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Optimal Use of Limited Resources

Optimal Use of Limited Resources. when something constrains or limits operations (labour hours, machine hours, raw material, space) determine contribution margin per the limiting factor allocate usage to maximum profit. Plain Fancy Contribution margin per unit $4.00 $9.00

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Optimal Use of Limited Resources

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  1. Optimal Use of Limited Resources • when something constrains or limits operations (labour hours, machine hours, raw material, space) • determine contribution margin per the limiting factor • allocate usage to maximum profit • Plain Fancy • Contribution margin per unit $4.00 $9.00 • Units of production per hour 3 1 • Contribution margin per hour $12.00 $9.00 • allocate capacity to “Plain” up to expected demand, and then allocate remaining capacity to “Fancy”

  2. Optimal Use of Limited ResourcesExample (P 8-8) • Suppose a company makes two products: The fancy saw is more profitable based on contribution margin

  3. Optimal Use of Limited Resources Example (cont’d) • Demand is for more units than the company can produce. • There are 20,000 machine hrs available. • Two plain saws can be produced in the same time (one hour) as one fancy saw. • Calculate the total contribution margin for 20,000 hours for plain saws only and for fancy saws only.

  4. Optimal Use of Limited ResourcesExample (cont’d) The plain saw is more profitable when we consider that number of hours is constraining operations

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