ 15 minutes per unit of L95I = 240

32. What is the maximum contribution margin the company can earn per month?
A) $72,180
B) $96,180
C) $66,930
D) $69,757

Solution:

S14O L95I
Selling price.............................................................. $234.00 $240.00
Variable cost............................................................. 163.80 144.00
According to the profitability index, the most profitable product is S14O.

Less constrained resource required to produce 700 units of S14O... 6,300
Less constrained resource required by 240* units of L95I............... 3,600
*3,600 ÷ 15 minutes per unit of L95I = 240
S14O L95I Total

Unit contribution margin.......... $ 70.20 $96.00
Volume (units)......................... 700 240
Contribution margin................. $49,140 $23,040 $72,180

33. 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?
A) $96.00 per minute
B) $7.80 per minute
C) $6.40 per minute

Solution:

S14O L95I
Selling price.............................................................. $234.00 $240.00
Variable cost............................................................. 163.80 144.00
34. The company is considering launching a new product that would have a variable cost
of $150.00 per unit. It would require 19 minutes of the constrained resource. The
absolute minimum acceptable selling price for the new product should be:
A) $271.60
B) $150.00
C) $298.20
D) $156.40


Solution:

S14O L95I
Selling price........................................................... $234.00 $240.00
Variable cost.......................................................... 163.80 144.00
Constrained resource required per unit (minutes).. 9 15
Profitability index (per minute)............................. $7.80 $6.40
New product:
Variable cost per unit............................................. $150.00
Opportunity cost per unit (19 minutes × $6.40)..... 121.60
Minimum acceptable selling price......................... $271.60
Farthing Corporation's two products have the following characteristics:
H84T C22T
Selling price....................... $288.00 $38.00
Unit variable cost............... $259.20 $34.20
Monthly demand (units)..... 410 3,330
month. Each unit of product H84T requires 16 minutes on this machine and each unit of
product C22T requires 2 minutes on this machine.

35. How many units of product H84T should be produced each month?
A) 190
B) 0
C) 826
D) 410

Solution:

H84T C22T
Selling price.............................................................. $288.00 $38.00
Variable cost............................................................. 259.20 34.20
According to the profitability index, the most profitable product is C22T.

Less constrained resource required to produce 3,330 units of C22T 6,660
Less constrained resource required by 190 units of H84T............... 3,040
*3,040 ÷ 16 minutes per unit = 190

A) $24,462
B) $17,949
C) $18,126
D) $17,774

Solution:

H84T C22T
Selling price.............................................................. $288.00 $38.00
Variable cost............................................................. 259.20 34.20
According to the profitability index, the most profitable product is C22T.

Less constrained resource required to produce 3,330 units of C22T 6,660
Less constrained resource required by 190 units of H84T............... 3,040
*3,040 ÷ 16 minutes per unit = 190

A) $3.80 per minute
B) $1.90 per minute
D) $1.80 per minute

Solution:

H84T C22T
Selling price.............................................................. $288.00 $38.00
Variable cost............................................................. 259.20 34.20
of $69.00 per unit and no avoidable fixed costs. It would require 18 minutes of the
constrained resource. The absolute minimum acceptable selling price for the new
product should be:
A) $103.20
B) $69.00
C) $101.40
D) $70.80


Solution:

H84T C22T
Selling price.............................................................. $288.00 $38.00
Variable cost............................................................. 259.20 34.20
New product:
Variable cost per unit................................................ $ 69.00
Opportunity cost per unit (18 minutes × $1.80)........ 32.40
Minimum acceptable selling price............................ $101.40
Mackynen Products Inc. makes two products–P99V and U15X. Product P99V's selling price
is $20.00 and its unit variable cost is $12.00. Product U15X's selling price is $50.00 and its
unit variable cost is $30.00. The monthly demand is 3,730 units for product P99V and 720
units for U15X. The constrained resource is a particular machine that is available for 10,300
minutes each month. Each unit of product P99V requires 2 minutes on this machine and each
unit of product U15X requires 10 minutes on this machine.

