Profitability Analysis - youcancallmefrance



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.

Ans:  False AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  1 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Medium

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 BB:  Critical Thinking AICPA FN:  Reporting LO:  1 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  2 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  2 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  3 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 BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Hard

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 BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Hard

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

Ans:  False AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  4 Level:  Easy

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 AICPA FN:  Reporting LO:  4 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

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 AICPA FN:  Reporting LO:  1 Level:  Easy

Solution:

| |Segment |Incremental Profit |Amount of |Profitability Index |

| | | |Constrained Resource|(per hour) |

| | | |Required (hours) | |

| |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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Easy

Solution:

| |Segment |Incremental Profit |Amount of |Profitability Index |

| | | |Constrained Resource|(per hour) |

| | | |Required (hours) | |

| |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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Easy

Solution:

| |Segment |Incremental Profit |Amount of |Profitability Index |

| | | |Constrained Resource|(per hour) |

| | | |Required (hours) | |

| |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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  1 Level:  Easy

Solution:

| |Segment |Incremental Profit |Amount of |Profitability Index |

| | | |Constrained Resource|(per hour) |

| | | |Required (hours) | |

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

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |Y82U |

| |Selling price |$264.00 |

| |Variable cost |  237.60 |

| |Unit contribution margin |$  26.40 |

| |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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |A58E |

| |Selling price |$253.00 |

| |Variable cost | 177.10 |

| |Unit contribution margin |$  75.90 |

| |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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |X99M |

| |Selling price |$144.00 |

| |Variable cost | 100.80 |

| |Unit contribution margin |$ 43.20 |

| |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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Computation of the profitability index:

| | |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

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.

| | |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 |

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

Ans:  A 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.

| | |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 |

| |Unit contribution margin |$17.00 |$17.50 |$14.20 |$16.80 |

| |Amount of the constrained resource required |0.40 |0.34 |0.20 |0.50 |

| |Profitability index |$42.50 |$51.47 |$71.00 |$33.60 |

| |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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

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 | |$120.20 |

| |Opportunity cost of using the constrained resource: | | |

| |Amount of constrained resource per unit (a) |8.40 | |

| |Opportunity cost per unit of the constrained resource (b) |$52.00 | |

| |Total opportunity cost (a) × (b) | |  436.80 |

| |Minimum selling price | |$557.00 |

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 |9 |15 |

| |(minutes) | | |

| |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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |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.

| |Total constrained resource available |9,900 |

| |Less constrained resource required to produce 700 units of S14O |6,300 |

| |Remaining constrained resource available |3,600 |

| |Less constrained resource required by 240* units of L95I |3,600 |

| |Remaining constrained resource available |       0 |

*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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |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.

| |Total constrained resource available |9,900 |

| |Less constrained resource required to produce 700 units of S14O |6,300 |

| |Remaining constrained resource available |3,600 |

| |Less constrained resource required by 240* units of L95I |3,600 |

| |Remaining constrained resource available |      0 |

*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

D) $70.20 per minute

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Medium

Solution:

Computation of the profitability index:

| | |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 |

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |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 |

New product:

| |Variable cost per unit |$150.00 |

| |Opportunity cost per unit (19 minutes × $6.40) | 121.60 |

| |Minimum acceptable selling price |$271.60 |

Use the following to answer questions 35-38:

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 |

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |H84T |C22T |

| |Selling price |$288.00 |$38.00 |

| |Variable cost | 259.20 | 34.20 |

| |Unit contribution margin |$ 28.80 |$ 3.80 |

| |Constrained resource required per unit (minutes) |16 |2 |

| |Profitability index (per minute) |$1.80 |$1.90 |

According to the profitability index, the most profitable product is C22T.

| |Total constrained resource available |9,700 |

| |Less constrained resource required to produce 3,330 units of C22T |6,660 |

| |Remaining constrained resource available |3,040 |

| |Less constrained resource required by 190 units of H84T |3,040 |

| |Remaining constrained resource available |      0 |

*3,040 ÷ 16 minutes per unit = 190

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |H84T |C22T |

| |Selling price |$288.00 |$38.00 |

| |Variable cost | 259.20 | 34.20 |

| |Unit contribution margin |$ 28.80 |$ 3.80 |

| |Constrained resource required per unit (minutes) |16 |2 |

| |Profitability index (per minute) |$1.80 |$1.90 |

According to the profitability index, the most profitable product is C22T.

