1. © 1999 Prentice-Hall Canada Inc. Slide 31 Optimal Use of Limited Resources when something constrains or limits operations (labour hours, machine hours, raw material, space) determine contribution margin per the limiting factor allocate usage to maximum profit PlainFancy Contribution margin per unit$4.00$9.00 Units of production per hour31 Contribution margin per hour$12.00$9.00 allocate capacity to “Plain” up to expected demand, and then allocate remaining capacity to “Fancy”

2. © 1999 Prentice-Hall Canada Inc. Slide 32 Optimal Use of Limited Resources Example (P 8-8) Suppose a company makes two products: The fancy saw is more profitable based on contribution margin Plain SawFancy Saw Sales Price$66$100 Variable Costs$50$70 Contribution Margin$16$30 Contribution Margin Ratio (CM/Sales) 24%30%

3. © 1999 Prentice-Hall Canada Inc. Slide 33 Optimal Use of Limited Resources Example (cont’d) Demand is for more units than the company can produce. There are 20,000 machine hrs available. Two plain saws can be produced in the same time (one hour) as one fancy saw. Calculate the total contribution margin for 20,000 hours for plain saws only and for fancy saws only.

4. © 1999 Prentice-Hall Canada Inc. Slide 34 Optimal Use of Limited Resources Example (cont’d) PlainFancy Units per hour21 CM per unit$16$30 CM per hour$32$30 Total contribution for 20,000 hrs $640,000$600,000 The plain saw is more profitable when we consider that number of hours is constraining operations