Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-45 (continued)
at times (as for tables in this case) can be sold from inventory.
13-46 Theory of Constraints (30 min)
and to advise customers of Polymer 2 there would be some delays in the
short–term. Then, CPC should work quickly to relieve the constraint,
reactor time, by applying the third, fourth and fifth TOC steps. Without
specialized technical knowledge of the manufacturing processes in this
industry, one can only speculate about what these steps might be.
First: Identify the Constraint
Total Time Required for Each activity for Given Demand
Time Required for Total Time Slack
Polymer 1 Polymer 2 Time Available Time
Filtering 60×2= 120 40×(2+2)= 160 280 320 40
Stripper 60×(1+1)
=
120 40×(2+1)= 120 240 320 80
Reactor 60×3= 180 40×5 = 200 380 320 (60)
13-31
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-46 (coninued)
Second: Identify the most profitable product
Polymer 1 Polymer 2
Price $ 145 $ 185
Materials Cost 45 60
Throughput Margin $ 100 $ 125
Constraint time(reactor) 3 5
Third: Identify the most profitable product mix
Since Polymer 1 is the most profitable product, its total demand of 60 is
filled first. The remaining time on the reactor is used to complete as many
units of Polymer 2 as possible:
Capacity of reactor available for Polymer 2 = 320 – (60 × 3) = 140
140÷5 = 28 units of Polymer 2
Polymer 1 Polymer 2 Total
13-32
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-47 Theory of Constraints for a Restaurant (80 min)
Note: 13-47 is a challenging problem with several difficult steps.
1.
Average Customer
Average Number of Time in
Data Number of Customers Restaurant
Customers/hr Price Materials
Cost
per car (hours)
Bar 24 $ 7.00 $ 1.00 1.5 2
Activity Bar Dining Capacity
Parking
(spaces)
32.00 16.67* 80 parking spaces
Bar (seats) 48.00 0.00* 54 seats
Dining (seats) 0.00 50.00* 100 seats
Kitchen (meals) 0.00 50.00 100 meals/hr
* Assumes the maximum capacity require in any hour is the case
scenario in which all 24 bar customers arrive at the start of the hour and
stay for 2 hours; those arriving at 9pm (an hour before closing) will only
stay for one hour(and have 2 drinks during this hour); this means
parking receives 24/1.5 = 16 cars per hour; the patron stays 2 hours,
so 16×2=32 parking spaces are required from 7pm-10pm. From 6pm-
7pm, only 16 parking spaces are required, for the first 24 patrons
13-33
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-47 (continued -1)
Step One: Identify the Constraint
Total Time Required for Each activity for Given Demand
Total
Capacity Capacity
Bar Dining Usage/hr Available Slack
Parking (spaces) 32.00 17.00 49.00 80 31.0
Bar/hr Dining/hr
Demand 24 50
Price $ 7.00 $ 22.00
Materials Cost $ 1.00 $ 5.00
Throughput Margin/hour $ 6.00 $ 17.00
Total Throughput Restaurant Total
a) At the current level of demand, there is sufficient capacity in
each of the four activities; see column headed “Slack” above.
b) The total throughput margin is $994 per hour, $3,976 per day,
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-47 (continued -2)
2a. First: calculate the required capacity usage for the expected
demand; the bar demand will increase 50% to 36 and the dining demand
will increase 20% to 60.
Data Average
Average
Number of
Customer
Time in
Product Number of
Customers/h
Price Materials
Cost
Customers
per car
Restaurant
(hours)
Time for preparation of each meal 12 min.
Number of meals that can be prepared at one time 20 meals
–
Capacity
Required/hr
Available
Activity Bar Dining Capacity/hr
Step One: Identify the Constraint
Total Time Required for Each activity for Given Demand
Total
Capacity Capacity Slack
Bar Dining Usage Available Time
Parking
(spaces)
48.
00
20.00
68.00 80 12.0
than capacity. The next step is to find the number of bar customers that
the restaurant could serve at full capacity.
13-35
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-47 (continued -3)
2b. The number of customers the bar could serve at full capacity is 27
customers from 7pm to 10pm; 27 customers at 2 hours per customer
Time for preparation of each meal 12 min.
Number of meals that can be prepared at one time 20 meals
Activity
Capacity
Required/hr
Bar Dining
Available
Capacity/hr
Parking (spaces) 36.00 20.00 80 parking spaces
Bar (seats) 54.00 0.00 54 seats
Step One: Identify the Constraint
Total Time Required for Each activity for Given Demand
Total
Capacity
Capacity Slack
Bar Dining Usage Available Time
Parking (spaces) 36.00 20.00 56.00 80 24.0
Bar (seats) 54.00 – 54.00 54 –
Bar Dining
Demand 27 60
Price $ 7.00 $ 22.00
2nd-4th hours: 27 patrons, one drink/hr* $ 162.00 $ –
Total for 4 hours $ 702.00 $1,020.00 $ 1,722.00
Restaurant average per day (4hrs) $ 702.00 $ 4,080.00 $ 4,782.00
Restaurant average per month (26 days) $ 18,252.00 $106,080.00 $124,332.00
*With 27 new customers arriving at 7pm, this assumes that 9 (=36-27) of the 6pm customers must leave at 7pm
Chapter 13 – Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing
13-47 (continued -4)
3.
Average
Average
Number of
Customer
Time in
Product
Number of
Customers/hr Price Materials Cost
Customers
per car
Restaurant
(hours)
Bar 36 $ 7.00 $ 1.00 1.5 2
Dining 60 $ 22.00 $ 5.00 3 1
Time for preparation of each meal 12 min.
Number of meals that can be prepared at one time 25 meals
Capacity
Required/hr Available
Activity Bar Dining Capacity/hr
Parking (spaces) 48.00 20.00 80 parking spaces
Bar (seats) 72.00 0.00 80 seats
Bar Dining Usage Available Time
Parking (spaces) 48.00 20.00 68.00 80 12.0
Bar (seats) 72.00 – 72.00 80 8.0
Dining (seats) – 60.00 60.00 120 60.0
Kitchen (meals) – 60.00 60.00 125 65.0
Bar Dining Total
Demand 36 60
Total Throughput
Restaurant total per hour $ 216.00 $ 1,020.00 $ 1,236.00
Restaurant total per day $ 864.00 $ 4,080.00 $ 4,944.00
Restaurant total per month $ 22,464.00 $106,080.00 $128,544.00
13-37
13-47 (continued -5)
The increase of $4,212 in total monthly throughput is less than the
$5,000 expected monthly cost of the construction needed to increase
the capacity of the restaurant. Moreover, the expansion of the dining
facility was unnecessary, because there was no constraint there. So
Also, the above analysis does not consider the increased cost of labor
and facilities/operating costs that would be involved in the expansion; an
expanded facility is likely to increase these additional costs.
In recessionary times, restaurants also get help from their suppliers, that
provide hints for the design of menus, marketing and administrative
13-38