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	$	326.35	$	543.61	$	497.00
Variable cost per unit	$	251.93	$	420.74	$	397.59
Time on the constraint (minutes)		2.80		6.80		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.)

	Ranking a. GK LQ XK b. Maximum amount

Answer 1

a)	Ranking
GK	1
LQ	2
XK	3
b) Maximum Amount	$12.43 per minute

Working Notes:

a)

	GK	LQ	XK
Selling price per unit	$ 326.35	$ 543.61	$ 497.00
Less: Variable cost per unit	$ 251.93	$ 420.74	$ 397.59
(a) Contribution per unit	$    74.42	$ 122.87	$    99.41
(b) Time on the constraint (minutes)	2.8	6.8	8
(c) Contribution per minute (a / b)	$    26.58	$    18.07	$    12.43
Ranking	1	2	3

As time is constraint, the contribution per minute has been used as the basis for ranking the products.

b) If product XQ is not produced then contribution that would be foregone is $12.43 per minute. Therefore if the company wants to hire additional capacity, the maximum amount it will pay for the hired capacity is $12.43 per minute. Because if the payment is more than that, the company will incur loss.