Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

Outdoor Luggage, Inc., makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

	Ski Guard			Golf Guard			Fishing Guard
Selling price per unit	$	280		$	200		$	245
Variable cost per unit	$	90		$	160		$	115
Plastic injection molding machine processing time required to produce one unit	6 minutes			14 minutes			2 minutes
Pounds of plastic pellets per unit	12 pounds			10 pounds			8 pounds

Required:

1. If we assume that the total time available on the plastic injection molding machine is the constraint in the production process, how much contribution margin per minute of the constrained resource is earned by each product?

 

2. Which product offers the most profitable use of the plastic injection molding machine?

3. If we assume that a severe shortage of plastic pellets has required the company to cut back its production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product?

4. Which product offers the most profitable use of the plastic pellets?

5. Which product has the largest contribution margin per unit?

Explanation

1.

The most profitable use of the constrained resource is determined by the contribution margin per unit of the constrained resource. In part 1, the constrained resource is time on the plastic injection molding machine. Therefore, the analysis would proceed as follows:

2.

Production of the Fishing Guard product would be the most profitable use of the constrained resource which is, in this case, time on the plastic injection molding machine. The contribution margin per minute is $65.00 for this product, which is larger than for the other two products.

3.

In this part, the constraint is the available pounds of plastic pellets.

 

4.

In this case, production of the Fishing Guard would be the most profitable use of the constrained resource. The contribution margin per unit of the constrained resource for this product is $16.25, which is larger than for the other two products.

5.

The Ski Guard product has the largest unit contribution margin, but it is not the most profitable use of the constrained resource in either case above. This happens because the Ski Guard uses more of the constrained resources in proportion to its contribution margin than the other two products. In other words, more of the other products can be produced for a given amount of the constrained resource and this more than makes up for their lower contribution margins.

Thanks