39. How many units of product U15X should be produced each month?
A) 284
B) 720
C) 0
D) 1,466

Solution:

P99V U15X
Selling price.............................................................. $20.00 $50.00
Variable cost............................................................. 12.00 30.00
Unit contribution margin........................................... $ 8.00 $20.00
According to the profitability index, the most profitable product is P99V.

Less constrained resource required to produce 3,730 units of P99V 7,460
Less constrained resource required by 284 units of U15X*............. 2,840
*2,840 ÷ 10 minutes per unit = 284 units

A) $35,520
B) $31,083
C) $44,240
D) $26,800

Solution:

P99V U15X
Selling price.............................................................. $20.00 $50.00
Variable cost............................................................. 12.00 30.00
According to the profitability index, the most profitable product is P99V.

Less constrained resource required to produce 3,730 units of P99V 7,460
Less constrained resource required by 284 units of U15X*............. 2,840
*2,840 ÷ 10 minutes per unit = 284 units
P99V U15X Total

Unit contribution margin.......... $8.00 $20.00
Volume (units)......................... 3,730 284

A) $4.00 per minute
B) $2.00 per minute
D) $8.00 per minute

Solution:

P99V U15X
Selling price.............................................................. $20.00 $50.00
Variable cost............................................................. 12.00 30.00
product should be:
A) $157.00
B) $233.00
C) $195.00
D) $159.00


Solution:

P99V U15X
Selling price.............................................................. $20.00 $50.00
Variable cost............................................................. 12.00 30.00
New product:
Variable cost per unit................................................ $157.00
The management of Krupke Corporation has provided the following data concerning its two
products:
M93U R20W
Selling price........................................ $272.00 $124.00
Unit variable cost................................ $190.40 $74.40
Constrained resource required for one
unit of the product (minutes).......... 8 4
Monthly demand (units)..................... 960 2,030
month.

43. How many units of product M93U should be produced each month?
A) 1,975
B) 285
C) 0
D) 960

Solution:

M93U R20W
Selling price.............................................................. $272.00 $124.00
Variable cost............................................................. 190.40 74.40
According to the profitability index, the most profitable product is R20W.

Less constrained resource required to produce 2,030 units of R20W 8,120
Less constrained resource required by 285 units of M93U*............ 2,280
*2,280 minutes ÷ 8 minutes per unit = 285 units

B) $81.60 per minute

Solution:

M93U R20W
Selling price.............................................................. $272.00 $124.00
Variable cost............................................................. 190.40 74.40
Fairless Corporation's two products have the following characteristics:
N64J V96I
Selling price......................... $78.00 $304.00
Unit variable cost................. $46.80 $243.20
Monthly demand (units)...... 2,440 360
month. Each unit of product N64J requires 3 minutes on this machine and each unit of product
V96I requires 19 minutes on this machine.

45. How many units of product V96I should be produced each month?
A) 745
B) 0
C) 120
D) 360

Solution:

N64J V96I
Selling price.............................................................. $78.00 $304.00
Variable cost............................................................. 46.80 243.20
Unit contribution margin........................................... $31.20 $ 60.80
According to the profitability index, the most profitable product is N64J.

Less constrained resource required to produce 2,440 units of N64J 7,320
Less constrained resource required by 120 units of V96I*............... 2,280
*2,280 minutes ÷ 19 minutes per unit = 120
B) $60.80 per minute
D) $3.20 per minute


Solution:

N64J V96I
Selling price.............................................................. $78.00 $304.00
Variable cost............................................................. 46.80 243.20
Unit contribution margin........................................... $31.20 $ 60.80
Penders Products Inc. makes two products–T40U and A47M. Product T40U's selling price is
$180.00 and its unit variable cost is $162.00. Product A47M's selling price is $24.00 and its
unit variable cost is $19.20. The monthly demand is 520 units for product T40U and 2,040
units for A47M. The constrained resource is a particular machine that is available for 10,200
minutes each month. Each unit of product T40U requires 15 minutes on this machine and
each unit of product A47M requires 3 minutes on this machine.

