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Appendix B Profitability Analysis: True/False Questions
Appendix B Profitability Analysis: True/False Questions
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.
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.
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.
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.
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.
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.
13. Measuring relative profitability makes sense only when a constraint exists that forces
trade-offs among segments.
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.
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
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
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
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
Solution:
Amount of
Constrained
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
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
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
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:
Solution:
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:
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:
Solution:
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:
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
Solution:
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
Solution:
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:
27. The same constrained resource is used by four different products at Coloma
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?
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.
28. Byod 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?
A) L300
B) L400
C) L200
D) L100
Solution:
From the standpoint of the entire company, the products should be ranked on the basis
of the profitability index.
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:
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:
The selling price of the new product must cover at least its variable cost and the
opportunity cost of using the constrained resource:
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:
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:
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
D) $70.20 per minute
Solution:
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:
New product:
Variable cost per unit............................................. $150.00
Opportunity cost per unit (19 minutes × $6.40)..... 121.60
Minimum acceptable selling price......................... $271.60
H84T C22T
Selling price....................... $288.00 $38.00
Unit variable cost............... $259.20 $34.20
Monthly demand (units)..... 410 3,330
The constrained resource is a particular machine that is available for 9,700 minutes each
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:
36. What is the maximum contribution margin the company can earn per month?
A) $24,462
B) $17,949
C) $18,126
D) $17,774
Solution:
37. 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) $3.80 per minute
B) $1.90 per minute
C) $28.80 per minute
D) $1.80 per minute
Solution:
38. The company is considering launching a new product that would have a variable cost
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:
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:
40. What is the maximum contribution margin the company can earn per month?
A) $35,520
B) $31,083
C) $44,240
D) $26,800
Solution:
41. 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) $4.00 per minute
B) $2.00 per minute
C) $20.00 per minute
D) $8.00 per minute
Solution:
42. The company is considering launching a new product that would have a variable cost
of $157.00 per unit and no avoidable fixed costs. It would require 19 minutes of the
constrained resource. The absolute minimum acceptable selling price for the new
product should be:
A) $157.00
B) $233.00
C) $195.00
D) $159.00
Solution:
New product:
Variable cost per unit................................................ $157.00
Opportunity cost per unit (19 minutes × $2.00)........ 38.00
Minimum acceptable selling price............................ $195.00
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
The constrained resource is a particular machine that is available for 10,400 minutes each
month.
43. How many units of product M93U should be produced each month?
A) 1,975
B) 285
C) 0
D) 960
Solution:
44. 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) $49.60 per minute
B) $81.60 per minute
C) $12.40 per minute
D) $10.20 per minute
Solution:
N64J V96I
Selling price......................... $78.00 $304.00
Unit variable cost................. $46.80 $243.20
Monthly demand (units)...... 2,440 360
The constrained resource is a particular machine that is available for 9,600 minutes each
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:
46. 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) $31.20 per minute
B) $60.80 per minute
C) $10.40 per minute
D) $3.20 per minute
Solution:
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:
48. 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) $1.20 per minute
B) $4.80 per minute
C) $18.00 per minute
D) $1.60 per minute
Solution:
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
The constrained resource is a particular machine that is available for 9,600 minutes each
month. Each unit of product I85 requires 2 minutes on this machine. Each unit of product S47
requires 11 minutes on this machine.
49. What is the maximum contribution margin the company can earn per month?
A) $25,584
B) $30,336
C) $34,560
D) $48,816
Solution:
50. The company is considering launching a new product that would have a variable cost
of $198.00 per unit. It would require 17 minutes of the constrained resource. The
absolute minimum acceptable selling price for the new product should be:
A) $198.00
B) $238.80
C) $40.80
D) $200.40
Solution:
New product:
Variable cost per unit................................................ $198.00
Opportunity cost per unit (17 minutes × $2.40)........ 40.80
Minimum acceptable selling price............................ $238.80
S00Y Y85S
Selling price................................... $57.00 $60.00
Unit variable cost........................... $51.30 $54.00
Monthly demand (units)................. 2,150 640
The constrained resource is a particular machine that is available for 10,100 minutes each
month. Each unit of product S00Y requires 3 minutes on this machine and each unit of
product Y85S requires 10 minutes on this machine.
