University:
California State University, Northridge
Course:
MGT 360 | Management and Organizational Behavior
Academic year:

2024
Views:

234

Pages:

23
Author:

verifieero86

Chapter 11 Relevant Costs for Decision Making 11-54 Learning Objective 5 Determine the most profitable use of a constrained resource and the value of obtaining more of the constrained resource. 11-55 Key Terms and Concepts When a limited resource of some type restricts the company’s ability to satisfy demand, the company is said to have a constraint. The machine or process that is limiting overall output is called the bottleneck – it is the constraint. 11-56 Utilization of a Constrained Resource • When a constraint exists, a company should select a product mix that maximizes the total contribution margin earned since fixed costs usually remain unchanged. • A company should not necessarily promote those products that have the highest unit contribution margin. • Rather, it should promote those products that earn the highest contribution margin in relation to the constraining resource. 11-57 Ensign Company - An Example Ensign Company produces two products and selected data are shown below: Selling price per unit Less variable expenses per unit Contribution margin per unit Current demand per week (units) Contribution margin ratio Processing time required on machine A1 per unit $ 1 Product 60 36 $ 24 2,000 40% 1.00 min. $ 2 50 35 $ 15 2,200 30% 0.50 min. 11-58 Ensign Company - An Example • Machine A1 is the constrained resource and is being used at 100% of its capacity. • There is excess capacity on all other machines. • Machine A1 has a capacity of 2,400 minutes per week. Should Ensign focus its efforts on product 1 or 2? 11-59 Quick Check  How many units of each product can be processed through Machine A1 in one minute? Product 1 a. b. c. d. 1 unit 1 unit 2 units 2 units Product 2 0.5 unit 2.0 units 1.0 unit 0.5 unit 11-60 Quick Check  How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit 2 units unityou are with me! Justd.checking to make0.5 sure 11-61 Quick Check  What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined. 11-62 Quick Check  With one minute of machine A1, we could make 1 unit of Product 1, with a contribution margin of What generates more profit for the company, $24, or 2 units of Product 2, each with a using one minute of machine A1 to process contribution margin of $15. Product 1 or using one minute of machine A1 to process Product 2? = $30 > $24 2 × $15 q. Product 1 b. Product 2 d. They both would generate the same profit. d. Cannot be determined. 11-63 Ensign Company - An Example The key is the contribution margin per unit of the constrained resource. Product Contribution margin per unit Time required to produce one unit Contribution margin per minute ÷ $ 1 2 24 $ 15 1.00 min. ÷ 0.50 min. $ 24 $ 30 Product 2 should be emphasized. It provides more valuable use of the constrained resource machine A1, yielding a contribution margin of $30 per minute as opposed to $24 for Product 1. 11-64 Ensign Company - An Example The key is the contribution margin per unit of the constrained resource. Product Contribution margin per unit Time required to produce one unit Contribution margin per minute ÷ $ 1 2 24 $ 15 1.00 min. ÷ 0.50 min. $ 24 $ 30 If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then use remaining capacity to make Product 1. 11-65 Ensign Company - An Example Let’s see how this plan would work. Alloting Our Constrained Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 × 2,200 units 0.50 min. 1,100 min. 11-66 Ensign Company - An Example Let’s see how this plan would work. Alloting Our Constrained Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 Total time available Time used to make Product 2 Time available for Product 1 × 2,200 units 0.50 min. 1,100 min. 2,400 min. 1,100 min. 1,300 min. 11-67 Ensign Company - An Example Let’s see how this plan would work. Alloting Our Constrained Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 Total time available Time used to make Product 2 Time available for Product 1 Time required per unit Production of Product 1 × 2,200 units 0.50 min. 1,100 min. ÷ 2,400 1,100 1,300 1.00 1,300 min. min. min. min. units 11-68 Ensign Company - An Example According to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1. Our contribution margin looks like this. Production and sales (units) Contribution margin per unit Total contribution margin Product 1 1,300 $ 24 $ 31,200 Product 2 2,200 $ 15 $ 33,000 The total contribution margin for Ensign is $64,200. 11-69 Quick Check  Colonial Heritage makes reproduction colonial furniture from select hardwoods. Chairs Selling price per unit $80 Variable cost per unit $30 Board feet per unit 2 Monthly demand 600 Tables $400 $200 10 100 The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No 11-70 Quick Check  Colonial Heritage makes reproduction colonial furniture from select hardwoods. Chairs Selling price per unit $80 Variable cost per unit $30 Board feet per unit 2 Monthly demand 600 Tables $400 $200 10 100 The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No (2 × 600) + (10 × 100 ) = 2,200 > 2,000 11-71 Quick Check  Chairs Selling price per unit $80 Variable cost per unit $30 Board feet per unit 2 Monthly demand 600 Tables $400 $200 10 100 The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 tables 11-72 Chairs Tables Selling price $ 80 $ 400 Variable cost 30 200 Contribution margin $ 50 $ 200 Chairs Tables Selling price per unit feet $80 $400 Board 2 10 Variable cost per unit $30 CM per board foot $200 $ 25 $ 20 Quick Check  Board feet per unit Monthly demand 2 600 10 100 Production of chairs 600 The company’s supplier hardwood only be Boardoffeet required will 1,200 able to supply 2,000Board boardfeet feet this month.800 What remaining plan would maximize profits? Board feet per table 10 80 a. 500 chairs and Production 100 tablesof tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 tables 11-73 Quick Check  As before, Colonial Heritage’s supplier of hardwood will only be able to supply 2,000 board feet this month. Assume the company follows the plan we have proposed. Up to how much should Colonial Heritage be willing to pay above the usual price to obtain more hardwood? a. $40 per board foot b. $25 per board foot c. $20 per board foot d. Zero 11-74 Quick Check  As before, Colonial Heritage’s supplier of hardwood willwood only will be able to supply 2,000 The additional be used to make tables. board feet thisboard month.foot Assume the company In this use, each of additional wood will follows plan wetohave Up $20 to how allow thethe company earnproposed. an additional of much should Colonial Heritage willing to contribution margin and be profit. pay above the usual price to obtain more hardwood? a. $40 per board foot b. $25 per board foot c. $20 per board foot d. Zero 11-75 Managing Constraints Finding ways to relax the constraint Relax the constraint by: • Working overtime. • Subcontracting production. • Invest in additional machines. • Shifting workers. • Focus on business process improvements. • Reduce defective units. These methods and ideas are all consistent with the Theory of Constraints, which is introduced in the Prologue.