47. How many units of product T40U should be produced each month?
A) 0
B) 520
C) 928
D) 272

Solution:

T40U A47M
Selling price.............................................................. $180.00 $24.00
Variable cost............................................................. 162.00 19.20
According to the profitability index, the most profitable product is A47M.

Less constrained resource required to produce 2,040 units of A47M 6,120
Less constrained resource required by 272 units of T40U*............. 4,080
A) $1.20 per minute
B) $4.80 per minute
D) $1.60 per minute


Solution:

T40U A47M
Selling price.............................................................. $180.00 $24.00
Variable cost............................................................. 162.00 19.20
The management of Savarese Corporation has provided the following data concerning its two
products–I85 and S47:
I85 S47
Monthly demand (units)................. 3,040 680
Selling price................................... $24.00 $118.80
Unit variable cost........................... $16.80 $92.40
month. Each unit of product I85 requires 2 minutes on this machine. Each unit of product S47
requires 11 minutes on this machine.

A) $25,584
B) $30,336
C) $34,560
D) $48,816

Solution:

I85 S47
Selling price.............................................................. $24.00 $118.80
Variable cost............................................................. 16.80 92.40

Less constrained resource required to produce 3,040 units of I85. . . 6,080
Less constrained resource required by 320 units of S47*................. 3,520
I85 S47 Total

Volume (units)......................... 3,040 320

A) $198.00
B) $238.80
C) $40.80
D) $200.40

Solution:

I85 S47
Selling price.............................................................. $24.00 $118.80
Variable cost............................................................. 16.80 92.40
New product:
Hofheimer Corporation's two products have the following characteristics:
S00Y Y85S
Selling price................................... $57.00 $60.00
Unit variable cost........................... $51.30 $54.00
Monthly demand (units)................. 2,150 640
month. Each unit of product S00Y requires 3 minutes on this machine and each unit of
product Y85S requires 10 minutes on this machine.

A) $10,870
B) $16,095
C) $14,445
D) $12,651

Solution:

S00Y Y85S
Selling price.............................................................. $57.00 $60.00
Variable cost............................................................. 51.30 54.00
According to the profitability index, the most profitable product is S00Y.

Less constrained resource required to produce 2,150 units of S00Y 6,450
Less constrained resource required by 365 units of Y85S*.............. 3,650
S00Y Y85S Total

Volume (units)......................... 2,150 365

A) $148.00
B) $154.60
C) $168.90
D) $148.60

Solution:

S00Y Y85S
Selling price.............................................................. $57.00 $60.00
Variable cost............................................................. 51.30 54.00
New product:
Rao Products Inc. makes two products–N17O and A57Y. Product N17O's selling price is
$120.00 and its unit variable cost is $108.00. Product A57Y's selling price is $30.00 and its
unit variable cost is $18.00. The monthly demand is 470 units for product N17O and 1,470
units for A57Y. The constrained resource is a particular machine that is available for 10,200
minutes each month. Each unit of product N17O requires 15 minutes on this machine and
each unit of product A57Y requires 5 minutes on this machine.

A) $19,920
B) $13,200
C) $23,280
D) $16,490

Solution:

N17O A57Y
Selling price.............................................................. $120.00 $30.00
Variable cost............................................................. 108.00 18.00
Profitability index (per minutes)............................... $0.80 $2.40
According to the profitability index, the most profitable product is A57Y.

