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Unformatted text preview: MGMT 201 (Ganguly)
Lecture 16: Making decisions Lecture (complete this topic) (complete [Conclude Ch. 14]
1 Decisions Involving Limited Decisions Resources Resources
Firms often face the problem of deciding Firms how limited resources are going to be used. how Usually, fixed costs are not affected by this Usually, decision, so management can focus on maximizing total contribution margin. maximizing Let’s look at the Martin, Inc. example. 2 Limited Resources
Martin, Inc. produces two products and Martin, selected data is shown below: selected 3 Limited Resources
The lathe is the scarce resource because The there is excess capacity on other machines. The lathe is being used at 100% of its capacity. capacity. The lathe capacity is 2,400 minutes per The week. week. Should Martin focus its efforts on Webs or Highs? 4 Limited Resources
Let’s calculate the contribution margin per unit Let’s of the scarce resource, the lathe. of 5 Limited Resources
Let’s calculate the contribution margin per unit Let’s of the scarce resource, the lathe. of 6 Limited Resources
Let’s calculate the contribution margin per unit Let’s of the scarce resource, the lathe. of Highs should be emphasized although the contribution/unit was much greater for Webs. This decision results in the more valuable use of the scarce resource the lathe, yielding a contribution margin of $30 per minute as opposed to $24 per minute for the Webs. 7 Limited Resources
Let’s calculate the contribution margin per unit Let’s of the scarce resource, the lathe. of If there are no other considerations, the best plan would If be to produce to meet current demand for Highs and then use any capacity that remains to make Webs. then 8 Limited Resources
Let’s see how this plan would work. 9 Limited Resources
According to the plan, Martin will produce According 2,200 Highs and 1,300 Webs. Martin’s contribution margin looks like this. contribution The total contribution margin for Martin, Inc. is $64,200. Any other combination would result in less contribution.
10 10 Theory of Constraints
Binding constraints can limit a company’s Binding profitability. profitability.
To relax constraints management can . . .
Outsource Work overtime Retrain employees Reduce non-valueadded activities
11 11 Uncertainty
One common technique for addressing the One impact of uncertainty is impact sensitivity analysis - a way to determine sensitivity what would happen in a decision analysis if a key prediction or assumption proved to be wrong. be 12 12 Expected Values
From the last example, recall the the contribution From margin for Webs was $24 and $15 for Highs. margin
Dueto unce rtainty, assum Martin has thefollowing e probablecontribution m argins for thetwo products. Webs Highs 13 13 Expected Values
From our last example, recall the the contribution From margin for Webs was $24 and $15 for Highs. margin
Martin would use the expected value Due to uncertainty, assume we have the following contribution margins in its decision about probable contribution margins for the two products. utilizing its limited resource - the lathe. Webs Highs 14 14 Other Issues in Decision Making
Incentives for Decision Makers Short-Run Versus Long-Run Decisions 15 15 End of this very important topic! 16 16 ...
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This note was uploaded on 03/18/2011 for the course MGMT 201 taught by Professor Rowe during the Spring '08 term at Purdue University-West Lafayette.
- Spring '08