Question

Bakker Industries sells three products (Products 611, 613, and 615) that it manufactures in a factory consisting of four departments (Departments 1 through 4). Both labor and machine times are applied to the products in each of the four departments. Neither machines nor labor can be switched from one department to another.

Bakker’s management is planning its production schedule for the next several months. There are labor shortages in the community. Some of the machines will be out of service for overhauling. Available machine and labor time by department for each of the next 6 months is listed below.

	Department
Monthly Capacity Availability	1	2	3	4
Normal machine capacity in machine hours	3,500	3,500	3,000	3,500
Capacity of machines being repaired in machine hours	(500)	(400)	(300)	(200)
Available machine capacity in machine hours	3,000	3,100	2,700	3,300
Labor capacity in direct labor hours	4,000	4,500	3,500	3,000
Available labor in direct labor hours	3,700	4,500	2,750	2,600

Labor and Machine Specifications per Unit of Product
Product	Labor and Machine Time
611	Direct labor hours	2	3	3	1
	Machine hours	2	1	2	2
613	Direct labor hours	1	2	--	2
	Machine hours	1	1	--	2
615	Direct labor hours	2	2	1	1
	Machine hours	2	2	1	1

The Sales Department’s forecast of product demand over the next six months is presented below.

Product	Monthly Sales Volume (Units)
611	500
613	400
615	1,000

Bakker’s inventory levels will not be increased or decreased during the next six months. The unit price and cost data valid for the next six months are presented below.

	Product
	611	613	615
Unit selling price	$196	$123	$167
Unit costs:
Direct material	$    7	$   13	$   17
Direct labor:
Department 1	12	6	12
Department 2	21	14	14
Department 3	24	--	16
Department 4	9	18	9
Variable overhead	27	20	25
Fixed overhead	15	10	32
Variable selling	3	2	4 A: Determine whether the monthly sales demand for the three products can be met by Bakker Industries’ factory. Use the monthly requirement by department for machine hours and direct labor hours for the production of Products 611, 613, and 615 in your calculations. B: If Bakker chooses to maximize contribution margin through the bottleneck operation, what total contribution amount will the company achieve? Support the schedule with appropriate calculations, and present a schedule of the contribution to profit that would be generated by the production schedule selected. If Bakker chooses to maximize throughput margin, what total throughput margin will the company achieve? Support the schedule with appropriate calculations, and present a schedule of the contribution to profit that would be generated by the production schedule selected. C:

Answer 1

Answer A

		Total Labour Hours Required				Total Machine hours Required
Product	Demand (Units)	D1	D2	D3	D4	D1	D2	D3	D4
611	500	1000	1500	1500	500	1000	500	1000	1000
613	400	400	800	0	800	400	400	0	800
615	1000	2000	2000	1000	1000	2000	2000	1000	1000
	Required Hrs	3400	4300	2500	2300	3400	2900	2000	2800
	Available Hrs	3700	4500	2750	2600	3000	3100	2700	3300
	Surplus / (Deficit)	300	200	250	300	(400)	200	700	500

It can be clearly seen that total machine hours required in department D1 is 3400 while machine hours available is only 3000 hours. Hence, there is shortfall of 400 machine hours.

Thus the monthly sales demand for the three products cannot be met by Bakker Industries’ factory

Answer B

Since machine hours of department 1 is bottleneck, contribution per MH of Department 1 is to be calculated to determine the ranking of products.

		Product
		611	613	615
Selling Price		196.00	123.00	167.00
Material		7.00	13.00	17.00
Labour
	D1	12.00	6.00	12.00
	D2	21.00	14.00	14.00
	D3	24.00	-	16.00
	D4	9.00	18.00	9.00
Variable Overhead		27.00	20.00	25.00
Variable Selling Price		3.00	2.00	4.00
Contribution		93.00	50.00	70.00
Machine hours required in D1		2.00	1.00	2.00
Contribution per Machine hour of D1		46.50	50.00	35.00

Ranking II I III

Since the contribution per machine hour of D1 is highest in case of Product 613, it wil be produced first and then product 611 and 615 sequentially.

Product Name	Machine Hour of D1 utilised	Units Produced
613	400	400
611	1000	500
615	1600	800
	3000

Total Contribution as per above production schedule:

		Product
		611	613	615
Units Manufactured		1000	400	1600
Contribution Per Unit		93	50	70
(As calculated Above)
Total Contribution		93000	20000	112000

Aggregate Contribution of all products = $ 225000

Answer C:

Throughput Margin in Calculated by reducing Direct Material Cost from the Sales.

		Product
		611	613	615
Selling Price		196.00	123.00	167.00
Direct Material Cost		7.00	13.00	17.00
Throughput Margin		189.00	110.00	150.00
Machine hours required in D1		2.00	1.00	2.00
Contribution per Machine hour of D1		94.50	110.00	75.00
Units Produced		1,000	400	1,600
Total Throughput Margin		1,89,000	44,000	2,40,000

Total throughput margin for all products = 4,73,000