Profitability analysis exams PDF

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True/False Questions 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 Relativ...

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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 FN: Reporting LO: 1

AICPA BB: Critical Thinking Level: Medium

2. Relative profitability should be measured by dividing the incremental profit from a segment by its market share. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 1

AICPA BB: Critical Thinking Level: Medium

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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 1

AICPA BB: Critical Thinking Level: Medium

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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 1

AICPA BB: Critical Thinking Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

B-3

Appendix B Profitability Analysis 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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 1

AICPA BB: Critical Thinking Level: Medium

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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking Level: Medium

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 FN: Reporting LO: 2

AICPA BB: Critical Thinking Level: Medium

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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking Level: Medium

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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 3

B-4

AICPA BB: Critical Thinking Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis 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. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking Level: Hard

12. Absolute profitability is determined by subtracting a segment's fully allocated costs from its revenues. Ans: False AACSB: Analytic AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking Level: Easy

13. Measuring relative profitability makes sense only when a constraint exists that forces trade-offs among segments. Ans: True AACSB: Analytic AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking Level: Easy

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 AICPA FN: Reporting LO: 2 Level: Easy 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 AICPA FN: Reporting LO: 4 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

B-5

Appendix B Profitability Analysis 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........................................................................ Avoidable cost.............................................................. Incremental profit.........................................................

$186,200 111,720 $ 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 AICPA FN: Reporting LO: 1 Level: Easy Solution:

Segment V42J...........

Incremental Profit $74,480

Amount of Constrained Resource Required (hours) 380

Profitability Index (per hour) $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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

B-6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis Solution:

Segment R48D..........

Incremental Profit $7,800

Amount of Constrained Resource Required (hours) 150

Profitability Index (per hour) $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.............................. Avoidable cost.................... Incremental profit...............

$112,000 78,400 $ 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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution:

Segment P13K..........

Incremental Profit $33,600

Amount of Constrained Resource Required (hours) 280

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Profitability Index (per hour) $120

B-7

Appendix B Profitability Analysis 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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Solution:

Segment Q89G..........

Incremental Profit $68,200

Amount of Constrained Resource Required (hours) 310

Profitability Index (per hour) $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................................... Variable cost per unit..................... Unit contribution margin................

$240.00 168.00 $ 72.00

Amount of the constrained resource used by the job... Monthly unit sales........................................................

12 minutes 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 AICPA FN: Reporting LO: 2 Level: Easy

B-8

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis Solution: Computation of the profitability index: Selling price.............................................................. Variable cost.............................................................. Unit contribution margin........................................... Constrained resource required per unit (minutes)..... Profitability index (per minute)................................

M75A $240.00 168.00 $ 72.00 12 $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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Computation of the profitability index: Selling price.............................................................. Variable cost.............................................................. Unit contribution margin........................................... Constrained resource required per unit (minutes)..... Profitability index (per minute)................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Y82U $264.00 237.60 $ 26.40 11 $2.40

B-9

Appendix B Profitability Analysis 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.......................................................................... Variable cost per unit............................................................ Amount of the constrained resource required by one unit.... Monthly unit sales.................................................................

$253.00 $177.10 11 grams 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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Computation of the profitability index: Selling price.............................................................. Variable cost.............................................................. Unit contribution margin........................................... Constrained resource required per unit (grams)........ Profitability index (per gram)...................................

A58E $253.00 177.10 $ 75.90 11 $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 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

B-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis Solution: Computation of the profitability index: Selling price.............................................................. Variable cost.............................................................. Unit contribution margin........................................... Constrained resource required per unit (ounces)...... Profitability index (per ounce)..................................

X99M $144.00 100.80 $ 43.20 6 $7.20

24. Claywell Corporation has provided the following data concerning its two products: Selling price.................................................................... Unit variable cost............................................................ Unit contribution margin.................................................

L41M R62D $98.00 $480.00 58.80 432.00 $39.20 $ 48.00

Amount of the constrained resource required for one unit of the product (grams).......................................... Monthly unit demand......................................................

7 4,600

16 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 Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Computation of the profitability index: Selling price........................................................... Variable cost........................................................... Unit contribution margin........................................ Constrained resource required per unit (grams)..... Profitability index (per gram)................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

L41M $98.00 58.80 $39.20 7 $5.60

B-11

Appendix B Profitability Analysis 25. Delle Corporation has provided the following data concerning its two products: Selling price.................................................................... Unit variable cost............................................................ Amount of the constrained resource required for one unit of the product (ounces)......................................... Monthly unit demand......................................................

Z31X L25X $87.00 $64.00 $52.20 $38.40 3 6,600

2 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 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Solution: Computation of the profitability index: Selling price........................................................... Variable cost........................................................... Unit contribution margin........................................ Constrained resource required per unit (ounces).. . Profitability index (per ounce)...............................

B-12

Z31X $87.00 52.20 $34.80 3 $11.60

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis 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 Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

B-13

Appendix B Profitability Analysis Solution: Computation of the profitability index: Selling price........................................................... Variable cost........................................................... Unit contribution margin........................................ Constrained resource required per unit (grams)..... Profitability index (per gram)................................

U68 R64 $30.00 $216.00 24.00 194.40 $ 6.00 $ 21.60 2 8 $3.00 $2.70

According to the profitability index, the most profitable product is U68. Total constrained resource available................................................. Less constrained resource required to produce 2,000 units of U68. . Remaining constrained resource available........................................ Less constrained resource required by 3,650 units of R64*............. Remaining constrained resource available........................................

33,200 4,000 29,200 29,200 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

B-14

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Appendix B Profitability Analysis 27. The same constrained resource is used by four different products at Coloma Corporation. Data concerning those products appear below: Unit selling price............................ Unit variable cost........................... Amount of the constrained resource required........................

O100 O200 O300 O400 $32.50 $27.90 $14.80 $41.80 $14.30 $5.60 $2.40 $21.70 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 Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Solution: From the standpoint of the entire company, the products should be ranked on the basis of the profitability index. Unit selling price........................................ Uni...