Utilization of Scarce Resource willing to pay above the usual price to obtain

more hardwood?
Key Terms and Concepts:

 When a limited resources of some type restricts the
company’s ability to satisfy demand, the company is
said to have a constraint.
 The machine or process that is limiting overall output
is called the bottleneck (It is the constraint)
 Fixed costs are usually unaffected in these situations.
 A firm should not necessarily promote those products
that have the highest contribution margins per unit.
3. GIBIYAAN makes tasty treats for events. Jim’s
Cakes has only one employee: Jim. Jim’s business
is booming, but this success has caused a
problem, Jim does not have enough time to fill all
of his orders. The company sells three products:
Wedding Cakes, Birthday Cakes and Cupcakes.
Information about the three products is shown
below:

Problems:
Wedding Birthday Cupcake
1. UMAASA Company produces two products and Selling Price P400 P40 P5
selected data are shown below: Variable Cost 160 15 2.25
Contribution Margin P240 P25 P2.75
Product J Product P CM ratio 60% 62.5% 55.0%
Selling price per P60 P50 Hours to make 20 2 0.20
unit: Required:
Variable cost per P36 P35
unit: a. In terms of making money, which orders make
Contribution P24 P15 the best use of Jim’s constrained resource? (His
Margin per unit: constrained resource is time).
Current demand 2,000 2,200
per week (units)
4. UWATAKOTITS Company produces three
Contribution 40% 30%
products: X, Y, and Z. The selling price, variable
Margin ratio
costs, and contribution margin for one unit of
Processing time 1 min. 0.50 min.
each product follows:
required on
machine GUBAON Product X Y Z
per unit
Selling Price P60 P90 P80
Less: Variable costs:
Additional Information: Direct materials P27 P14 P40
 Machine GUBAON has a capacity of 2,400 Direct labor 12 32 16
minutes per week. Variable marketing 3 8 4
overhead
Required: Total Variable cost P42 P54 P60
a. How many units of each product can be Contribution margin P18 P36 P20
processed through Machine GUBAON in one Contribution margin 30% 40% 25%
minute? ratio
b. Which among the two products will generate
more profit for the company, using one minute of
Additional Information: Due to strike in the plant of
machine GUBAON to process Product J or using
one minute of machine GUBAON to process one of its competitors, demand for the company’s
Product 2? products far exceeds its capacity to produce.
c. How much should UMAASA be willing to pay for Management is trying to determine which product(s)
an additional minute of GUBAON machine time? to concentrate on next week in filling its backlog of
orders. The direct labor rate is P8 per hour, and only
2. INLOVE Company makes reproduction colonial 3,000 hours of labor time are available each week.
furniture from select hardwoods.
Required:
Chairs Tables a. Compute the amount of contribution margin that
Selling price per P80 P400 will be obtained per hour of time spent on each
unit: product.
b. Which orders would you recommend that the
Variable cost per P30 P200
company work on next week – the orders for
unit:
product X, Y, or Z? Show computations.
Board feet per unit: 2 10
c. By paying overtime wages, more than 3,000
Monthly demand 600 100
hours of direct labor time can be made available
next week. Up to how much should the company
Required: be willing to pay per hour in overtime wages if
a. The company’s supplier of hardwood will only be there is unfilled demand to the three products?
able to supply 2,000 board feet this month. Is this Explain
enough hardwood to satisfy demand?
b. What plan would maximize profits?
c. Assume the company follows the plan we have
proposed. Up to how much should INLOVE be