Question

Exercise 12-5 Volume Trade-Off Decisions [LO12-5]

Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

	Ski Guard			Golf Guard			Fishing Guard
Selling price per unit	$	300		$	380		$	225
Variable cost per unit	$	160		$	170		$	75
Plastic injection molding machine processing time required to produce one unit	7 minutes			6 minutes			4 minutes
Pounds of plastic pellets per unit	11 pounds			13 pounds			6 pounds

Required:

1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product?

2. Which product offers the most profitable use of the plastic injection molding machine?

3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product?

4. Which product offers the most profitable use of the plastic pellets?

5. Which product has the largest contribution margin per unit?

Answer 1

1	Ski guard	Golf guard	Fishing guard
Selling price per unit	300	380	225
Variable cost per unit	160	170	75
Contribution margin per unit	140	210	150
Plastic injection molding machine processing time required to produce one unit	7	6	4
Contribution margin per unit of the constrained resource	20	35	37.5
2
Fishing guard
3
	Ski guard	Golf guard	Fishing guard
Selling price per unit	300	380	225
Variable cost per unit	160	170	75
Contribution margin per unit	140	210	150
Pounds of plastic pellets required to produce one unit	11	13	6
Contribution margin per unit of the constrained resource	12.73	16.15	25
4
Fishing guard
5
Golf guard