Bottleneck Management Sample Problem

40 labor 35 profit w 960 160 480 1920 3520 x 640 1440

Info icon This preview shows pages 8–12. Sign up to view the full content.

40 labor $ 35 profit W 960 160 480 1920 3520 X 640 1440 1760 1120 4960 Y 640 480 1920 1440 4480 Z 1600 0 1120 1760 4480 Processing Time (min/unit) Total time need in each work area to satisty ALL demand It is easier to analyze the data in table form. You need to calculate the time required in each work area to meet the expected demand for each product, and determine if there is a bottleneck .
Image of page 8

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Calculate profit margin per minute at bottleneck A B C D Profit Margin: $10 $15 $45 $35 Time at BOTTLENECK : 4 mins 9 11 7 Profit margin/minute: $2.50 $1.67 $4.09 $5.00 * calculations are per unit Determine the order you would want to build, to maximize profit: D then C then A then B
Image of page 9
Determine how much you can build with the time available at the constraint Bottleneck is area:_______ with 4,800 mins of available capacity 4800 mins capacity is available - 1120 mins to build 160 of ( D ) the highest profit/min product 3680 mins left to build the next product - 1760 mins to build 160 of ( C ) the next highest profit/min product 1920 mins left to build the next product - 640 mins to build 160 of ( A ) the next highest profit/min product 1280 mins left to build the least profitable product ( B ) Given the time left, you can only build 142 units of product B (1280 mins / 9 mins each = 142.2 units)
Image of page 10

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Compute profitability for the product mix. A B C D Revenue (160 x $50) + ( 142 x $75) + (160 x $100) + (160 x $150) = $58,650 Materials (160 x $20) + ( 142 x $40) + (160 x $25) + (160 x $ 75) = – $24,880 Labor (160 x $20) + ( 142 x $20) + (160 x $30) + (160 x $ 40) = – $17,240 Profit = $16,530 or only using profit (160x$10) + ( 142 x $15) + (160 x $45) + (160 x $35) = $16,530 Using the Theory of Constraints (TOC) approach that maximizes the revenue per minute in the bottleneck, rather than traditional accounting, you would be able to make $130 more profit per week or $6,760 more per year.
Image of page 11
Determine how much you can build with the time available at the constraint and the profit using traditional accounting The build order is now C D B A 4800 mins capacity is available - 1760 mins to build 160 of ( C ) the highest profit/min product 3040 mins left to build the next product - 1120 mins to build 160 of ( D ) the next highest profit/min product 1920 mins left to build the next product - 1440 mins to build 160 of ( B ) the next highest profit/min product 480 mins left to build the least profitable product ( A ) Given the time left, you can only build 120 units of product A (480 mins / 4 mins each = 120 units) Profit is (120*$10)+(160*$15)+(160*$45)+(160*$35) = $16,400
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern