QUESTION - Imah Baker manufactures varieties of cup cakes. Since the demand for the cakes is increasing, the management has engaged you in assisting the production department to determine an economical sales and production mix for the upcoming year. The company has provided the following data:
|
Flavor
|
Demand Next Year (units)
|
Price per 1,000 Unit
|
|
Selling Price
|
Direct Materials
|
Direct Labor
|
|
Coffee
|
250,000
|
$2,800
|
$630
|
$600
|
|
Strawberry
|
200,000
|
$3,400
|
$1,100
|
$650
|
|
Cappuccino
|
150,000
|
$3,800
|
$1,240
|
$650
|
|
Chocolate
|
150,000
|
$3,000
|
$1,000
|
$620
|
The following additional information is available:
1. The company's plant has a capacity of 20,000 direct labor-hours per year on a single-shift-basis. The company's present employees and equipment can produce all four flavors.
2. The direct labor rate of $20 per hour is expected to remain unchanged during the coming year.
3. Fixed costs total $250,000 per year.
4. Variable overhead costs are $20 per direct labor-hour.
5. All of the company's nonmanufacturing costs are fixed.
6. The will be no finished goods inventory.
Ordinarily, a system has only one constraint. The capacity of any complete process is determined by the capacity of the constraint, which could be a single machine or work center. In addition to making sure that the best product mix is chosen by ranking products based on the contribution margin per unit of the constrained resource, managers should seek ways to increase the effective capacity of the constraint. Imah Baker is now experiencing problem in fulfilling the market demand. The plant in Shah Alam is now producing cakes in full capacity. Based on the order received, it seems like Imah Baker cannot fulfill the demand because of the labor-hour constraint but the top management insist that Imah Baker should accept the order and work for it.
Conceptually, the capacity of the bottleneck can be increased by increasing the rate of output at the bottleneck or increasing the time available at the bottleneck. It is important for managers to handle the bottleneck as a top priority in ensuring that the production will go smoothly and company's target can be achieved.
Required:
i. Determine the total labor-hour needed to fulfill the demand.
ii. Prepare a schedule showing the total direct labor-hour that will be required to produce the units estimated to be sold during the coming year.
iii. Determine the contribution margin per constrained resource on each flavor.
iv. Rank according to priority to produce based on your finding in (ii) and (iii) above.
v. Discuss how can managers in Imah Baker handle the constraint with some specific examples of ways to elevate the constraint in order to produce maximum output and at the same time getting maximum profit.
vi. Besides profit, what other factors that can influence your decision to determine the priority of producing the flavor.