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It shows that air max shoes are 26 252 200 or 2520000

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Unformatted text preview: tribution, while an hour used to produce Air Max shoes generates only \$180 shoes Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Now suppose that neither shoe has enough demand to Now fill the entire capacity, but the combined demand will more than fill the capacity. In this case, it is better for the company to produce Air court to satisfy the Air demand of the customers, after that the company can produce Air Max. This depends on the relative use of capacity by the two products. Suppose the facility can produce 7 pairs in stead of 5 pairs from Air max shoes per hour of machine time. Then the Air Air Max would be the most profitable use of plant capacity. It would have a \$252 (7 pairs X \$36/ pair) contribution for each machine hour compared with Air Court is \$200 (10 pairs X \$20/pair) as shown below: Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Air Court Air Max Air Contribution margin from Contribution 10,000 machine hours: 10,000X10 pairX\$20/pair \$2,000,000 10,000X10 10,000X7pairs X\$36/pair 10,000X7pairs Contribution margin/machine hour: \$2,000,000 ÷ 10,000 hours \$200 \$2,520,000 ÷ 10,000 hours \$2,520,000 \$252 It is shown from the analysis that Air Max shoes will It have more contribution margin/unit of capacity – per hour or per 10,000 hours. It shows that Air Max shoes are 26% 252-200 or (2,520,000 - 2,000,000) more profitable 252 (2,520,000 than than 200 2,000,000 200 the Air Court. the Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Optimal Use of Limited Resources In retail stores, the limiting factor is often floor space. The focus is on products taking up less space or on using the space for shorter periods of time. Retail stores seek faster inventory turnover (the number of times the average inventory is sold per year). Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Optimal Use of Limited Resources Faster inventory turnover makes the same product Faster inventory turnover makes the same product a more profitable use of space in a discount store. a more profitable use of space in a discount store. Discount Regular Department Department Store Store Retail Price \$4.00 \$3.50 Costs of Merchandise and other variable costs 3.00 3.00 Contribution to profit per unit \$1.00 (25%) \$ .50 (14%) Units sold per year 10,000 22,000 Total contribution to profit, assuming the same space allotment in both stores \$10,000 11,000 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Joint Product Costs Joint products: Describe the situation when two or more Joint products: Describe the situation when two or more manufactured products that 1. have relatively significant sales manufactured products that 1. have relatively significant sales value and value and 2. Are not separately identifiable as 2. Are not separately identifiable as individual products until their split­off point. individual products until their split­off point. The split­off point is that juncture of The split­off point is that juncture of manufacturing where the joint products manufacturing where the joint products...
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