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Where there are no constraints, produce all products that give profit/contribution. If a constraint exists,
ration the resource available amongst the products that will produce the highest contribution despite
the limitation.
2. Throughput accounting
3. Linear programming
Both 1 and 2 use similar analysis and they will be the object of my discussion.
c. cal. contribution per limiting factor (i.e. contribution/labour hour per unit assuming labour is the
limiting factor)
Throughput accounting
Concept.
1. In the short-run, only direct material costs are variable. Labour and overheads (conversion costs) are
fixed and are grouped together and called Total factory costs. (NB: This is the differentiating factor from
the conventional method above where we assume direct material, direct labour and variable o/hs to be
variable costs)
2. In a JIT environment, goods should only be produced when there is demand for them. This ensures
faster time to market. Producing for inventory does not create sales.
3. Factory spends money when goods are produced. The company makes money when goods are sold.
Overall profitability is determined by the relative rate at which the company makes money and the rate
at which the factory spends money.
*throughput calls constraint ‘’bottleneck resource’’
*a bottleneck resource is that factor that will not allow production to flow without delay.
*In a process, it is the process that will take the longest time that will delay other processes. Other
processes will have to wait for it.
Question 1
The factory has 50 production lines each of which contain the three processes: Raw material for the sheet metal is
first pressed then stretched and finally rolled. The processing capacity varies for each process and the factory
manager has provided the following data:
Processing time per metre in hours
Product A Product B Product C
Pressing 0·50 0·50 0·40
Stretching 0·25 0·40 0·25
Rolling 0·40 0·25 0·25
Required:
(a) Identify the bottleneck process and briefly explain why this process is described as a ‘bottleneck’.
(adapted from F5 June 2009, Q1) (3 marks)
Solution:
You don’t have to do any calculation. By observation, you will see that for product A, pressing will take the longest
time and other processes (stretching and rolling) will have to wait. The same thing goes for product B and C.
*the process with the lowest output, will be the bottleneck if output is the yardstick.
PRODUCTS A B C
$ $ $ $ $ $
Selling price 400 600 500
Variable cost/unit
Dm 20 30 40
dl 10 10 10
v. o/hs 15 (45) 15 (45) 20 (70)
Contribution/unit (a) 355 555 430
Labour hour (key factor)/unit (b) 5hrs 15hrs 10hrs
Contribution/labour hour (a/b) $71 $37 $43
Ranking 1st 3rd 2nd
Throughput format
Product A Product B Product C
Selling price 70·0 60·0 27·0
Raw materials 3·0 2·5 1·8
Throughput 67·0 57·5 25·2
Bottleneck hours 0·50 0·50 0·40
Throughput per bottleneck hour* (a)134·0 115·0 63·0
Fixed costs per hour (b) 90·0 90·0 90·0
TPAR 1·49 1·28 0·7
Decision rule:
Any product(s) with throughput accounting ratio (TPAR) of less than 1, do not produce. HERE PRODUCT C.
Produce product(s) with TPAR> 1. HERE PRODUCT A AND B.
*Any product with a TPAR<1, the factory is spending more money than the cash the company is generating from
sales.
*TPAR>1, the rate at which cash is generated from sales is higher than the rate at which the factory is spending
money.
Start from sales in the calculation above and follow the table downward.
*when answering questions, give points relevant to the questions. There will always an answer in the question.
Now try question no1, june 2009. Discuss your challenges with me here.
amgprofessionals@gmail.com