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ADM 2304 Lecture Notes - Lecture 13: Contribution Margin, Job Satisfaction

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School
University of Ottawa
Department
Administration
Course
ADM 2304
Professor
Tony Quon

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Document Summary

> 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. Contribution margin in relation to a constrained resource. > when a constraint exists, a company should select a product mix that maximizes the total contribution margin earned since xed 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. > 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.

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Related Questions

Brissett Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

GK LQ XK
Selling price per unit $ 326.37 $ 543.63 $ 496.00
Variable cost per unit $ 251.92 $ 420.73 $ 397.58
Time on the constraint (minutes) 2.70 6.70 8.00

Required:

a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized.

b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? (Round your answer to 2 decimal places.)

PROBLEM 12-25 Utilization of a Constrained Resource [LO12-5, L012-6] The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data: Demand Next Year (units) Selling Price per Unit Direct Materials Direct Labor Product Debbie Sarah ........... Mike ............. Sewing kit ........ 50,000 42,000 35,000 40,000 325,000 $13.50 $5.50 $21.00 $10.00 $8.00 $4.30 $1.10 $6.44 $2.00 $3.20 $3.20 $2.00 $5.60 $4.00 $1.60 The following additional information is available: a. The company's plant has a capacity of 130,000 direct labor-hours per year on a single-shift basis. The company's present employees and equipment can produce all five products. b. The direct labor rate of $8 per hour is expected to remain unchanged during the coming year. c. Fixed costs total $520,000 per year. Variable overhead costs are $2 per direct labor-hour. d. All of the company's nonmanufacturing costs are fixed. e. The company's finished goods inventory is negligible and can be ignored. Required: 1. Determine the contribution margin per direct labor-hour expended on each product. 2. Prepare a schedule showing the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. 3. Examine the data you have computed in (1) and (2) above. How would you allocate the 130,000 direct labor-hours of capacity to Walton Toy Company's various products? 4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource? 5. What is the highest price, in terms of a rate per hour, that Walton Toy Company would be will- ing to pay for additional capacity (that is, for added direct labor time)? 6. Assume again that the company does not want to reduce sales of any product. Identify ways in which the company could obtain the additional output.

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the company’s products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product Demand
Next year
(units)		 Selling
Price
per Unit		 Direct
Materials		 Direct
Labor
Debbie 70,000 $ 38.00 $ 4.70 $ 3.50
Trish 62,000 $ 4.60 $ 1.60 $ 1.00
Sarah 55,000 $ 31.00 $ 9.44 $ 6.50
Mike 48,000 $ 14.00 $ 4.00 $ 4.50
Sewing kit 345,000 $ 10.00 $ 5.20 $ 0.50

The following additional information is available:

The company’s plant has a capacity of 94,500 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

The direct labor rate of $10 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $585,000 per year. Variable overhead costs are $3 per direct labor-hour.

All of the company’s nonmanufacturing costs are fixed.

The company’s finished goods inventory is negligible and can be ignored.

Required:

1. How many direct labor hours are used to manufacture one unit of each of the company’s five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products?

3. What is the contribution margin per direct labor-hour for each of the company’s five products?

4. Assuming that direct labor-hours is the company’s constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

5. Assuming that the company has made optimal use of its 94,500 direct labor-hours, what is the highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?