Relative profitability measures should only be used when:
A) absolute profitability measures fail to provide a decision.
B) absolute profitability measures cannot be used.
C) a constraint forces a trade-off among segments.
D) market shares are falling.

Question

Quizplus · Accepted Answer

Relative profitability measures, such as contribution margin ratio or return on investment, are useful when there is a constraint that forces the company to make trade-offs among segments or products. In such situations, absolute profitability measures may not provide a clear decision because they do not consider the impact of resource allocation on other segments. Therefore, relative profitability measures can help the company to prioritize its resources and maximize its overall profit. Absolute profitability measures should be used whenever possible, and relative measures should be used as a supplement to provide additional insights. Market share is not related to the use of profitability measures.

Relative Profitability Measures Should Only Be Used When