Knowledge Check 01 When a company does not have enough capac

Knowledge Check 01 When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, this leads to keep or drop decisions volume trade-off decisions sell or process further decisions make or buy decisions

Solution

1. The answer is “volume trade-off decisions”. Volume trade off decisions has to be made in those situations in which a company operates in the realm of constraints and hence is able to produce less than the market demand.

2. The answer is “$3 per minute”.

Explanation: Contribution margin of B = $6 per unit. Hence contribution margin per unit of constrained resource = $6/2 minutes = $3 per minute.

3. The answer is “600 units”.

Explanation: Contribution margin per unit of constrained resource for B= $3 per minute (as computed above). Contribution margin per unit of constrained resource for A = $8/4 minutes = $2 per minute.

As B has a higher contribution margin per unit of constrained resource all the demand for B should be met by producing 600 units.