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Determining Profit in the Traditional Contribution Margin Method and Bottleneck Method

Canine Kernels Company (CKC) manufactures two different types of dog chew toys (A and B, sold in 1,000-count boxes) that are manufactured and assembled on three different workstations (W, X, and Y) using a small-batch process (see figure 7.9). Batch setup times are negligible. The flowchart denotes the path each product follows through the manufacturing process, and each product's price, demand per week, and processing times per unit are indicated as well. Purchased parts and raw materials consumed during production are represented by inverted triangles. CKC can make and sell up to the limit of its demand per week; no penalties are incurred for not being able to meet all the demand. Each workstation is staffed by a worker who is dedicated to work on that workstation alone and is paid $6 per hour. Total labor costs per week are fixed. Variable overhead costs are $3,500/week. The plant operates one 8-hour shift per day, or 40 hours/week. Which of the three workstations, W, X, or Y, has the highest aggregate workload, and thus serves as the bottleneck for CKC?

See attachment for diagrams

4. The senior management at Canine Kernels Company (CKC) is concerned with the existing capacity limitation, so they want to accept the mix of orders that maximizes the company's profits. Traditionally, CKC has utilized a method whereby decisions are made to produce as much of the product with the highest contribution margin as possible (up to the limit of its demand), followed by the next highest contribution margin product. Because capacity is limited, choosing the proper product mix is crucial. Troy Hendrix, the newly hired production supervisor, is an aid follower of the theory of constraints philosophy and the bottleneck method for scheduling. He believes that profitability can indeed be approved if bottleneck resources are exploited to determine the product mix.

a) What is the profit if the traditional contribution margin method is used for determining CKC's product mix?
b) What is the profit if the bottleneck method advocated by Troy is used for selecting the product mix?
c) Calculate the profit gain, both in absolute dollars as well as in terms of percentage gains, by using TOC principles for determining product mix.

Please provide answers in excel.

Thank you so much!

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Solution Preview

1) We have,
Workstation Load from product A Load from product B Total load
W 10*90=900 14*85=1190 2090
X 10*90=900 20*85=1700 2600
Y 15*90=1350 11*85=935 2285
Workstation X is the bottleneck for CKC because the aggregate workload is higher than the workloads of W, Y and the maximum available capacity of 2400 hrs.

2) We have,
a) Profit if traditional contribution margin method is used for determining CKC's product mix:

Contribution margin per unit of each product:
Price $55 $65
Less: Raw Material and purchase parts $5 $10
Contribution margin $50 $55
Here the contribution margin per unit sequence is B, A.

Allocating resources W,X and Y to the products in the order B,A.
Work Center Minutes at the start Minutes left after 85 B Can only make 70A
W 2400 1210 510
X 2400 700 0
Y 2400 1465 415

Computing profitability:
Revenue ...

Solution Summary

The expert determines profits via contribution margins and bottleneck methods.