51. What is the maximum contribution margin the company can earn per month?
A) $10,870
B) $16,095
C) $14,445
D) $12,651
Solution:
52. The company is considering launching a new product that would have a variable cost
of $148.00 per unit. It would require 11 minutes of the constrained resource. The
absolute minimum acceptable selling price for the new product should be:
A) $148.00
B) $154.60
C) $168.90
D) $148.60
Solution:
New product:
Variable cost per unit................................................ $148.00
Opportunity cost per unit (11 minutes × $0.60)........ 6.60
Minimum acceptable selling price............................ $154.60
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.
53. What is the maximum contribution margin the company can earn per month?
A) $19,920
B) $13,200
C) $23,280
D) $16,490
Solution:
54. The company is considering launching a new product that would have a variable cost
of $142.00 per unit and no avoidable fixed costs. It would require 10 minutes of the
constrained resource. The absolute minimum acceptable selling price for the new
product should be:
A) $142.00
B) $142.80
C) $166.00
D) $150.00
Solution:
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
The constrained resource is a particular machine that is available for 10,400 minutes each
month.
55. How many units of product G90K should be produced each month?
A) 650
B) 0
C) 377
D) 1,313
Solution:
56. What is the maximum contribution margin the company can earn per month?
A) $78,364
B) $59,800
C) $87,100
D) $68,990
Solution:
B06G P87G
Selling price....................... $260.00 $38.00
Unit variable cost............... $234.00 $26.60
Monthly demand (units)..... 610 2,990
The constrained resource is a particular machine that is available for 9,600 minutes each
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:
58. What is the maximum contribution margin the company can earn per month?
A) $35,810
B) $43,498
C) $39,692
D) $49,946
Solution:
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:
60. What is the maximum contribution margin the company can earn per month?
A) $57,724
B) $41,089
C) $46,048
D) $36,040
Solution:
Paup 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.
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:
From the standpoint of the entire company, the products should be ranked on the basis
of the profitability index.
The same constrained resource is used by four different products at Kessinger 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.
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:
From the standpoint of the entire company, the products should be ranked on the basis
of the profitability index.
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:
Ans:
Amount of
Constrained
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
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
b.
Incremental Profit
Job 4........... $14,148
Job 1........... 13,896
Job 6........... 9,216
Job 5........... 4,080
Total........... $41,340
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:
Ans:
Amount of
Constrained
Resource Profitability
Incremental Required Index
Segment Profit (hours) (per hour)
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
b.
Incremental Profit
Project 6..... $ 5,820
Project 2..... 5,904
Project 5..... 4,872
Project 4..... 7,018
Total........... $23,614
Required:
Ans:
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
b.
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
Required:
Ans:
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
d. Selling price of new product > $223.00 + ($3.60 per gram × 24 grams) = $223.00
+ $86.40 = $309.40
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:
Ans:
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
c. Selling price of new product > $269.00 + ($8.40 per ounce × 26 ounces) = $269.00
+ $218.40 = $487.40
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
Constrained resource required per unit (grams)..... 7 10
Demand (units)....................................................... 980 710
Required:
Ans:
b.
Total constrained resource available................................................. 10,000
Less constrained resource required to produce 980 units of G10..... 6,860
Remaining constrained resource available........................................ 3,140
Less constrained resource required by 314 units of K99.................. 3,140
Remaining constrained resource available........................................ 0
c.
G10 K99 Total
Unit contribution margin.... $16.80 $22.00
Volume (units)................... 980 314
Contribution margin........... $16,464 $6,908 $23,372
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:
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?
Ans:
b.
Total constrained resource available................................................. 9,500
Less constrained resource required to produce 1,140 units of U46. . 5,700
Remaining constrained resource available........................................ 3,800
Less constrained resource required by 380 units of P83................... 3,800
Remaining constrained resource available........................................ 0
c.
U46 P83 Total
Unit contribution margin.......... $17.00 $28.00
Volume (units)......................... 1,140 380
Contribution margin................. $19,380 $10,640 $30,020
72. Delapena 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.
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.
The company does not have enough of the constrained resource to satisfy for demand
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.
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:
The selling price of the new product must cover at least its variable cost and the
opportunity cost of using the constrained resource:
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:
The selling price of the new product must cover at least its variable cost and the
opportunity cost of using the constrained resource: