Question

Brissett Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

	GK		LQ		XK
Selling price per unit	$	326.33	$	543.59	$	498.00
Variable cost per unit	$	251.94	$	420.75	$	397.60
Time on the constraint (minutes)		2.90		6.90		8.00

Required:

a. 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.

b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? (Round your answer to 2 decimal places.)

Answer 1

SOLUTION

1.

	GK	LQ	XK
Selling price per unit (A)	326.33	543.59	498.00
Variable cost per unit (B)	251.94	420.75	397.60
Contribution margin per unit (C=A-B)	74.39	122.84	100.40
Time on the constraint (minutes) (D)	2.90	6.90	8.00
Contribution margin per unit of the constrained resource (C/D)	25.65	17.80	12.55
Ranking	1	2	3

Resulting ranking of products: GK,LQ, XK

2. The company should be willing to pay up to $12.55 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product XK. By assumption, the other products will already have been produced up to demand.