Suggest an approach for maximizing profit when faced with scarce resources.

The approach used in this scenario is:

Allocate scarce resources first to those products or services which provides maximum CONTRIBUTION MARGIN PER UNIT OF THE SCARCE RESOURCE.

 

A simple scarce resource allocation decision involves the following steps:

1. Calculate the Contribution Margin (Revenue – Variable Costs) per unit of limited or scarce resource for each product or service which is consuming scarce resource.
2. Rank the products in the order of decreasing contribution margin per unit of scarce resource.
3. Allocate scarce resource first to the product or service with highest contribution margin per unit of limited resource, then to the product with next highest contribution margin per unit of scarce resource and so on.

The allocation of scarce resources in this way will maximize the profit for the company.

 

In order to maximize profit with limited resources, you must have to identify the high margin products in your portfolio along with its sale forecast and then allocate the resources accordingly in order to get the desired outcome.

I will recommend to use sale forecast as well instead of only focusing on the contribution margin of the products.

According to managerial economics, Profit maximization is subject to various constraints faced by the firm. These constraints relate to resource scarcity, technology, contractual obligations, and laws and government regulations. In their attempt to maximize the present value of profits, business managers must consider not only the short-term and long-term implications of decisions made within the firm, but also various external constraints that may limit the firm's ability to achieve its organizational goals. The first external constraint of resource scarcity refers to the limited availability of essential inputs (including skilled labor), key raw materials, energy, specialized machinery and equipment, warehouse space, and other resources. Moreover, managers often face constraints on plant capacity that are exacerbated by limited investment funds available for expansion or modernization. Contractual obligations also constrain managerial decisions. Labor contracts, for example, may constrain managers' flexibility in worker scheduling and work assignment. Labor contracts may also determine the number of workers employed at any time, thereby establishing a floor for minimum labor costs.

Always try to decrease your production cost by this way you can maximize your profit when faced with scarce resources.

agree with mr. Mohammad Iqbal Abubaker  in his answer

 

(1) Analysis of sub-systems such as processing plants, and assembly systems or transportation systems.

(2) regulatory institutions or political constraints within which the marketing system structure analysis.

The approach subsystems easier in terms of measurement. Often assess the efficiency of the system in the form of the operating costs of the system. In such analyzes typically performed comparisons of standard cost accounting work and aspects of engineering of plants or systems marketing with the latest technology, or they may use the written programs or others of approaches that achieve optimal behavior and is marketing margins Studies (price spread between farm and retail) in this group, as used margins in general to give some of the efficiency of the food marketing system and changes in efficiency indicators.

Often the regulatory and institutional constraints studies focus on the extent of deviation from the format market structure is competitive,

Because the goal is to identify and measure the degree of imperfection of the market, such as the number and distribution facilities sizes and the degree of product excellence, the level of market information and include attempts to measure the efficiency of the system some logistical achievement standards, such as the proportion of prices to costs, the excess energy, modern technology and the application, the cost of product differentiation.

The degree of efficiency in agricultural markets has been measured according to prices from those determined in the competitive market, and by the input of the output, or increase the cost of operations for certain minimum limits, or the marketing margin per unit of a particular product compared Bmg or a specific reference in advance.

contribution margin per unit related to scarce resource is a good approach.

by lowering the cost from production to the finished product / selling point, we can maximize the profit

or we can concentrate in high margin product to gain more profit

Before performing any brain storming meetings - please try to answer the three simple questions -

1. What are the resources?  What is the bottleneck& What if there is more than one scarce resource?

2. How do resources relate to the production capacities?

3. How do resources chnage profit maximization problems?

I think based on the answers you will get - you will be able to find out the appropriate solution...

Managers must often make decisions regarding the best use of economic resources. While the goal is to maximize net income, scarce resources often put a constraint on the number of products a company must produce. So far in this text, management decisions have been focused on producing and selling products with one of two characteristics--those that generate the highest contribution margin per unit of product, or those that generate the highest proportion of profit out of each sales dollar. Neither of these have considered any limitation on the resources needed for production. In reality, limitations are always a possibility. Acquiring sufficient resources is necessary for profitable operations, but when they are not available, managers are forced to make product-mix decisions by selecting which product to be produced in order to best utilize the limited resource.

