Appendix B - Appendix B Profitability Analysis True/False...

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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 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 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition B-3
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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 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
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Appendix B - Appendix B Profitability Analysis True/False...

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