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Prepared by Diane Tanner University of North Florida

Chapter 9. Resource Allocation Decisions. Prepared by Diane Tanner University of North Florida. Production Constraints. 2. Constraints occur when the capacity to manufacture a product or provide a service is limited in some manner Examples Labor Skilled craftspeople Facilities

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 9 Resource Allocation Decisions Prepared by Diane Tanner University of North Florida

  2. Production Constraints 2 • Constraints occur when the capacity to manufacture a product or provide a service is limited in some manner • Examples • Labor • Skilled craftspeople • Facilities • Special machinery • Limited factory space • Materials • Limited availability

  3. Limited resources may cause management to focus on the constraint instead of the contribution margin per unit Goal Determine the most profitable allocation of resources i.e., which product will contribute the most to profit Influence of Constraints 3

  4. Decisions When Resources are Limited 4 • If products are mutually exclusive • When events do not occur at the same time • i.e., a customer will buy one product instead of the other; does not insist that both be purchased • If products are not mutually exclusive • When customers insist on having more than one product available

  5. Limited Resource Decisions When Products are Mutually Exclusive 5 How to select products to produce/sell Step 1: Determine contribution margin per unit per constrained resource of each product/service Step 2: Choose the product/service with the highest CM per constrained resource to produce; Produce zero of the other products

  6. Limited Resource Decisions When Multiple Product Production Required 6 How to select products to produce/sell • Step 1: Determine contribution margin per unit per constrained resource • Step 2: Choose the product/service with the lowest CM per constrained resource to produce the product with the minimum quantity required • Step 3: Determine the resource used for the product with minimum units Continued

  7. Limited Resource Decisions When Multiple Product Production Required (cont) 7 Step 4: Subtract the resource to be used for the product with minimum units from the total resource available Step 5: Allocate the remaining resource to the second product

  8. The End

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