Product Sales Mix Decisions - New Project 5

https://support.microsoft.com/en-us/office/using-solver-to-determine-the-optimal-product-mix-c057e214-962f-4339-8207-e593e340491f

Supposed, a business sells two products: A and B. The sales data for each product is as follows:

Product A: 100 units sold at $20 each

Product B: 400 units sold at $15 each

Total sales quantity = 100 + 400 = 500 units

Total sales revenue = [ (100*20) + (400*15)] = $8000

Hence, the mix of product A = 100/500 = 20%

Mix of product B = 400/500 = 80%

Hence, as per the present scenario, product B is a more profitable product for the organization, and the two actionable steps can be:

A company, Sweet Treats, makes two types of cookies: Chocolate Chip (CC) and Peanut Butter (PB). They have 200 hours of labor available per month and can sell unlimited quantities of either cookie. CC requires 2 hours of labor and sells for $1 per cookie, while PB requires 3 hours and sells for $1.50. What is the best product mix to maximize profit?

Solution:

1. Calculate Contribution Margin:

CC Contribution Margin: $1.00 - (Cost of CC per hour) = $1.00 - (Cost of CC per hour) (This would need to be calculated using cost accounting. Assume, for simplicity, that the labor cost is $0.50/hour. Then the CC contribution margin would be $1.00 - ($0.50 * 2) = $0.00).

PB Contribution Margin: $1.50 - (Cost of PB per hour) = $1.50 - (Cost of PB per hour) (Assume, for simplicity, that the labor cost is $0.50/hour. Then the PB contribution margin would be $1.50 - ($0.50 * 3) = $0.00).

Calculate the profit per hour. CC: $0/2hours = $0.00/hour, and PB: $0.00/3hours = $0.00/hour.

2. Calculate the profit per labor hour for each cookie:

CC profit per hour: ($0.00 contribution margin) / 2 hours = $0.00/hour.

PB profit per hour: ($0.00 contribution margin) / 3 hours = $0.00/hour.

3. Determine the optimal product mix:

Since both cookies have the same profit per labor hour, the company can produce either cookie, or a combination of both, without a preference.

4. Calculate Total Profit:

For this example, total profit is $0 regardless of which product is chosen. In a real scenario, the answer would vary based on the cost structure.

In summary, the best product mix is to produce either CC or PB or a combination of both, as long as it doesn't exceed the 200 hours available.

Southside Company produces three types of baseball gloves: child, teen, and adult. The gloves are produced in separate departments and sent to the quality testing department before being packaged and shipped. A machine￾hour bottleneck has been identified in the quality testing department. Southside would like to optimize its use of machine hours (step 2) by producing the two most profitable gloves. The machine hours required for each glove follow:

Price and variable cost information is as follows:

Calculate the contribution margin per unit of constrained resource for each glove.

Based on the analysis, which two gloves would Southside prefer to produce and sell to optimize the use of machine hours in the quality testing department?

The company would prefer to produce and sell the child and teen gloves, since these products have the highest contribution margin per machine hour.

Wood World, Inc., produces wooden desks, chairs, and bookcases. These items are produced using the same machines, and there is a maximum of 80,000 machine-hours available during the year. The information about the production time and costs for these three items is:

Wood World is limited in producing its products by the number of possible machine-hours. Orders have been received for 60,000 desks, 48,000 chairs, and 40,000 bookcases, which will require 94,000 machine-hours to produce. Since there are not enough machine-hours available to fill all of the orders, which orders should Wood World fill first?

Wood World should fulfill the orders for bookcases first, desks second, and chairs last. The bookcases provide the highest contribution margin per machine-hour, followed by desks and then chairs. Maximising the contribution margin per constraint, in this case per machine-hour, is the best way for Wood World to manage the constraint. How many of each item will be produced?

Therefore, based on contribution margin and the constraint of machine hours, Wood World should fill all 40,000 of the bookcase orders first, then fill the 60,000 desk orders and, and fill 20,000 of the chair orders last. Are there any qualitative issues that Wood World should consider? One concern may be that customers who typically buy a desk and chair together may not be able to do so if the chair production is affected by a bottleneck. Another qualitative issue in keeping with the furniture example is that a company might find producing dining room tables to be significantly more profitable than matching chairs or matching cupboards. However, they will still be required to produce the less profitable chairs and cupboards, because many consumers will want to buy all three items as a set.

The benefits of effectively managing constraints can be enormous. Managers need to understand the positive impact effective management of constrained resources can have on the company’s bottom line. The contribution margin per unit of the scarce resource can be used to assess the value of relaxing the constraint. When there is unsatisfied demand for a single product because of a constraint, the value of additional time on the constraint is simply the contribution margin per unit of the scarce resource for that product. When there are two or more products with unsatisfied demand, the value of additional time on the bottleneck would be the largest contribution margin per unit of the scarce resource for any product whose demand is unsatisfied. In many situations, when dealing with conflicting time constraints an evaluation of multiple bottlenecks might identify a viable solution. While many bottleneck issues and their solutions could be somewhat complex, others might be addressed more simply. For example, in some cases the problem might be solved by the addition of an additional work shift or overtime.