The senior management at Canine Kernels Company (CKC) is concerned with the existing capacity limitation, so they want to accept the mix of orders that maximizes the company’s profits. Traditionally, CKC has utilized a method where by decisions are made to produce as much of the product with the highest contribution margin as possible (up to the limit of its demand), followed by the next highest contribution margin product, and so on until no more capacity is available. Because capacity is limited, choosing the proper product mix is crucial. Troy Hendrix, the newly hired production supervisor, is an avid follower of the theory of constraints philosophy and the bottleneck method for scheduling. He believes that profitability can indeed be approved if bottleneck resources are exploited to determine the product mix.
a. What is the profit if the traditional contribution margin method is used for determining CKC’s product mix?
b. What is the profit if the bottleneck method advocated by Troy is used for selecting the product mix?
c. Calculate the profit gain, both in absolute dollars as well as in terms of percentage gains, by using TOC principles for determining product mix.