Reetz 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 A25H: $\begin{array}{lr}
\text {Selling price }&\$ 58.00 \
\text {Variable cost per unit }&\$ 46.40 \
\text { Amount of the constrained resource required by one unit.}&\text {2 grams }\
\text {Monthly unit sales }&\text {4,100 units }\
\end{array}$
What is the profitability index for product A25H?
A)$47,560
B)$29.00 per gram
C)$5.80 per gram
D)0.20

Question

Reetz 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 A25H: $\begin{array}{lr}
\text {Selling price }&\$ 58.00 \
\text {Variable cost per unit }&\$ 46.40 \
\text { Amount of the constrained resource required by one unit.}&\text {2 grams }\
\text {Monthly unit sales }&\text {4,100 units }\
\end{array}$
 What is the profitability index for product A25H?
A)$47,560
B)$29.00 per gram
C)$5.80 per gram
D)0.20

Quizplus · Accepted Answer

The profitability index is calculated by dividing the contribution margin per unit by the amount of the constrained resource required per unit. The contribution margin per unit is the selling price minus the variable cost per unit, which is $58.00 - $46.40 = $11.60. The constrained resource required per unit is 2 grams. Therefore, the profitability index is $11.60 / 2 grams = $5.80 per gram.

Reetz Corporation Would Like to Determine the Relative Profitability of the Company's