| |Total constrained resource available |9,700 |

| |Less constrained resource required to produce 3,330 units of C22T |6,660 |

| |Remaining constrained resource available |3,040 |

| |Less constrained resource required by 190 units of H84T |3,040 |

| |Remaining constrained resource available |      0 |

*3,040 ÷ 16 minutes per unit = 190

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |H84T |C22T |

| |Selling price |$288.00 |$38.00 |

| |Variable cost | 259.20 | 34.20 |

| |Unit contribution margin |$ 28.80 |$ 3.80 |

| |Constrained resource required per unit (minutes) |16 |2 |

| |Profitability index (per minute) |$1.80 |$1.90 |

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |H84T |C22T |

| |Selling price |$288.00 |$38.00 |

| |Variable cost | 259.20 | 34.20 |

| |Unit contribution margin |$ 28.80 |$ 3.80 |

| |Constrained resource required per unit (minutes) |16 |2 |

| |Profitability index (per minute) |$1.80 |$1.90 |

New product:

| |Variable cost per unit |$ 69.00 |

| |Opportunity cost per unit (18 minutes × $1.80) | 32.40 |

| |Minimum acceptable selling price |$101.40 |

Use the following to answer questions 39-42:

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |P99V |U15X |

| |Selling price |$20.00 |$50.00 |

| |Variable cost | 12.00 | 30.00 |

| |Unit contribution margin |$ 8.00 |$20.00 |

| |Constrained resource required per unit (minutes) |2 |10 |

| |Profitability index (per minute) |$4.00 |$2.00 |

According to the profitability index, the most profitable product is P99V.

| |Total constrained resource available |10,300 |

| |Less constrained resource required to produce 3,730 units of P99V | 7,460 |

| |Remaining constrained resource available |2,840 |

| |Less constrained resource required by 284 units of U15X* | 2,840 |

| |Remaining constrained resource available |       0 |

*2,840 ÷ 10 minutes per unit = 284 units

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |P99V |U15X |

| |Selling price |$20.00 |$50.00 |

| |Variable cost | 12.00 | 30.00 |

| |Unit contribution margin |$ 8.00 |$20.00 |

| |Constrained resource required per unit (minutes) |2 |10 |

| |Profitability index (per minute) |$4.00 |$2.00 |

According to the profitability index, the most profitable product is P99V.

| |Total constrained resource available |10,300 |

| |Less constrained resource required to produce 3,730 units of P99V | 7,460 |

| |Remaining constrained resource available |2,840 |

| |Less constrained resource required by 284 units of U15X* | 2,840 |

| |Remaining constrained resource available |       0 |

*2,840 ÷ 10 minutes per unit = 284 units

| | |P99V |U15X |Total |

| |Unit contribution margin |$8.00 |$20.00 | |

| |Volume (units) |3,730 |284 | |

| |Contribution margin |$29,840 |$5,680 |$35,520 |

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |P99V |U15X |

| |Selling price |$20.00 |$50.00 |

| |Variable cost | 12.00 | 30.00 |

| |Unit contribution margin |$ 8.00 |$20.00 |

| |Constrained resource required per unit (minutes) |2 |10 |

| |Profitability index (per minute) |$4.00 |$2.00 |

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |P99V |U15X |

| |Selling price |$20.00 |$50.00 |

| |Variable cost | 12.00 | 30.00 |

| |Unit contribution margin |$ 8.00 |$20.00 |

| |Constrained resource required per unit (minutes) |2 |10 |

| |Profitability index (per minute) |$4.00 |$2.00 |

New product:

| |Variable cost per unit |$157.00 |

| |Opportunity cost per unit (19 minutes × $2.00) | 38.00 |

| |Minimum acceptable selling price |$195.00 |

Use the following to answer questions 43-44:

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|8 |4 |

| |(minutes) | | |

| |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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |M93U |R20W |

| |Selling price |$272.00 |$124.00 |

| |Variable cost | 190.40 | 74.40 |

| |Unit contribution margin |$  81.60 |$ 49.60 |

| |Constrained resource required per unit (minutes) |8 |4 |

| |Profitability index (per minute) |$10.20 |$12.40 |

According to the profitability index, the most profitable product is R20W.

