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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Bottleneck profit

Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100. Product K requires five furnace hours, while Product L requires four furnace hours. Determine the most profitable product, assuming that the furnace is a production bottleneck.

To determine

Production Bottleneck: Production Bottleneck is a situation of constraint in the manufacturing company, where the demand for goods is higher, than the production capacity of the company. In this situation the production or contribution per bottleneck hour is calculated to determine the value of a product.

To Determine: The most profitable product assuming that the testing is a production bottleneck.

Explanation

Differential analysis of the production bottleneck of both the products is shown below.

Product K Product L
Unit Contribution margin $120.00 $100.00
Testing hours per unit 5 hours 4 hours
Unit Contribution per production bottleneck hour (1)     $24.00 (2)     $25.00

Table (1)

Hence, Product L is more profitable than Product K, as Product L has $1 per unit per hour more revenue than Product K.

Explanation: Production bottleneck is calculated on the basis of the production or contribution per bottleneck hour. Production bottleneck aims to find out which product could be produced more in quantity and generate a considerably greater income with the given limited resources. Here the company has two alternatives either to produce Product K which would generate $120 per unit but take 5 hours to be produced or to produce Product L which would generate $1000 per unit but take 4 hours to be produced. Hence, it clearly shows that Product L will generate $25 per unit per hour and also a greater quantity could be produced...

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