Question

Problem 1. Bottleneck (Constrained Resource) Decision

The constraint at Crumedy Inc. is an expensive milling machine. The three products listed below use this constrained resource.
GV OP FB

Selling price unit............................ $420.70 $444.24 $329.13

Variable cost per unit...... ........    $345.80 $349.20 $246.98

Time on the constraint (minutes)....... 7.00 7.20 5.30

Required:
Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work!

Problem 2. Make or Buy Decision

A firm’s manager must decide whether to make or buy a certain item used in the production of vending machines. Cost and volume estimates are as follows:

                                                Make               Buy     

Annual fixed cost                     $150,000          None

Variable cost per unit                $60                  $80

Annual volume (units)             12,000             12,000

The fixed cost relates to rent that would be incurred on facilities and equipment if the “make” option is chosen. This cost would not be incurred if the “buy” option is chosen.

Given these numbers, should the firm make or buy this item? Show your work.

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Answer 1

Answer 1.

Resulting ranking of products: FB, OP, GV

Explanation:

	GV	OP	FB
Selling price unit	$420.70	$444.24	$329.13
Less: Variable cost per unit	($345.80)	($349.20)	($246.98)
= Contribution per unit	$74.90	$95.04	$82.15
Divide by Time on the constraint	7.00 minutes	7.20 minutes	5.30 minutes
Contribution margin per unit of the constrained resource	$10.70	$13.20	$15.50
Resulting ranking of products	3	2	1

Answer 2:

The firm should make the items.

Explanation:

Total cost of making the items = (Variable cost per unit * Annual volume) + Annual fixed cost = ($60 * 12,000) + $150,000 = $870,000

Total cost of buying the items = (Variable cost per unit * Annual volume) + Annual fixed cost = ($80 * 12,000) + $0 = $960,000

Decision: Since the total cost of making the items is less than the total cost of buying the items, the firm should make the items.