Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 15

Theory of Constraints Bakker Industries sells three products (611, 613, and 615) that it manufactures in four departments. Both labor and machine time are applied to products in each of the four departments. The machine-processing and labor skills required in each department prohibit switching either machines or labor from one department to another. However, Bakker has a good supply of both full-time and part-time labor and does not expect hiring or retention of employees to be a problem. Because of the availability of part-time labor, Bakker considers labor a variable cost and includes it in the calculation of throughput margin.

Bakker’s management is planning its production schedule for the next several months. Some machines will be out of service for extensive overhauling. Available machine times by department for each of the next six months are as follows:

	Department
	1	2	3	4
Normal machine capacity in machine-hours	3,500	3,500	3,000	3,500
Capacity of machines being repaired, in machine-hours	500	400	300	200
Available capacity in machine-hours	3,000	3,100	2,700	3,300

Labor and machine specifications per unit of product follow:

		Department
Product	Labor and Machine Time	1	2	3	4
611	Direct labor-hours	2	3	3	1
	Machine-hours	2	1	2	2
613	Direct labor-hours	1	2	0	2
	Machine-hours	1	1	0	2
615	Direct labor-hours	2	2	1	1
	Machine-hours	2	2	1	1

The Sales Department’s forecast of product demand over the next six months is as follows:

Product	Monthly Sales
611	500 units
613	400 units
615	1,000 units

Bakker’s inventory levels will not increase or decrease during the next six months. The unit price and cost data valid for the next six months follow:

	Product
	611	613	615
Price	$196	$123	$167
Direct materials	7	13	1 7
Direct labor
Department 1	12	6	12
Department 2	21	14	14
Department 3	24	—	16
Department 4	9	18	9
Variable overhead	27	20	25
Fixed overhead	15	10	32
Variable selling	3	2	4

Required

1. Determine whether Bakker can meet the monthly sales demand for the three products. What department is a constraint, if any?

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2. What monthly production schedule would be best for Bakker Industries? Assume that Bakker includes all variable manufacturing costs in calculating throughput.

Step 1 of 2

1.?Bakker will not be able to meet the demand. Department 1 is a constraint, based on machine time. We do not consider labor time because Bakker is able to hire and retain all the labor it needs.

?	Departments
	1	2	3	4
Machine Hours needed	?	?	?	?
611?	1,000= 500x2	500= 500x1	1,000= 500x2	1,000= 500x2
613	400= 400x1	400= 400x1	0	800= 400x2
615	2,000= 1,000x2	2,000= 1,000x2	1,000= 1,000x1	1,000= 1,000x1
Total hours needed	3,400	2,900	2,000	2,800
Hours Available	3,000	3,100	2,700	3,300
Excess (deficiency)	(400)	200	700	500