Less constrained resource required to produce 1,470 units of A57Y 7,350
Less constrained resource required by 190 units of N17O*............. 2,850
N17O A57Y Total

Volume (units)......................... 190 1,470

product should be:
A) $142.00
B) $142.80
C) $166.00
D) $150.00

Solution:

N17O A57Y
Selling price.............................................................. $120.00 $30.00
Variable cost............................................................. 108.00 18.00
Profitability index (per minutes)............................... $0.80 $2.40
New product:
Variable cost per unit................................................ $142
Opportunity cost per unit (10 minutes × $0.80)........ 8
Minimum acceptable selling price............................ $150
The management of Kurt Corporation has provided the following data concerning its two
products:
G90K E17G
Selling price................................................................. $160.00 $75.00
Unit variable cost......................................................... $128.00 $45.00
Constrained resource required for one unit of the
product (minutes)..................................................... 10 3
Monthly demand (units)............................................... 650 2,210
month.

55. How many units of product G90K should be produced each month?
A) 650
B) 0
C) 377
D) 1,313

Solution:

G90K E17G
Selling price.............................................................. $160.00 $75.00
Variable cost............................................................. 128.00 45.00
According to the profitability index, the most profitable product is E17G.

Less constrained resource required to produce 2,210 units of E17G 6,630
Less constrained resource required by 377 units of G90K*............. 3,770
A) $78,364
B) $59,800
C) $87,100
D) $68,990


Solution:

G90K E17G
Selling price.............................................................. $160.00 $75.00
Variable cost............................................................. 128.00 45.00
According to the profitability index, the most profitable product is E17G.

Less constrained resource required to produce 2,210 units of E17G 6,630
Less constrained resource required by 377 units of G90K*............. 3,770
G90K E17G Total

Volume (units)......................... 377 2,210
Finlayson Corporation's two products have the following characteristics:
B06G P87G
Selling price....................... $260.00 $38.00
Unit variable cost............... $234.00 $26.60
Monthly demand (units)..... 610 2,990
month. Each unit of product B06G requires 10 minutes on this machine and each unit of
product P87G requires 2 minutes on this machine.

57. How many units of product B06G should be produced each month?
A) 610
B) 0
C) 1,208
D) 362

Solution:

B06G P87G
Selling price.............................................................. $260.00 $38.00
Variable cost............................................................. 234.00 26.60
According to the profitability index, the most profitable product is P87G.

Less constrained resource required to produce 2,990 units of P87G 5,980
Less constrained resource required by 362 units of B06G*............. 3,620
A) $35,810
B) $43,498
C) $39,692
D) $49,946


Solution:

B06G P87G
Selling price.............................................................. $260.00 $38.00
Variable cost............................................................. 234.00 26.60
According to the profitability index, the most profitable product is P87G.

Less constrained resource required to produce 2,990 units of P87G 5,980
Less constrained resource required by 362 units of B06G*............. 3,620
B06G P87G Total

Volume (units)......................... 362 2,990
Coughlin Products Inc. makes two products–O58J and K04S. Product O58J's selling price is
$140.00 and its unit variable cost is $112.00. Product K04S's selling price is $78.00 and its
unit variable cost is $62.40. The monthly demand is 730 units for product O58J and 2,390
units for K04S. The constrained resource is a particular machine that is available for 10,300
minutes each month. Each unit of product O58J requires 10 minutes on this machine and each
unit of product K04S requires 3 minutes on this machine.

59. How many units of product O58J should be produced each month?
A) 1,447
B) 313
C) 0
D) 730

Solution:

O58J K04S
Selling price.............................................................. $140.00 $78.00
Variable cost............................................................. 112.00 62.40
According to the profitability index, the most profitable product is K04S.

Less constrained resource required to produce 2,390 units of K04S 7,170
Less constrained resource required by 313 units of O58J*.............. 3,130
A) $57,724
B) $41,089
C) $46,048
D) $36,040


Solution:

O58J K04S
Selling price.............................................................. $140.00 $78.00
Variable cost............................................................. 112.00 62.40
According to the profitability index, the most profitable product is K04S.

