Transcript Scare Resources

Scarce resources:
Making production decisions when
resources are tight.
Choosing among products.
Setting production schedules
Agenda
• Reichard Maschinen GmbH written
analysis
• Contribution approach - recap
• A more in-depth look at scarce resource
decisions
• Group work: Information Technology, Inc.
Reichard Maschinen GmbH
Written Analysis
• A 10% assignment. Maximum of five
pages (not including exhibits).
• Be sure you have downloaded the
instructions for the write-up.
• Cover memo - a page or two.
• Analysis: computations and reasoning
• Cover page, but no slick or stiff covers
• Typed, double-spaced, 12-point font.
Reichard Maschinen Written
Analysis
Decisions
1. Whether or not to manufacture plastic rings.
2. Alternative schedules for launching plastic
rings.
3. Strategic implications of ring decision and
effect on demand in both short- and long-run.
Contribution approach: recap
• Contribution margin vs.
– Product line contribution
– Division contribution
– Segment contribution, etc.
• Traceable fixed costs.
• Differential vs. Relevant Costs.
– Your textbook’s approach
– No conceptual difference - same answers!
Scarce resources
• What are resources? What is a bottleneck?
• How do resources relate to capacity?
• How do scarce resources change profit
maximization problems?
• What if there is more than one scarce
resource?
Example 1
Suppose that Ajax Company produces products A and B,
with the following selling prices and variable costs.
A
B
Sales price per unit
$25
$30
Variable cost per unit
10
18
CM per unit
$15
$12
CM ratio
60%
40%
Machine time is limited. Product A takes 2 minutes.
Product B takes 1 minute. Which should Ajax produce?
Example 2
Duo Company: Duo manufactures two products, Uno and
Dos. Contribution margin data follow:
Uno
Dos
Unit selling price
$13.00
$31.00
Less: DM
7.00
5.00
DL
1.00
6.00
V O/H
1.25
7.50
Variable S&A
.75
.50
Unit contribution margin
$3.00
$12.00
Example 2
Duo Company’s production process uses
highly skilled labor, which is in short supply.
The same employees work on both products
and earn the same wage rate.
Which of Duo Company’s products is more
profitable? Explain.
Example 2
Duo Company: Assume that the direct-labor rate is $24
per hour, and 10,000 labor hours are available per year. In
addition, the company has a short supply of machine time.
Only 8,000 hours are available each year. Uno requires 1
machine hour per unit, and Dos requires 2 machine hours
per unit.
Which product should Duo manufacture?
Tyler Tool Company
Tyler Tool Company manufactures electric carpentry tools. The
production department has met all production requirements for
the current month and has an opportunity to produce
additional units of product with its excess capacity. Unit selling
prices and unit costs for three different drill models are as
follows:
Selling price
DM
DL ($10 / hr.)
Variable overhead
Fixed overhead
Home
$58
16
10
8
16
Deluxe
$65
20
15
12
5
Pro
$80
19
20
16
15
Tyler Tool Company
Variable overhead is applied on the basis of DL$, while
fixed overhead is applied on the basis of machine hours.
There is sufficient demand for the additional production
of any model in the product line.
1. If there are no constraints, which product should be
produced?
2. If labor is scarce, which product should be produced?
University Hospital
University Hospital has an outpatient surgery center that treats
patients in three activity centers: (1) Surgery, (2) Phase I
recovery, and (3) Phase II recovery. At the end of Phase II
surgery, patients go home. Daily capacities and production levels
are as follows:
Daily capacity
Daily production
Surgery
40
30
Phase I
30
30
Phase II
60
30
The hospital receives an average of $1,000 per surgery. The
variable cost per surgery is $300. Demand is sufficient for 60.
Surgeries not performed in the center go to regular surgery where
variable costs are $700. Revenue is still $1,000.
University Hospital
Here are some alternatives that management is considering:
a. Continue performing 30 surgeries per day in the outpatient
center and send 30 patients to regular surgery.
b. Rebuild the recovery rooms so that some of the Phase II space
could be used for Phase I recovery. This would cost $2,000 per
day and would enable the outpatient center to perform 40
surgeries per day and send 20 to regular surgery.
c. Expand the facilities of the outpatient center at a differential
cost of $15,000 per day so it could perform 60 surgeries per day,
and service all of them in Phase I and II recovery.
University Hospital
Approach: Compute contribution from each alternative
and compare.
Continue performing 30 surgeries per day in the outpatient
center and send 30 patients to regular surgery.
University Hospital
Rebuild the recovery rooms so that some of the Phase II
space could be used for Phase I recovery. This would cost
$2,000 per day and would enable the outpatient center to
perform 40 surgeries per day and send 20 to regular
surgery.
University Hospital
Expand the facilities of the outpatient center at a
differential cost of $15,000 per day so it could perform 60
surgeries per day, and service all of them in Phase I and II
recovery.
Kickapoo Company
The Motor Division of Kickapoo Company can increase its regular
production of 900 units per week by 100 units per week by adding
a second shift (400 man hours per day) - no more labor is
available. However, the labor cost per unit will increase by one
half. Other normal costs and revenues are as follows:
Price per unit
Direct material
Direct labor (20 man hrs.)
Variable overhead
Fixed overhead
Gross margin per unit
*Allocated based on 1,200 units per week.
$2500
(1000)
(500)
(200)
(600)*
$ 200
(750)
Kickapoo Company
1. What is the contribution margin on a unit manufactured during a regular shift?
2. What is the contribution margin on a unit manufactured during the second shift? What’s gross margin?
Kickapoo Company: Motor
Division Profit
What is the total contribution of the additional 100
units per week? What is the contribution per year?
What is the gross margin of the additional 100
units per week? What is total gross margin per week?
Kickapoo Company: Company
Profits
What is Kickapoo’s annual reported gross margin from
Motor’s product at normal production?
Kickapoo Company: Company
Profit
What is Kickapoo’s annual income from Motor’s product
with the 100 unit per week increase?
Kickapoo Company
Suppose Motor Division must choose between manufacturing its regular product or an altered version using
its idle capacity. The cost and revenue information
associated with the new product are as follows:
Selling price
Materials
Direct labor (36 man hours)
Variable overhead
Product contribution
$2800
(600)
(900)
(200)
$1100
(1350)
Which product should Motor Division manufacture?
Kickapoo Company
Group work: Information
Technology, Inc.
Answer questions (1) and (2) in your groups and
hand in your answers at the end of the hour.
The best answer to part (2) requires a little creative
thinking.