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	$	250		$	250		$	255
Variable cost per unit	$	160		$	140		$	155
Plastic injection molding machine processing time required to produce one unit	13 minutes			6 minutes			5 minutes
Pounds of plastic pellets per unit	7 pounds			10 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	250	250	255
Variable cost per unit	160	140	155
Contribution margin per unit	90	110	100
Plastic injection molding machine processing time required to produce one unit	13	6	5
Contribution margin per unit of the constrained resource	6.92	18.33	20.00
2
Fishing guard
3
	Ski guard	Golf guard	Fishing guard
Selling price per unit	250	250	255
Variable cost per unit	160	140	155
Contribution margin per unit	90	110	100
Pounds of plastic pellets required to produce one unit	7	10	6
Contribution margin per unit of the constrained resource	12.86	11.00	16.67
4
Fishing guard
5
Golf guard