Resource Constraints

Herta Company

A company may suddenly be faced with an unexpected dilemma such as a lack of materials needed for production. Making the optimal decision in view of a constraint on resources can be crucial to maximize profit until the situation eases or a new long-term plan is developed. Let's assume that Herta Company makes and distributes frozen gourmet foods. The company is the most famous for the two kinds of pies it makes. The basic pie uses 2 lbs. of berries and the deluxe pie uses 5 lbs. of the same berries. Herta Company currently has 6,000 lbs. of imported berries on hand. The company is planning to purchase another 6,000 lbs. of to make 1,000 basic pies and 2,000 deluxe pies. More information about the contribution margin for each type of pie is shown below.

Pie

Selling price  $8.10
Less variable expenses
Direct materials (ingredients)  $2.00
Direct labor  $2.10
Variable overhead (flour, etc.)  $1.00
Contribution margin  $3.00

Deluxe Pie

Selling price $13.90
Less variable expenses
Direct materials (ingredients)  $5.00
Direct labor  $1.40
Variable overhead (flour, etc.)  $1.50
Contribution margin  $6.00

The company has just received word that the source of the berries has been shut down by regional disturbances. Consequently, the company will not be able to import the 6,000 lbs. it planned on using in the coming month's production. There's no other source of berries.

Required:

Computations (use Excel).

Determine the optimal usage of the company's inventory of 6,000 lbs. of berries. Show your computations in good format.

Compute the total contribution margin that the company would have earned if all 12,000 lbs. of berries were available.

How many of each pie should Herta Company make and distribute in order to maximize the contribution margin?

Compute the total contribution margin for the product mix that you recommend.

Memo (use Word).

Write a memo to the production manager explaining how to handle production for the next month. Refer to your analysis in your response. Write a four or five paragraph memo to the owner of the business. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short essay (use Word).

Use the background material and do research as needed to comment on different types of limitations on resources a company may encounter and strategies to maximize profit.