Less constrained resource required to produce 2,390 units of K04S 7,170
Less constrained resource required by 313 units of O58J*.............. 3,130
O58J K04S Total

Volume (units)......................... 313 2,390
Paup Corporation has four products that use the same constrained resource. Data concerning
those products appear below:
R100 R200 R300 R400

Unit selling price............................... $32.30 $27.30 $16.60 $32.20
Unit variable cost.............................. 14.50 7.90 4.50 16.10
Unit contribution margin................... $17.80 $19.40 $12.10 $16.10
required.......................................... 0.47 0.39 0.23 0.58
Profitability index............................. $37.87 $49.74 $52.61 $27.76
The company does not have enough of the constrained resource to satisfy for demand of all
four products.

61. 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?
A) R200
B) R100
C) R400
D) R300

Solution:
If the salespersons are paid commissions that are a set percentage of sales, then they
will favor the products with the highest selling prices. Since product R100 has the
highest selling price, it will be the product salespersons prefer to sell.
62. 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?
A) R100
B) R200
C) R300
D) R400

Solution:
R100 R200 R300 R400

Unit selling price..................................... $32.30 $27.30 $16.60 $32.20
Unit variable cost.................................... 14.50 7.90 4.50 16.10
Unit contribution margin......................... $17.80 $19.40 $12.10 $16.10
required................................................ 0.47 0.39 0.23 0.58
Profitability index................................... $37.87 $49.74 $52.61 $27.76
Ranking................................................... 3 2 1 4
According to the profitability index, product R300 should be emphasized.

The same constrained resource is used by four different products at Kessinger Corporation.
Data concerning those products appear below:
U100 U200 U300 U400

Unit selling price............................. $31.70 $21.00 $14.80 $36.00
Unit variable cost............................. $10.10 $6.90 $2.10 $18.70
required........................................ 0.49 0.35 0.26 0.59
The company does not have enough of the constrained resource to satisfy for demand of all
four products.
63. 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?
A) U400
B) U100
C) U200
D) U300

Solution:
If the salespersons are paid commissions that are a set percentage of sales, then they
will favor the products with the highest selling prices. Since product U400 has the
highest selling price, it will be the product salespersons prefer to sell.
64. 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?
A) U100
B) U200
C) U400
D) U300


Solution:
U100 U200 U300 U400

required................................................ 0.49 0.35 0.26 0.59
Ranking................................................... 2 3 1 4
According to the profitability index, product U300 should be emphasized.
Essay Questions
65. Bozich Corporation is considering six jobs for the upcoming period. Those jobs are
listed below, along with relevant data.
Amount of
Constrained
Resource
Incremental Required
Profit (hours)
Job 1........... $13,896 36
Job 2........... $7,316 31
Job 3........... $11,590 38
Job 4........... $14,148 36
Job 5........... $4,080 12
Job 6........... $9,216 24
The total amount of the constrained resource that is available during the upcoming
period is 108 hours.
Required:
a. Determine which jobs should be accepted for the upcoming period.

b. Determine the total incremental profit for the upcoming period if your plan from
part (a) above is adopted.

Ans:
a. Rank the segments on the basis of the profitability index:
Amount of
Constrained
Job 1........... $13,896 36 $386
Job 2........... $7,316 31 $236
Job 3........... $11,590 38 $305
Job 4........... $14,148 36 $393
Job 5........... $4,080 12 $340
Job 6........... $9,216 24 $384
Cumulative
Amount of Amount of
Constrained Constrained
Profitability Resource Resource
Index Required Required
Segment (per hour) (hours) (hours)
Job 4........... $393 36 36
Job 1........... $386 36 72
Job 6........... $384 24 96
Job 5........... $340 12 108
Job 3........... $305 38 146
Job 2........... $236 31 177
Job 4, Job 1, Job 6, and Job 5 should be accepted.
b.
Incremental Profit
Job 4........... $14,148
Job 1........... 13,896
Job 6........... 9,216
Job 5........... 4,080
Total........... $41,340
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 1 Level: Easy

