Problem B-5 Volume Trade-Off Decision; Managing the Constraint [LOB-2, LOB-3]

Sammamish Brick, Inc., manufactures bricks using clay deposits on the companys property. Raw clays are blended and then extruded into molds to form unfired bricks. The unfired bricks are then stacked onto movable metal platforms and rolled into the kiln where they are fired until dry. The dried bricks are then packaged and shipped to retail outlets and contractors. The bottleneck in the production process is the kiln, which is available for 3,250 hours per year. Data concerning the companys four main products appear below. Products are sold by the pallet.

	Traditional Brick	Textured Facing	Cinder Block	Roman Brick
Gross revenue per pallet	$903	$1,366	$782	$1,056
Contribution margin per pallet	$564	$ 636	$460	$540
Annual demand (pallets)	100	120	110	160
Hours required in the kiln per pallet	12	12	5	6

No fixed costs could be avoided by modifying how much is produced of any product.

Required:

1a. Calculate the total hours required in the kiln to satisfy demand for all products.

1b. Is there sufficient capacity in the kiln to satisfy demand for all products?

	Yes
	No

2a. Calculate the profitability index for the company's four products.

2b. What is the production plan for the year that would maximize the companys profit? (Round answer to the nearest complete pallet (i.e., 12.3 pallets should be entered as 12.)

3. What would be the total contribution margin for the production plan you have proposed?

4. The kiln could be operated for more than 3,250 hours per year by running it after normal working hours. Up to how much per hour should the company be willing to pay in overtime wages, energy costs, and other incremental costs to operate the kiln additional hours?

5. The company is considering introducing a new product, glazed Venetian bricks, whose variable cost would be $920 per pallet and that would require 14 hours in the kiln per pallet. What is the minimum acceptable selling price for this new product?

6. Salespersons are currently paid a commission of 5% of gross revenues. Will this motivate the salespersons to make the right choices concerning which products to sell most aggressively?

	Yes
	No

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