Exercise 8 – Limited/Scarce Resource A company makes three products, all of whic
ID: 2476670 • Letter: E
Question
Exercise 8 – Limited/Scarce Resource
A company makes three products, all of which require the use of a particular machine. Only 200 machine hours are available each month. The company can sell 1,000 units of Pacs, 900 units of Bumps, and 500 units of Lams each month.
Pacs Bumps Lams
Selling price $12 $16 $21
VC $7 $8 $10
CM $5 $8 $11
Machine time (minutes) 6 10 15
Required: Which item should you make first? How many of each item should you make? Is there any item that you will not make?
My question is am I suppose to calculate this in minutes and hours and how do I do that? Please help me with this problem.
Explanation / Answer
All Amounts in $ The contribution margin for Lams is the highest (viz. $ 11 per unit) Each lam takes 15 minutes, hence production of 500 lams will take 500 X 15 = 7,500 minutes or 7,500 / 60 = 125 hours. Hence, 500 lams should be produced first. Next in line is Bumps which give a contribution of $ 8 per unit, For each unit of Bump, 10 minutes are required. Hence, for producing 900 units, 900 X 10 = 9,000 minutes or 9,000 / 60 = 150 hours are required. However, the balance hours available after production of Bumps is only 75, in which 450 bumps can be produced. Thus, from the above two workings, it can be inferred that the Company should not produce any Pacs, owing to shortage of time.
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