| |Total constrained resource available |10,400 |

| |Less constrained resource required to produce 2,030 units of R20W | 8,120 |

| |Remaining constrained resource available |2,280 |

| |Less constrained resource required by 285 units of M93U* | 2,280 |

| |Remaining constrained resource available |       0 |

*2,280 minutes ÷ 8 minutes per unit = 285 units

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |M93U |R20W |

| |Selling price |$272.00 |$124.00 |

| |Variable cost | 190.40 | 74.40 |

| |Unit contribution margin |$  81.60 |$ 49.60 |

| |Constrained resource required per unit (minutes) |8 |4 |

| |Profitability index (per minute) |$10.20 |$12.40 |

Use the following to answer questions 45-46:

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 |

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |N64J |V96I |

| |Selling price |$78.00 |$304.00 |

| |Variable cost | 46.80 | 243.20 |

| |Unit contribution margin |$31.20 |$ 60.80 |

| |Constrained resource required per unit (minutes) |3 |19 |

| |Profitability index (per minute) |$10.40 |$3.20 |

According to the profitability index, the most profitable product is N64J.

| |Total constrained resource available |9,600 |

| |Less constrained resource required to produce 2,440 units of N64J |7,320 |

| |Remaining constrained resource available |2,280 |

| |Less constrained resource required by 120 units of V96I* |2,280 |

| |Remaining constrained resource available |       0 |

*2,280 minutes ÷ 19 minutes per unit = 120

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |N64J |V96I |

| |Selling price |$78.00 |$304.00 |

| |Variable cost | 46.80 | 243.20 |

| |Unit contribution margin |$31.20 |$ 60.80 |

| |Constrained resource required per unit (minutes) |3 |19 |

| |Profitability index (per minute) |$10.40 |$3.20 |

Use the following to answer questions 47-48:

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |T40U |A47M |

| |Selling price |$180.00 |$24.00 |

| |Variable cost | 162.00 | 19.20 |

| |Unit contribution margin |$ 18.00 |$ 4.80 |

| |Constrained resource required per unit (minutes) |15 |3 |

| |Profitability index (per minute) |$1.20 |$1.60 |

According to the profitability index, the most profitable product is A47M.

| |Total constrained resource available |10,200 |

| |Less constrained resource required to produce 2,040 units of A47M | 6,120 |

| |Remaining constrained resource available |4,080 |

| |Less constrained resource required by 272 units of T40U* | 4,080 |

| |Remaining constrained resource available |       0 |

*4,080 minutes ÷ 15 minutes per unit = 272 units

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |T40U |A47M |

| |Selling price |$180.00 |$24.00 |

| |Variable cost | 162.00 | 19.20 |

| |Unit contribution margin |$ 18.00 |$ 4.80 |

| |Constrained resource required per unit (minutes) |15 |3 |

| |Profitability index (per minute) |$1.20 |$1.60 |

Use the following to answer questions 49-50:

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |I85 |S47 |

| |Selling price |$24.00 |$118.80 |

| |Variable cost | 16.80 |   92.40 |

| |Unit contribution margin |$ 7.20 |$ 26.40 |

| |Constrained resource required per unit (minutes) |2 |11 |

| |Profitability index (per minute) |$3.60 |$2.40 |

| |Total constrained resource available |9,600 |

| |Less constrained resource required to produce 3,040 units of I85 |6,080 |

| |Remaining constrained resource available |3,520 |

| |Less constrained resource required by 320 units of S47* |3,520 |

| |Remaining constrained resource available |       0 |

*3,520 minutes ÷ 11 minutes per unit = 320 units

| | |I85 |S47 |Total |

| |Unit contribution margin |$7.20 |$26.40 | |

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

| |Contribution margin |$21,888 |$8,448 |$30,336 |

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |I85 |S47 |

| |Selling price |$24.00 |$118.80 |

| |Variable cost | 16.80 | 92.40 |

| |Unit contribution margin |$  7.20 |$ 26.40 |

| |Constrained resource required per unit (minutes) |2 |11 |

| |Profitability index (per minute) |$3.60 |$2.40 |

New product:

| |Variable cost per unit |$198.00 |

| |Opportunity cost per unit (17 minutes × $2.40) | 40.80 |

| |Minimum acceptable selling price |$238.80 |

Use the following to answer questions 51-52:

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 |

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |S00Y |Y85S |

| |Selling price |$57.00 |$60.00 |

| |Variable cost |  51.30 |  54.00 |

| |Unit contribution margin |$  5.70 |$ 6.00 |

| |Constrained resource required per unit (minutes) |3 |10 |

| |Profitability index (per minute) |$1.90 |$0.60 |

According to the profitability index, the most profitable product is S00Y.

