Scarce Resources

1
Scarce Resources

• Measuring capacity
• Increasing and decreasing capacity
• Making production decisions when resources are
  tight.
• Choosing among products.
• Setting production schedules

2
Scarce resources

• What are resources?
• How do resources relate to capacity?
• How do scarce resources change profit
  maximization problems?
• What if there is more than one scarce resource?

3
Some notions of capacity

• Capacity relates to how much service or product
  can be produced in a given period.
• Theoretical Capacity
• Practical Capacity
• Normal Capacity
• Excess capacity
• Idle capacity Is it different from excess
  capacity?

4
Implications

• Effect on product costs
• On prices
• On performance measurement
• On decisions about capacity/resource use

5
Ajax Company
Suppose that Ajax Company produces products A and
B, with the following selling prices and variable
costs. A B Sales price per
unit 25 30 Variable cost per unit 10 18 CM
per unit 15 12 CM ratio 60 40 Machine time is
limited. Product A takes 2 minutes.Product B
takes 1 minute. Which should Ajax produce?
6
Tyler Tool Company
Tyler Tool Company manufactures electric
carpentry tools. The production department has
met all production requirements for the current
month and has an opportunity to produce
additional units of product with its excess
capacity. Unit selling prices and unit costs for
three different drill models are as
follows Home Deluxe Pro Selling price 58
65 80 DM 16 20 19 DL (10 / hr.)
10 15 20 Variable overhead 8 12
16 Fixed overhead 16 5
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Tyler Tool Company
Variable overhead is applied on the basis of DL,
while fixed overhead is applied on the basis of
machine hours. There is sufficient demand for
the additional production of any model in the
product line. 1. If there are no constraints,
which product should be produced? 2. If labor
is scarce, which product should be produced?
8
University Hospital
University Hospital has an outpatient surgery
center that treats patients in three activity
centers (1) Surgery, (2) Phase I recovery, and
(3) Phase II recovery. At the end of Phase II
surgery, patients go home. Daily capacities and
production levels are as follows Surgery Phase
I Phase II Daily capacity 40 30
60 Daily production 30 30 30 The
hospital receives an average of 1,000 per
surgery. The variable cost per surgery is 300.
Demand is sufficient for 60. Surgeries not
performed in the center go to regular surgery
where variable costs are 700. Revenue is still
1,000.
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University Hospital
Here are some alternatives that management is
considering a. Continue performing 30
surgeries per day in the outpatient center and
send 30 patients to regular surgery.
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University Hospital
b. Rebuild the recovery rooms so that some of
the Phase II space could be used for Phase I
recovery. This would cost 2,000 per day and
would enable the outpatient center to perform 40
surgeries per day and send 20 to regular surgery.
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University Hospital
c. Expand the facilities of the outpatient
center at a differential cost of 15,000 per day
so it could perform 60 surgeries per day, and
service all of them in Phase I and II recovery.
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Group work