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sir, I have a little confusion in the questions where they ask how many units should xyz sell in order to maximize profits? or which selling price should be chosen in order to maximize profits.
sometimes they see which level gives the highest contribution and select that level without considering fixed cost. however, sometimes they consider fixed cost and select the highest level of profit and not the contribution. how is one supposed to know whether to base an answer on contribution or profits?
It depends on the actual question.
However since profit = contribution less fixed costs, if the fixed costs are not changing then maximum contribution will automatically give maximum profit.
Thank you, sir.
sir questions on ROI and RI where they give us the current ROI and also give details for the project under consideration, they sometimes calculate the revised ROI and sometimes they just calculate the ROI for that particular project not considering the old profit and net assets.
how are we supposed to know when to calculate revised RI and ROI and when to calculate just for the project. there are some theoretical MCQs on this which I got wrong because I compared the old ROI with the revised ROI instead of old ROI with just the projects ROI.
If the question asks specifically for the ROI then it will make it clear whether it wants the ROI of the project or whether it wants the new ROI of the division including the new project.
If it is just wanting to know whether the project should be accepted, then if the ROI of the project is more than the existing ROI of the division, then automatically the new ROI of the division will be more than the existing ROI – it has to be. So then it doesn’t matter which you look at.
sir, there is a question in one of the Kaplan mocks where they have asked “will the evaluation criteria of ROI and RI motivate division d managers to accept the project ?
the projects ROI alone was lower than the existing ROI
but when I calculated the projects ROI with the existing profit and net assets it was higher than the existing ROI. I, therefore, chose the option that the project should be accepted as it will increase the divisions ROI. but unfortunately, this was not the answer.
in the answer, they have mentioned that failing to evaluate the project separately eg combining it with the existing results would produce an ROI in excess oh the projects ROI.
I did understand the solution but don’t know when to calculate the overall ROI and when to calculate just for the project.
If the projects ROI is lower than the existing ROI, then the new ROI (including the project) must be lower than the existing ROI as well – it is simply impossible for it to be otherwise and there must have been a mistake in your workings.
My previous reply remains correct!
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