| |Total constrained resource available |10,100 |

| |Less constrained resource required to produce 2,150 units of S00Y | 6,450 |

| |Remaining constrained resource available |3,650 |

| |Less constrained resource required by 365 units of Y85S* | 3,650 |

| |Remaining constrained resource available |      0 |

*3,650 minutes ÷ 10 minutes per unit = 365 units

| | |S00Y |Y85S |Total |

| |Unit contribution margin |$5.70 |$6.00 | |

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

| |Contribution margin |$12,255 |$2,190 |$14,445 |

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |S00Y |Y85S |

| |Selling price |$57.00 |$60.00 |

| |Variable cost |  51.30 | 54.00 |

| |Unit contribution margin |$  5.70 |$ 6.00 |

| |Constrained resource required per unit (minutes) |3 |10 |

| |Profitability index (per minute) |$1.90 |$0.60 |

New product:

| |Variable cost per unit |$148.00 |

| |Opportunity cost per unit (11 minutes × $0.60) | 6.60 |

| |Minimum acceptable selling price |$154.60 |

Use the following to answer questions 53-54:

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |N17O |A57Y |

| |Selling price |$120.00 |$30.00 |

| |Variable cost |  108.00 |  18.00 |

| |Unit contribution margin |$  12.00 |$12.00 |

| |Constrained resource required per unit (minutes) |15 |5 |

| |Profitability index (per minutes) |$0.80 |$2.40 |

According to the profitability index, the most profitable product is A57Y.

| |Total constrained resource available |10,200 |

| |Less constrained resource required to produce 1,470 units of A57Y | 7,350 |

| |Remaining constrained resource available |2,850 |

| |Less constrained resource required by 190 units of N17O* | 2,850 |

| |Remaining constrained resource available |       0 |

*2,850 minutes ÷ 15 minutes per unit = 190 units

| | |N17O |A57Y |Total |

| |Unit contribution margin |$12.00 |$12.00 | |

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

| |Contribution margin |$2,280 |$17,640 |$19,920 |

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Medium

Solution:

Computation of the profitability index:

| | |N17O |A57Y |

| |Selling price |$120.00 |$30.00 |

| |Variable cost |  108.00 |  18.00 |

| |Unit contribution margin |$  12.00 |$12.00 |

| |Constrained resource required per unit (minutes) |15 |5 |

| |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 |

Use the following to answer questions 55-56:

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |G90K |E17G |

| |Selling price |$160.00 |$75.00 |

| |Variable cost |  128.00 |  45.00 |

| |Unit contribution margin |$  32.00 |$30.00 |

| |Constrained resource required per unit (minutes) |10 |3 |

| |Profitability index (per minute) |$3.20 |$10.00 |

According to the profitability index, the most profitable product is E17G.

| |Total constrained resource available |10,400 |

| |Less constrained resource required to produce 2,210 units of E17G | 6,630 |

| |Remaining constrained resource available |3,770 |

| |Less constrained resource required by 377 units of G90K* | 3,770 |

| |Remaining constrained resource available |       0 |

*3,770 minutes ÷ 10 minutes per unit = 377 units

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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |G90K |E17G |

| |Selling price |$160.00 |$75.00 |

| |Variable cost |  128.00 |  45.00 |

| |Unit contribution margin |$  32.00 |$30.00 |

| |Constrained resource required per unit (minutes) |10 |3 |

| |Profitability index (per minute) |$3.20 |$10.00 |

According to the profitability index, the most profitable product is E17G.

| |Total constrained resource available |10,400 |

| |Less constrained resource required to produce 2,210 units of E17G | 6,630 |

| |Remaining constrained resource available |3,770 |

| |Less constrained resource required by 377 units of G90K* | 3,770 |

| |Remaining constrained resource available |       0 |

*3,770 minutes ÷ 10 minutes per unit = 377 units

| | |G90K |E17G |Total |

| |Unit contribution margin |$32.00 |$30.00 | |

| |Volume (units) |377 |2,210 | |

| |Contribution margin |$12,064 |$66,300 |$78,364 |

Use the following to answer questions 57-58:

