Constraints Exercise Product A Product B Product C Selling price $180 $270 $240
ID: 341911 • Letter: C
Question
Constraints Exercise
Product A
Product B
Product C
Selling price
$180
$270
$240
Less variable expenses:
Direct materials
Other
24
102
72
90
32
148
Total variable expenses
126
162
180
Contribution margin per unit
Contribution margin per constrained resource
1. Rank the products in order of profitability based on contribution margin per unit.
2. Assume that the same raw materials are used in all the products and is available in limited quantities at $8 per pound. There is a limited quantity of material on hand for production for the current month, and there is a backlog on the orders for each product. If the company cannot buy additional material this month, which product should it concentrate on first? Second? Third? Why?
3. Now let’s change the facts. Assume that the company has only 3,000 lb of material on hand for this month’s production and has order backlogs as follows:
Product A 200 units
Product B. 300 units
Product C 150 units
There is not enough material on hand available to clear the entire backlog of orders; however, the company can buy the same material at a premium price from a foreign supplier. What is the maximum price per lb. that the company would be willing to pay to acquire enough material to complete all the backlog of orders this month?
Step 1. Which product is affected by the shortfall?
Step 2. Maximum price per lb computation.
Product A
Product B
Product C
Selling price
$180
$270
$240
Less variable expenses:
Direct materials
Other
24
102
72
90
32
148
Total variable expenses
126
162
180
Contribution margin per unit
Contribution margin per constrained resource
Explanation / Answer
Ranking based on contribution per unit
Answer 2 Company should constraint product B as it gives least contribution per unit of material.
If deficiency still prevail then Product C can be be constrained as after Product B it has least contribution per unit of material and divert all resources to produce product A with maximum contribution per unit.
Working note 1: statement of material used per unit
Material cost/ cost per unit= unit of material used
Answer 3-Statement of material used
Product B is affected by shortfall by 900lbs eg. 100 units
Maximum price company may offer= sale price- labour/ no. of units
= 270-90 = 180/9 =$20/unit
Product A Product B Product C Sales 180 270 240 Variable cost 126 162 180 Contribution 54 108 60 Ranking iii i ii Constraint Material W/N 1 3 9 4 Contribution 18 12 15 Revised Ranking i iii ii