Floorspaceorcubicmetersindepartmentstores

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Unformatted text preview: g income of $30,000 (65,000 – 35,000). income The decision is to drop the groceries. Remember that the relevant costs are the Remember the variable costs and the avoidable fixed costs. variable avoidable Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Optimal Use of Limited (scarce) Resources Suppose a plant makes more than one product and is operating at capacity. If demand for its product exceeds the amount the company can produce, managers must decide which orders to accept. The decision is to accept the one that makes the biggest total profit contribution per unit of limiting factor. of A limiting factor or scarce resource restricts or constrains A limiting factor or scarce resource restricts or constrains the production or sale of a product or service. Limiting the production or sale of a product or service. Limiting factors include labor hours and machine hours that limit factors include labor hours and machine hours that limit production in manufacturing firms, and square feet of production in manufacturing firms, and square feet of floor space or cubic meters in department stores. floor space or cubic meters in department stores. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Assume that the capacity of the facility is Assume determined by machine time (hour), and the maximum capacity is 10,000 machine hours. 10,000 The facility can produce 10 pairs (capacity is The 10 determined by machine hours) of Air Court Shoes per hour or 5 pairs of Air Max shoes per hour. per The question now is which shoe the company The should spend its resources/ or which shoe is more profitable? more Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Optimal Use of Limited Resources Unit data follow: Selling price per pair Variable costs per pair Contribution margin per pair Contribution margin ratio Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Air Air Court Max $80 $120 60 84 $20 $36 25% 30% Optimal Use of Limited Resources Which is more profitable? If the limiting factor is demand, that is, pairs of shoes, the more profitable product is Air Max. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Air Max is the product with the higher contribution margin per unit. The sale of a pair of Air Court shoes adds $20 to profit. The sale of a pair of Air Max shoes adds $36 to profit. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Suppose that demand for either shoe would fill the plant’s capacity. Now, capacity is the limiting factor. Which is more profitable? If the limiting factor is capacity, the more profitable product is Air Court. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Suppose that there is only one production facility (limiting factor) that can either make 100,000 air court pairs of shoes or 50,000 air max of shoes. Air Court Air Court $20 contribution margin per pair × 10 pair / hour × 10,000 hours = $2,000,000 contribution margin Air Max: $36 contribution margin per pair × 5 pair / hour × 10,000 hours = $1,800,000 contribution Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Air court 1. Pairs of shoes from 10,000 1. hours X 10 pairs; X 5 pairs 100,000 hours 2. Contribution margin/pair $20 3. Contribution margin from 10,000 hours of capacity, (1X2) $2,000,000 hours Contribution margin per hour Contribution Air max Air 50,000 $36 $1,800,000 3 ÷10,000 $200 $180 Each machine hour used to produce Air Court shoes generates Each $200 of con...
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This document was uploaded on 03/02/2014 for the course ACCOUNTING 221 at Alaska Pacific University.

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