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 |

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

Ans:  D AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |B06G |P87G |

| |Selling price |$260.00 |$38.00 |

| |Variable cost | 234.00 | 26.60 |

| |Unit contribution margin |$  26.00 |$11.40 |

| |Constrained resource required per unit (minutes) |10 |2 |

| |Profitability index (per minute) |$2.60 |$5.70 |

According to the profitability index, the most profitable product is P87G.

| |Total constrained resource available |9,600 |

| |Less constrained resource required to produce 2,990 units of P87G |5,980 |

| |Remaining constrained resource available |3,620 |

| |Less constrained resource required by 362 units of B06G* |3,620 |

| |Remaining constrained resource available |       0 |

*3,620 minutes ÷ 10 minutes per unit = 362 units

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |B06G |P87G |

| |Selling price |$260.00 |$38.00 |

| |Variable cost | 234.00 | 26.60 |

| |Unit contribution margin |$  26.00 |$11.40 |

| |Constrained resource required per unit (minutes) |10 |2 |

| |Profitability index (per minute) |$2.60 |$5.70 |

According to the profitability index, the most profitable product is P87G.

| |Total constrained resource available |9,600 |

| |Less constrained resource required to produce 2,990 units of P87G |5,980 |

| |Remaining constrained resource available |3,620 |

| |Less constrained resource required by 362 units of B06G* |3,620 |

| |Remaining constrained resource available |       0 |

*3,620 minutes ÷ 10 minutes per unit = 362 units

| | |B06G |P87G |Total |

| |Unit contribution margin |$26.00 |$11.40 | |

| |Volume (units) |362 |2,990 | |

| |Contribution margin |$9,412 |$34,086 |$43,498 |

Use the following to answer questions 59-60:

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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |O58J |K04S |

| |Selling price |$140.00 |$78.00 |

| |Variable cost |  112.00 |  62.40 |

| |Unit contribution margin |$  28.00 |$15.60 |

| |Constrained resource required per unit (minutes) |10 |3 |

| |Profitability index (per minute) |$2.80 |$5.20 |

According to the profitability index, the most profitable product is K04S.

| |Total constrained resource available |10,300 |

| |Less constrained resource required to produce 2,390 units of K04S | 7,170 |

| |Remaining constrained resource available |3,130 |

| |Less constrained resource required by 313 units of O58J* | 3,130 |

| |Remaining constrained resource available |       0 |

*3,130 minutes ÷ 10 minutes per unit = 313 units

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

Ans:  C AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  2 Level:  Easy

Solution:

Computation of the profitability index:

| | |O58J |K04S |

| |Selling price |$140.00 |$78.00 |

| |Variable cost |  112.00 |  62.40 |

| |Unit contribution margin |$  28.00 |$15.60 |

| |Constrained resource required per unit (minutes) |10 |3 |

| |Profitability index (per minute) |$2.80 |$5.20 |

According to the profitability index, the most profitable product is K04S.

| |Total constrained resource available |10,300 |

| |Less constrained resource required to produce 2,390 units of K04S | 7,170 |

| |Remaining constrained resource available |3,130 |

| |Less constrained resource required by 313 units of O58J* | 3,130 |

| |Remaining constrained resource available |       0 |

*3,130 minutes ÷ 10 minutes per unit = 313 units

| | |O58J |K04S |Total |

| |Unit contribution margin |$28.00 |$15.60 | |

| |Volume (units) |313 |2,390 | |

| |Contribution margin |$8,764 |$37,284 |$46,048 |

Use the following to answer questions 61-62:

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 |

| |Amount of the constrained resource 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

Ans:  B AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

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

Ans:  C 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.

| | |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 |

| |Amount of the constrained resource 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.

Use the following to answer questions 63-64:

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 |

| |Amount of the constrained resource 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

Ans:  A AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

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

Ans:  D 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.

| | |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 |

| |Unit contribution margin |$21.60 |$14.10 |$12.70 |$17.30 |

| |Amount of the constrained resource required |0.49 |0.35 |0.26 |0.59 |

| |Profitability index |$44.08 |$40.29 |$48.85 |$29.32 |

| |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.

| | |Incremental Profit |Amount of Constrained |

| | | |Resource Required (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:

| |Segment |Incremental Profit |Amount of Constrained |Profitability Index |

| | | |Resource Required |(per hour) |

| | | |(hours) | |

| |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 |

| |Segment |Profitability Index |Amount of Constrained |Cumulative Amount of |

| | |(per hour) |Resource Required |Constrained Resource |

| | | |(hours) |Required (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.

