8 Consider a Simple Firm WXYZ Only two employees: Mr. M and Mr. N They can choose between any one of Four Products: W, X, Y, or Z Unlimited materials and unlimited market demand They each get paid $10 per hour. The Firm operates 8 hours a day. They get paid whether they produce anything or not.
11 So, What Product Should They Make? Decision suggested by Accounting: Produce items with the HIGHEST PROFIT MARGIN That would be Z with a $26.17 Profit Margin selling at $52 each ($52)*(16 ea) - ($20)*(16ea) - (2 workers)*(8 hours)*($10/hour) = $352 /day
35 Consider Adding a New Product We can add a new product R R flows through the constraint on the Right. Just uses the right side of the plant A and B What do you think? Is it a lose- R ? R Sells for $40 RM is $20 Overhead $15.75 Looks like a winner at $4.75 Profit! R
37 Putting T, I OE in Practice Suggest using a simple form: Option_______________________ Date _______ Proposal by __________________ Sales - Materials = Throughput -Operating Expense = Profit Current Change Future $K/yr Refn: The Theory of Constraints and Its Implications for Management Accounting, Western Textile.