An analyst is considering an investment in Treetops Inc. and has gathered the following information. What is the expected return
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1-a. The total time available on the plastic injection molding machine is the constraint in the production process. What is the contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?
Answer:
We need to need to find the contribution margin for each product.
Then we need to find contribution margin per unit of constrained resources with the following formula:
Constraint: Time available on plastic injection moulding machine
Ski Guard Golf guard Fishing guard
Selling Price per unit 200 300 255
Less: Variable Cost 60 140 55
Contribution Margin 140 160 200
Processing time per unit (minutes) 2 5 4
Contribution Margin unit of constraint 70 (140/2) 32 (160/5) 50
1-b. Which product would be the most profitable use of this constraint?
Manufacturing the <u>Ski Guard</u> would be the <u>most profitable use</u> of this constraint since it has <u>the maximum contribution margin per unit of constraint, ($70 per unit).</u>
1-c. Which product would be the least profitable use of this constraint?
The <u>Golf Guard</u> would be the least profitable use of this constraint since it has the <u>least contribution margin per unit of constraint, at $32 per unit</u>.
2a. A severe shortage of plastic pellets has required the company to cut back its production so much that the plastic injection molding machine is no longer the bottleneck. Instead, the constraint is the total available pounds of plastic pellets. What is contribution margin per unit of the constrained resources for Ski Guard, Golf Guard and Fishing Guard?
We need to need to find the contribution margin for each product.
Then we need to find contribution margin per unit of constrained resources with the following formula:
Constraint: Pounds of plastic pellets
Ski Guard Golf guard Fishing guard
Selling Price per unit 200 300 255
Less: Variable Cost 60 140 55
Contribution Margin 140 160 200
Plastic pellets per unit (pounds) 7 4 8
Contribution Margin per pound 20 (140/7) 40 (160/4) 25 (200/8)
2-b. Which product would be the most profitable use of this constraint?
The <u>Golf Guard</u> would be the <u>most profitable use</u> of this constraint since it has <u>the maximum contribution margin per unit of constraint, ($40 per unit).</u>
2-c. Which product would be the least profitable use of this constraint?
The <u>SkiGuard</u>, with a contribution margin of <u>$20 per pound</u> of plastic would be the <u>least profitable</u> use of this constraint.
3. Which product has the largest unit contribution margin?
Answer : The <u>fishing guard</u> has the <u>largest per unit contribution margin </u>at <u>$200.</u>