66. Polosky LLC is a consulting firm that is considering six projects for the upcoming
period. The six projects under consideration are listed below, along with relevant data.
Amount of
Constrained
Resource
Incremental Required
Profit (hours)
Project 1..... $6,555 23
Project 2..... $5,904 16
Project 3..... $5,980 23
Project 4..... $7,018 22
Project 5..... $4,872 14
Project 6..... $5,820 15
The managing partner's time is the constraint in the firm. Only 67 hours of this
constrained resource are available during the upcoming period.
Required:
a. Determine which projects should be accepted for the upcoming period.

b. Determine the total incremental profit for the upcoming period if your plan from
part (a) above is adopted.

Ans:
a. Rank the projects on the basis of the profitability index:
Amount of
Constrained
Project 1..... $6,555 23 $285
Project 2..... $5,904 16 $369
Project 3..... $5,980 23 $260
Project 4..... $7,018 22 $319
Project 5..... $4,872 14 $348
Project 6..... $5,820 15 $388
Cumulative
Amount of Amount of
Constrained Constrained
Profitability Resource Resource
Index Required Required
Segment (per hour) (hours) (hours)
Project 6..... $388 15 15
Project 2..... $369 16 31
Project 5..... $348 14 45
Project 4..... $319 22 67
Project 1..... $285 23 90
Project 3..... $260 23 113
Project 6, Project 2, Project 5, and Project 4 should be accepted.
b.
Incremental Profit
Project 6..... $ 5,820
Project 2..... 5,904
Project 5..... 4,872
Project 4..... 7,018
Total........... $23,614

LO: 1 Level: Easy

67. Salus Corporation is considering the following six long-term projects:
Net Present Value Investment Required

Project 1..... $19,436 $11,300
Project 2..... $19,000 $12,500
Project 3..... $33,174 $19,400
Project 4..... $20,825 $17,500
Project 5..... $26,398 $19,700
Project 6..... $20,294 $14,600
Only $57,800 is available for investment in these projects.
Required:
a. Determine which projects should be accepted.

b. Determine the total net present value of all of the accepted projects if your plan
from part (a) above is adopted.
Ans:
a. Rank the projects on the basis of the profitability index:
Segment Net Present Value Investment Required Profitability Index

Project 1..... $19,436 $11,300 1.72
Project 2..... $19,000 $12,500 1.52
Project 3..... $33,174 $19,400 1.71
Project 4..... $20,825 $17,500 1.19
Project 5..... $26,398 $19,700 1.34
Project 6..... $20,294 $14,600 1.39
Cumulative
Profitability Investment Investment
Segment Index Required Required
Project 1..... 1.72 $11,300 $11,300
Project 3..... 1.71 $19,400 $30,700
Project 2..... 1.52 $12,500 $43,200
Project 6..... 1.39 $14,600 $57,800
Project 5..... 1.34 $19,700 $77,500
Project 4..... 1.19 $17,500 $95,000
Project 1, Project 3, Project 2, and Project 6 should be accepted.
b.

Net Present Value

Project 1..... $19,436
Project 3..... 33,174
Project 2..... 19,000
Project 6..... 20,294
Total........... $91,904

LO: 1 Level: Easy

68. Saraiva Corporation has two products that use the same constrained resource–a critical
raw material.
R28 Z55
Selling price.............................................................. $182.00 $144.00
Variable cost............................................................. $127.40 $86.40
Constrained resource required per unit (grams)........ 7 16
Demand (units).......................................................... 1,080 440
The total amount of the constrained resource available is 9,800 grams.
Required:
a. Which product is most profitable, given the company's constraint?

b. How much of each product should be produced?
c. What is the total contribution margin if your plan in part (b) above is followed?
d. The company is considering launching a new product whose variable cost is $223
and that requires 24 grams of the constrained resource. What is the minimum
selling price for the new product?
Ans:
a. Computation of the profitability index:

