I need help with this question.. There are only 172 hours per month available cu
ID: 2457012 • Letter: I
Question
I need help with this question.. There are only 172 hours per month available currently in this department. At first glance, it would he tempting to make the standing desk, since it has a higher contribution margin per unit, but with the constraint of the painting department hours will that give MDT Desks the highest monthly contribution margin To determine if that is true, we don't need to calculate the contribution margin for all 172 hours. We just need to calculate the contribution margin for one hour for each product and determine which is higher. If the Executive desk takes 15 minutes to paint, we can make 4 per hour (60/15). We can make 3 of the Standing desk pa hour (60/20). Multiply the number of desks that can be made each hour by the contribution margin per desk. Although the Executive Desk has a lower contribution margin per unit, the increased product per hour results in a higher contribution margin per hour. Therefore, we would only produce Executive desks. What if demand for the desks was limited MDT Desks, Inc. makes two types of office desks. Executive and Standing. Both desks require time in the Painting Department, but there are only 172 hours per month available currently in that department. The company can only sell 500 of each desk per month. What is the optimal product mix that would maximize profit each monthExplanation / Answer
Answer:
This is related to Decision Making under Limiting/Key Factor.
First we need to understand what is limiting factor:
Key/Limiting Factor --- A key factor refers to the constraints (restriction/scarce)in availability of production resources. It is a factor which puts a limit on production and profit of a business.
In such a case, a decision has to be taken regarding the choice of the product whose production is to be increased, reduced or stopped.
There are two type of Decision Making under this type of problem:
1) Decision Making when No Limiting Factor
2) Decision Making when Limited/Scarce Resource (Limiting Factor) -- In this question Hours is limiting factor.
You need to understand how we can take decision when there is a limited resource:
- When resources are limited, then the selection of product is based on Contribution Marning Per Unit of Limited factor
- Select the product which has higher Contribution Margin Per Unit of Limited Factor
From the information given in the question, we can calculate Contribution Margin Per Hours because Hours are Limiting Factor here.
You can see Contribution Margin Per Hour (limiting factor) is higher in Executive Desk i.e. $320 per hour.
So, the company should make Executive Desk First than Standing Desk if hours are available.
Now, in order to find out optimum product mix, we need to calculate first no. of hours required for each desk:
Executive Desk = 500 Desk x 15 / 60 = 125 Hours
Standing Desk = 500 Desk x 20 / 60 = 166.67 Hours
Total Hours required = 125 + 166.67 Hours = 291.67 Hours
The hours are limited to 172 Hours
So, we will make Executive Desk first due to higher contribution margin per hour and then make Standing Desk from balance hours.
Hours requried to make 250 Executive Desk = 125 Hours
Balance Hours = 172 Hours - 125 Hours = 47 Hours
No. of Standing Desk which can be made by using 47 hours = 47 Hours / 0.33 = 142.42 or 142 Desk
Therefore, the optimum product mix which can provided maximum contribution margin to company is as follows:
Executive Desk = 250 Desk
Standing Desk = 142 Desk
Hope the above explaination is helpful to you for solving further such type of question.
Please remember one thing......in limiting factor decision is to be based on higher Contribution Margin Per Unit of Limited Factor...
thank you,
your friend.
Particulars Executive Desk Standing Desk Contribution Margin Per Unit (Given) $80 $90 Painting Department Time Required (Minutes Per Unit) 15 Minutes 20 Minutes Painting Department Time Required (Hours Per Unit) 0.25 Hours 0.33 Hours Contribution Margin per hours (CM Per Unit / Hours Per Unit) $320 $270