Question

How do you determine how to allocate constrained resources to maximize income?

How do you calculate the effects on operating income of keeping or eliminating operations?

Answer 1

1.

For the purpose of allocating constrained resources to maximize income, we calculate the contribution/income per unit of the constrained resource. Then the ranking is done from highes income to lowest income. The product providing the maximum income per unit of constrained resource is the one where the resources in allocated to and then to the second and then on and on. The balance constriant resouce is allocated to the one with least rank.

2.

For the purpose of calculating the effec on operating income of keeping or eliminating operations, a differential analysis is performed. The costs and revenues are then compared if operations are continued or eliminted. The net inocme is calculated in both scenarios. The situation which fetches higher net income is then selected/preferred.