R28 Z55
Selling price........................................................... $182.00 $144.00
Variable cost.......................................................... 127.40 86.40
Profitability index.................................................. $7.80 $3.60
According to the profitability index, the most profitable product is R28.
b.
Total constrained resource available.................................................. 9,800
Less constrained resource required to produce 1,080 units of R28.... 7,560
Remaining constrained resource available......................................... 2,240
Less constrained resource required by 140 units of Z55.................... 2,240
Remaining constrained resource available......................................... 0
c.
R28 Z55 Total
Unit contribution margin................ $54.60 $57.60
Volume........................................... 1,080 140

Contribution margin....................... $58,968 $8,064 $67,032
d. Selling price of new product > $223.00 + ($3.60 per gram × 24 grams) = $223.00
+ $86.40 = $309.40

LO: 2,3 Level: Medium

69. The constraint at Parchman Inc. is a key raw material. A total of 9,600 ounces of this
constrained resource are available. Data concerning the company's two products, Y58
and J06, appear below:
Y58 J06
Demand (units)....... 1,850 3,700
Selling price........... $112.00 $44.00
Variable cost.......... $78.40 $26.40
Each unit of product Y58 requires 4 ounces of the constrained raw material; each unit
of product J06 requires 2 ounces.
Required:
a. In the present circumstances, which product is most profitable?

c. The company is considering launching a new product whose variable cost is $269
and that requires 26 ounces of the constrained resource. What is the minimum
acceptable selling price for the new product?

Ans:

Y58 J06
Selling price.............................................................. $112.00 $44.00
Variable cost............................................................. 78.40 26.40
Constrained resource required per unit (ounces)...... 4 2
Profitability index..................................................... $8.40 $8.80
According to the profitability index, the most profitable product is J06.
b.
Total constrained resource available................................................ 9,600
Less constrained resource required to produce 3,700 units of J06... 7,400
Remaining constrained resource available....................................... 2,200
Less constrained resource required by 550 units of Y58.................. 2,200
Remaining constrained resource available....................................... 0
Produce 3,700 units of J06 and 550 units of Y58.
c. Selling price of new product > $269.00 + ($8.40 per ounce × 26 ounces) = $269.00
+ $218.40 = $487.40

LO: 2,3 Level: Medium

70. Wentland Corporation has two products, G10 and K99, that use the same constrained
resource–a critical raw material. Data concerning those products follow:
G10 K99
Selling price........................................................... $56.00 $110.00
Variable cost.......................................................... $39.20 $88.00
Demand (units)....................................................... 980 710
The total amount of the constrained resource available is 10,000 grams.
Required:

Ans:

G10 K99
Selling price........................................................... $56.00 $110.00
Variable cost.......................................................... 39.20 88.00
Unit contribution margin........................................ $16.80 $ 22.00
Profitability index (per gram)................................ $2.40 $2.20
According to the profitability index, the most profitable product is G10.
b.
Less constrained resource required to produce 980 units of G10..... 6,860
Less constrained resource required by 314 units of K99.................. 3,140
c.
G10 K99 Total
Unit contribution margin.... $16.80 $22.00
Volume (units)................... 980 314
Contribution margin........... $16,464 $6,908 $23,372

LO: 2 Level: Easy

71. The constrained resource at Else Corporation is a key raw material. A total of 9,500
ounces of the constrained resource are available. Data concerning the company's two
products, U46 and P83, follow:
U46 P83
Demand (units)....... 1,140 630
Selling price........... $170.00 $70.00
Variable cost.......... $153.00 $42.00
Product U46 requires 5 ounces of the constrained resource; product P83 requires 10
ounces.
Required:
Ans:

