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Unformatted text preview: ne has no further use after this order. a. $50 b. $10 c. $15 d. $29 10-49 Quick Check What is the rock bottom minimum price below which Northern Optical should not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machine has no further use after this order. a. $50 b. $10 c. $15 d. $29 Variable production cost Additional fixed cost Total relevant cost Number of units Average cost per unit = $100,000 + 50,000 $150,000 10,000 $15 10-50 Learning Objective 5 Determine the most profitable use of a constrained resource. 10-51 Key Terms and Concepts When a limited resource of some type restricts the company’s ability to satisfy demand, the company is said to have a constraint. The machine or process that is limiting overall output is called the bottleneck – it is the constraint. 10-52 Utilization of a Constrained Resource • Fixed costs are usually unaffected in these situations, so the product mix that maximizes the company’s total contribution margin should ordinarily be selected. • A company should not necessarily promote those products that have the highest unit contribution margins. • Rather, total contribution margin will be maximized by promoting those products or accepting those orders that provide the highest contribution margin in relation to the constraining resource. 10-53 Utilization of a Constrained Resource: An Example Ensign Company produces two products and selected data are shown below: 10-54 Utilization of a Constrained Resource: An Example • Machine A1 is the constrained resource and is being used at 100% of its capacity. • There is excess capacity on all other machines. • Machine A1 has a capacity of 2,400 minutes per week. Should Ensign focus its efforts on Should Ensign focus its efforts on Product 1 or Product 2? Product 1 or Product 2? 10-55 Quick Check How many units of each product can be processed through Machine A1 in one minute? Product 1 a. b. c. d. 1 unit 1 unit 2 units 2 units Product 2 0.5 unit 2.0 units 1.0 unit 0.5 unit 10-56 Quick Check How many units of each product can be processed through Machine A1 in one minute? Product 1 a. b. c. d. 1 unit 1 unit 2 units 2 units Product 2 0.5 unit 2.0 units 1.0 unit 0.5 unit Just checking to make sure you are with us. Just checking to make sure you are with us. 10-57 Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined. 10-58 Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. With one determined. d. Cannot beminute of machine A1, Ensign could make 1 unit of P...
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