 

Limited Resource Decisions

Because a limited resource generates a limitation on production or sales of a company, it is often called a constraint. If the problem is expected to be long-term, the best option may be to expand capacity. If the limitation is for a minor component of a company's operations, some company's consider outsourcing. For example, a company faced with a backlog in their shipping department near the holidays may outsource workers by hiring from a temp agency. When a manager faces a limited resource decision in the short-run, the key is to allocate the limited resource so that it maximizes the contribution margin per unit of the constrained resource.

 

Examples of Limited Resources

Manufacturing, merchandising, and service companies often have limited access to materials, labor, and facility resources that are used in the production of income. Three common limited resources for manufacturing companies are:

Limited skilled labor. There may be a limited number of qualified employees that are trained to perform a task in the production cycle or operations, or to provide services to customers. This limited resource is measured in labor hours.

 

Limited production materials. Suppliers may back order materials, causing a manufacturing company's production facility to limit its production of particular products, or to limit the ability to offer product-related services to customers. This limited resource consists of materials measured in terms of pounds, ounces, yards, or other material measurements.

 

Limited facilities. A factory may contain assembly space for only a limited number of work areas, have limited machine hours for product production, have limited daily shipments to customers, and experience other bottlenecks that limit or slow production. This limited resource is measured in different quantities, such as square feet, machine hours, pounds of shipped products, and others.

Selecting the Product to Produce

In order to maximize profits when resources are limited, a company must produce the product(s) with the highest contribution margin per unit of limited resource. There are two steps involved in selecting the most profitable use of the limited resource.

Step 1: The contribution margin (CM) per unit of the scarce resource is calculated for each product by dividing the amount of resource required for each unit of product into the contribution margin.

 

CM per limited resource = 

Contribution margin per unit of product Resource needed per unit of product

 

Step 2: Rank the products and select the product with the largest contribution margin per unit of limited resource. This is the product for which the company will produce the most units.

Assume CynaPak Company has two products. Product A has a contribution margin per unit of $50 and Product B has a contribution margin per unit of $18. The company has only 500 hours of skilled labor available each week. Each unit of product A requires 2.5 hours to produce, while Product B requires 48 minutes.

 

CynaPak's limited resource is labor hours, as there are only 500 labor hours available. To be consistent with measurements, you must convert minutes to hours for Product B so that both products are denominated in the same measure:

 

Hours required per unit for product B: 48/60 minutes = 0.80 hours

 

Their respective contribution margins (CM) per labor hour (limited resource) are:

 

CM per labor hr. for A =

Unit CM for product A

=

$50.00

= $20.00 per hour Resource per unit

2.5 hours

 

CM per labor hr. for B = Unit CM for product B = $18.00 = $22.50 per hour Resource per unit 0.8 hours

 

If demand is available for both products, Product B should be produced because it generates $22.50 per labor hour, a higher contribution margin per limited resource (labor hour) than the $20 generated per labor hour when Product A is produced.

 

Allocating the Scarce Resource

Once a company determines which product that maximizes the contribution margin per limited resource, demand should be considered. Often a company can not remain competitive if it totally eliminates one product in order to produce a more profitable product. This is especially true when a company's products are complementary to each other and not mutually exclusive. For example, suppose a fast food restaurant has a limited supply of food preparers. It would not be wise to produce only burgers and eliminate french fries even if the burgers contribute more profit out of each labor hour used. Many customers prefer fries with their burgers and would opt to buy nothing in favor of a competitor.

 

If demand is unlimited for both products and a minimum number of product units must be produced, you must first allocate the scarce resource based on the minimum required production of the product with the lowest contribution margin per unit of scarce resource. If more than two products are produced that use the same resource, then allocate the resource to the minimum required production of the next lowest contribution margin per unit of scarce resource, continuing this process through all except the most profitable product. Allocate all of the remaining resource to the product with the highest contribution margin per unit of scarce resource remains. 

