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% 252200 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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 Spring '13
 Dr. Hussein Khasharmeh

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