Professional Documents
Culture Documents
Appendix B
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
Appendix B-2
Absolute Profitability
Absolute profitability measures the impact on the
organizations overall profits of adding or dropping
a particular segment such as a product or
customer without making any other changes.
Appendix B-3
For
For aa New
New Segment
Segment
Compare
Compare the
the additional
additional revenues
revenues from
from adding
adding
that
that segment
segment to
to the
the costs
costs that
that would
would be
be incurred.
incurred.
Appendix B-4
Learning Objective 1
Relative Profitability
Relative profitability is concerned with ranking
products, customers, and other business segments
to determine which should be emphasized in an
environment of scarce resources.
Appendix B-6
Relative Profitability
Managers
Managers are
are interested in
in ranking
ranking segments
segments ifif aa
constraint
constraint forces
forces them
them to
to make
make trade-offs
trade-offs among
among
segments.
segments.
In
In the
the absence
absence ofof aa constraint,
constraint, all
all segments
segments that
that are
are
absolutely
absolutely profitable should be pursued.
Appendix B-7
Relative Profitability
Incremental
Incremental profit
profit from
from the
the segment
segment is
is
the
the absolute
absolute profitability
profitability of
of the
the segment.
segment.
Profitability Index
Management
Management of of Matrix,
Matrix, Inc.
Inc. developed
developed the
the following
following
information
information concerning
concerning its
its two
two segments:
segments:
Appendix B-9
The
The project
project profitability
profitability index
index is
is used
used
when
when aa company
company hashas more
more long-term
long-term projects
projects
with
with positive
positive net
net present
present values
values than
than itit can
can fund.
fund.
Appendix B-
10
The
The net
net present
present value
value ofof the
the project
project
goes
goes inin the
the numerator
numerator since
since itit represents
represents
the
the incremental
incremental profit
profit from
from the
the segment.
segment.
Appendix B-
11
The
The investment
investment funds
funds areare the
the
constraint,
constraint, soso the
the amount
amount of of investment
investment
required
required by
by aa project
project goes
goes in
in the
the denominator.
denominator.
Appendix B-
12
If management
only has 46 hours available,
which projects should
be accepted?
Appendix B-
14
Learning Objective 2
Next
Next most
most
Most
Most profitable
profitable profitable
profitable
Appendix B-
23
Products
RX200 VB30 SQ500
Unit contribution margin $ 15 $ 10 $ 16
Production per week in units 200 400 100
Total contribution $ 3,000 $ 4,000 $ 1,600
Learning Objective 3
Sales Commissions
Products
RX200 VB30 SQ500
Unit selling price $ 40 $ 30 $ 35
Unit variable cost 25 20 19
Unit contribution margin (a) $ 15 $ 10 $ 16
Contrained resource required per unit (b) 5 minutes 2 minutes 4 minutes
Profitability index per minute (a) (b) $ 3.00 $ 5.00 $ 4.00
RX200
Appendix B-
27
Sales Commissions
Products
RX200 VB30 SQ500
Unit selling price $ 40 $ 30 $ 35
Unit variable cost 25 20 19
Unit contribution margin (a) $ 15 $ 10 $ 16
Contrained resource required per unit (b) 5 minutes 2 minutes 4 minutes
Profitability index per minute (a) (b) $ 3.00 $ 5.00 $ 4.00
However,
However, RX200
RX200 is is the
the least
least profitable
profitable product,
product,
given
given the
the current
current machine
machine constraint.
constraint. ItIt might
might be
be
a better idea
idea to base sales
sales commissions
commissions on on the
the
profitability
profitability index
index for
for each
each product.
Appendix B-
28
Amount of the
Opportunity cost
Selling price Variable cost constrained
per unit of the
of new of the new + constrained
resource required
product product by a unit of the
resource
new product
Appendix B-
29
Amount of the
Opportunity cost
Selling price constrained
per unit of the
of new $30 + constrained
resource required
product by a unit of the
resource
new product
Appendix B-
31
Selling price
$3 6
of new $30 + per minutes
product
minute per unit
Appendix B-
33
$3 6
$48 $30 + per minutes
minute per unit
Appendix B-
34
End of Appendix B