Question

Raintree makes 2 products, rain jackets and rain pants. Each passes through the cutting machine, which is the binding constraint. Rain jackets take 15 minutes on the cutting machine and have a contribution margin per jacket of $16. Rain pants take 24 minutes on the cutting machine and have a contribution margin per pair of pants of $32.Assume that there are 4,800 hours available on the cutting machine and that the minimum demand for each product is 3,000 units. If 100 more hours of machine time can be obtained, how much will profits increase?

Answer 1

Increased hours will be used for producing the product which provides maximum contribution margin per unit of binding constraint i.e. per hour/minute of cutting machine.

	Rain Jackets	Rain Pants
Contribution Margin per Unit(A)	16	32
Hours on cutting machine per unit(B)	0.25	0.4
Contribution Margin per Machine hour (A/B)	64	80

The 100 additional hours will be used in the production of rain pants since the contribution per hour is more for rain pants.

Increase in profits = $80*100 = $8,000