U46 P83
Selling price.............................................................. $170.00 $70.00
Variable cost............................................................. 153.00 42.00
Constrained resource required per unit (ounces)...... 5 10
Profitability index (per ounce).................................. $3.40 $2.80
According to the profitability index, the most profitable product is U46.
b.
Less constrained resource required to produce 1,140 units of U46. . 5,700
Less constrained resource required by 380 units of P83................... 3,800
c.
U46 P83 Total
Volume (units)......................... 1,140 380

LO: 2 Level: Easy

72. Delapena Corporation has four products that use the same constrained resource. Data
concerning those products appear below:
M100 M200 M300 M400

Unit variable cost.................................... $17.10 $6.10 $4.00 $24.40
required............................................... 0.41 0.35 0.22 0.55
of all four products.
Required:
a. 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?
b. 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?
Ans:
a. If the salespersons are paid commissions that are a set percentage of sales, then
they will favor the products with the highest selling prices. Since product M400
has the highest selling price, it will be the product salespersons prefer to sell.
b. From the standpoint of the entire company, the products should be ranked on the
basis of the profitability index.
M100 M200 M300 M400

required................................................... 0.41 0.35 0.22 0.55
Ranking...................................................... 3 2 1 4
According to the profitability index, product M300 should be emphasized.

LO: 3 Level: Easy

73. The management of Garding Corporation is reviewing its policies concerning

compensation of salespersons. The company has four products that use the same
constrained resource. Data concerning those products appear below:
M100 M200 M300 M400

Unit variable cost.................................... $15.00 $7.00 $4.00 $32.90
required................................................ 0.43 0.34 0.21 0.53
of all four products.
Required:
a. 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?
b. 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?

Ans:
a. If the salespersons are paid commissions that are a set percentage of sales, then
they will favor the products with the highest selling prices. Since product M400
has the highest selling price, it will be the product salespersons prefer to sell.
b. From the standpoint of the entire company, the products should be ranked on the
basis of the profitability index.
M100 M200 M300 M400

required................................................ 0.43 0.34 0.21 0.53
Ranking................................................... 3 1 2 4
According to the profitability index, product M200 should be emphasized.

LO: 3 Level: Easy

74. Gala Corporation has designed a new product, E70, whose variable cost is $127.90 per
unit and that requires 5.40 minutes of the constrained resource. The opportunity cost is
$50.00 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 E70?
Ans:


LO: 3 Level: Easy

75. Zambrano Corporation is about to launch a new product, U34, whose variable cost is
$137.80 per unit and that would require 6.10 centiliters of a key raw material that is
the company's constrained resource. The opportunity cost of this raw material is
$67.00 per centiliter used.
Required:
What advice would you give to the company concerning the price that should be
charged for the new product U34?
Ans:


LO: 3 Level: Easy


Appendix B Profitability Analysis: True/False Questions

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Appendix B Profitability Analysis: True/False Questions

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Appendix B Profitability Analysis

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

2. Relative profitability should be measured by dividing the incremental profit from a

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-3

6. A catering service has contracts with a number of customers to supply lunches on a

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

B-4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

12. Absolute profitability is determined by subtracting a segment's fully allocated costs

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

Multiple Choice Questions

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

15. The absolute profitability of a business segment is determined by:

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-5

Amount of the constrained resource used by the job... 380 hours

What is the profitability index for job V42J?

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

B-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Amount of the constrained resource used by the job........................ 280 hours

What is the profitability index for job P13K?

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-7

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Selling price................................... $240.00

Amount of the constrained resource used by the job... 12 minutes

What is the profitability index for product M75A?

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

B-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Computation of the profitability index:

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

Computation of the profitability index:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-9

Selling price.......................................................................... $253.00

What is the profitability index for product A58E?

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

Computation of the profitability index:

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

B-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Computation of the profitability index:

Amount of the constrained resource required for one

The profitability index for product L41M is closest to:

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Computation of the profitability index:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-11

The profitability index for product Z31X is closest to:

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Computation of the profitability index:

B-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-13

Computation of the profitability index:

According to the profitability index, the most profitable product is U68.