 

Mutually Exclusive Allocation --- No Minimum Required Units of Other Products

Assume that CynaPak Company can sell as many units of both products that it can produce, and that available labor hours are limited to 500 per week. As previously calculated, Product A contributes $20 for each labor hour used in production, while Product B contributes $22.50 per hour. Because there is no minimum number of units of either product, CynaPak should produce only Product B because it generates a higher contribution margin per hour of production labor used in production. To calculate the number of units of Product B, divide the time required to produce each unit of Product B into the total available hours:

 

Units of Product A = 0

Units of Product B = 500 hours / 0.8 hours = 625 units

 

As such, CynaPak should produce 625 units of Product B and no units of Product A.

 

Allocation Not Mutually Exclusive --- Minimum Required Units of Other Products  

Now assume that CynaPak must produce a minimum of 60 units of each product to avoid losing customers to competitors. CynaPak should produce as many units of Product B as possible because Product B generates a higher contribution margin per hour of labor used in production. First, allocate hours to Product A because Product A requires a minimum number of units to be produced. The production of 60 units of Product A requires 150 labor hours. 

 

Units of Product A = 60 units x 2.5 hours = 150 hours

 

The number of remaining hours is now determined:

 

Hours available for Product B = 500 -150 = 350 hours

 

All of the 350 remaining hours are now allocated to Product B:

 

Units of Product B = 350 hours / 0.8 hours = 437.5 units = 437 units

 

Partial units cannot be sold, so we must round to whole units. In the case of limited resources, you must always round down because only 350 hours are available. The production of 437 units uses 349.6 hours (437 x 0.8). Producing 438 units would require 350.4 hours, with the additional 0.4 hours not available. The units of Product A and B to be produced are:

 

Units of Product A = 60

Units of Product B = 437

 

This production will maximize profit with the constraint on the number of labor hours and the minimum required units of the two products.

 

Walk Through Problem

BucketCo manufactures 2 models of resin buckets—beach buckets and garden buckets. Due to a shutdown of a resin supplier, BucketCo is only able to obtain 3,960 pounds of resin during each of the next few months. As a result of the supply decline, the price per pound of resin has risen to a total of $1.60 per pound. In order to stay competitive, BucketCo needs to produce at least 900 of each bucket model to remain competitive. The company is able to sell all the buckets it produces. Monthly budget information follows:

 

 

Beach Buckets

Garden Buckets

Number of Buckets

2,000

3,000

Sales

$120,000

$50,000

Variable costs

48,000

27,500

Fixed costs

20,000

10,500

Net operating income

$  52,000

$12,000

     

Contribution margin per unit

$36.00

$7.50

Profit per unit

$26.00

$4.00

Resin needed per bucket

1.2 pounds

0.24 pounds

 

Given the limited resource, how many buckets of each model should BucketCo produce to maximize profits? 

Solution

Step 1: Because the limited resource is the number of pounds of resin, you must determine the contribution margin per pound of resin:

Beach buckets: $36.00/1.2 pounds = $30.00 per pound

Garden buckets: $7.50/0.24 pounds = $31.25 per pound

This information tells us that for every pound of resin used to produce a beach bucket, the company generates $30.00 to cover fixed costs and contribute to profit, and for every pound used to produce a garden bucket, the company generates $31.25 of profit.

 

Step 2: Select the product producing the smallest contribution to profit as the product for which minimum production will be met. Because beach buckets generates a smaller contribution margin per pound than garden, the company should produce the minimum units (900) of Beach buckets.

 

Step 3: Determine the number of pounds of resin (the limited resource) to be used by the product for which minimum production will be made:

Pounds of resin for beach buckets: 900 x 1.2 pounds = 1,080 pounds 

Step 4: Determine the amount of limited resource available for the product with the most profitable use of the resource. The resin to be used for the production of the 900 beach buckets is subtracted from the total available pounds of resin to arrive at the pounds to be used for garden buckets:

Pounds available for garden buckets: 3,960 - 1,080 = 2,880 pounds

There will be 2,880 pounds of resin available to be used to produce garden buckets.

 

Step 5: Determine how many units of the most productive product---garden buckets---can be produced with the remaining 2,880 pounds of resin.

Garden buckets to be produced: 2,880/0.24 pounds each = 12,000 units

The production of 900 beach buckets and 12,000 garden buckets will maximize profits given the limited number of pounds of resin available and the minimum production of 900 buckets of both models.

agree with others-------------------------------