Question

Utilization of a Constraint

Flying High only has so much space on the plane for seating.  The airline can charge $900 for a first class ticket while it can only charge $300 for an economy ticket.  The contribution margin on each are $600 and $150 respectively.  The big difference is that a first class seat takes up 30 square feet while an economy seat only takes up 12 square feet.  If the airline has only 1,650 square feet for seating and a demand of 35 first class tickets and 90 economy seats, how many of each type of seat should they design in the plane?

Sell or Process Further

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $375,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price	Quarterly Output
A	$25 per pound	14,000 pounds
B	$19 per pound	21,800 pounds
C	$31 per gallon	5,200 gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Cost	Selling Price
A	$83,800	$30.60 per pound
B	$121,080	$25.60 per pound
C	$55,280	$39.60 per gallon

What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? AND Based on your analysis, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

answer:-

given, there is a market demand of 35 first class tickets and 90 economy class tickets that would require a total square feet of:

total square feet that first class would take = 30x35 = 1050 square feet

total square feet that economy class tickets would take = 12x90 = 1080 square feet.

total square feet needed as per demand is 2130 (1050+1080).

but we have only 1650 square feet available in total.

this square feet is our bottle neck in the process. we need to decide how to make the best use of our square feet available. for that, we need to find the contribution margin per square feet(contribution margin per unit/square feet needed).

	first class	economy
contribution margin per unit	600	150
square feet needed	30	12
contribution margin per square feet	$20	$12.5

contribution margin per square feet for first class seats($20) is greater than economy class seats($12.5). that means first class tickets are more profitable than economy class tickets. so we need to utilise maximum space to produce first class seats.

demand for first class seats = 35

square feet needed to design 35 seats = 35x30 = 1050

so we can use 1050 square feet from 1650 square feet available to design first class seats and the remaining 600 square feet to design economy class seats.

so to find out how many economy class seats can be designed from the remaining 600 sqaure feet, divide 600 by square feet required for one seat of economy class(12).

therefore, number of economy class seats that should be designed = 600/12 = 50 seats.

total seats that should be designed = 35 first class seats and 50 economy class seats.