| | |Incremental Profit |Amount of Constrained |

| | | |Resource Required |

| | | |(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:

| |Segment |Incremental Profit |Amount of |Profitability Index |

| | | |Constrained Resource|(per hour) |

| | | |Required (hours) | |

| |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 |

| |Segment |Profitability Index |Amount of Constrained |Cumulative Amount of |

| | |(per hour) |Resource Required |Constrained Resource |

| | | |(hours) |Required (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 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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 |

| |Segment |Profitability Index |Investment Required |Cumulative Investment |

| | | | |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 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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 |

| |Unit contribution margin |$  54.60 |$  57.60 |

| |Constrained resource required per unit (grams) |7 |16 |

| |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

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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?

b. How much of each product should be produced?

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:

a. Computation of the profitability index:

| | |Y58 |J06 |

| |Selling price |$112.00 |$44.00 |

| |Variable cost |    78.40 |  26.40 |

| |Unit contribution margin |$  33.60 |$17.60 |

| |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

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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 |

| |Constrained resource required per unit (grams) |7 |10 |

| |Demand (units) |980 |710 |

The total amount of the constrained resource available is 10,000 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?

Ans:

a. Computation of the profitability index:

| | |G10 |K99 |

| |Selling price |$56.00 |$110.00 |

| |Variable cost |  39.20 |   88.00 |

| |Unit contribution margin |$16.80 |$ 22.00 |

| |Constrained resource required per unit (grams) |7 |10 |

| |Profitability index (per gram) |$2.40 |$2.20 |

According to the profitability index, the most profitable product is G10.

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 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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:

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:

a. Computation of the profitability index:

| | |U46 |P83 |

| |Selling price |$170.00 |$70.00 |

| |Variable cost | 153.00 | 42.00 |

| |Unit contribution margin |$ 17.00 |$28.00 |

| |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.

| |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 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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 selling price |$35.70 |$23.30 |$18.00 |$45.10 |

| |Unit variable cost |$17.10 |$6.10 |$4.00 |$24.40 |

| |Amount of the constrained resource required |0.41 |0.35 |0.22 |0.55 |

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.

| | |M100 |M200 |M300 |M400 |

| |Unit selling price |$35.70 |$23.30 |$18.00 |$45.10 |

| |Unit variable cost |  17.10 |   6.10 |   4.00 |  24.40 |

| |Unit contribution margin |$18.60 |$17.20 |$14.00 |$20.70 |

| |Amount of the constrained resource required |0.41 |0.35 |0.22 |0.55 |

| |Profitability index |$45.37 |$49.14 |$63.64 |$37.64 |

| |Ranking |3 |2 |1 |4 |

According to the profitability index, product M300 should be emphasized.

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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 selling price |$31.20 |$28.00 |$13.70 |$47.00 |

| |Unit variable cost |$15.00 |$7.00 |$4.00 |$32.90 |

| |Amount of the constrained resource required |0.43 |0.34 |0.21 |0.53 |

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.

| | |M100 |M200 |M300 |M400 |

| |Unit selling price |$31.20 |$28.00 |$13.70 |$47.00 |

| |Unit variable cost |  15.00 |    7.00 |   4.00 | 32.90 |

| |Unit contribution margin |$16.20 |$21.00 |$9.70 |$14.10 |

| |Amount of the constrained resource required |0.43 |0.34 |0.21 |0.53 |

| |Profitability index |$37.67 |$61.76 |$46.19 |$26.60 |

| |Ranking |3 |1 |2 |4 |

According to the profitability index, product M200 should be emphasized.

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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:

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 | |$127.90 |

| |Opportunity cost of using the constrained resource: | | |

| |Amount of constrained resource per unit (a) |5.40 | |

| |Opportunity cost per unit of the constrained resource (b) |$50.00 | |

| |Total opportunity cost (a) × (b) | | 270.00 |

| |Minimum selling price | |$397.90 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting 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:

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 | |$137.80 |

| |Opportunity cost of using the constrained resource: | | |

| |Amount of constrained resource per unit (a) |6.10 | |

| |Opportunity cost per unit of the constrained resource (b) |$67.00 | |

| |Total opportunity cost (a) × (b) | | 408.70 |

| |Minimum selling price | |$546.50 |

AACSB:  Analytic AICPA BB:  Critical Thinking AICPA FN:  Reporting LO:  3 Level:  Easy

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