The Theory of Constraints

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Final 19 / 20
Assume a manufacturing company producing and selling product ( A ) that
requires two productions stages ( X) and ( Y) and sold with a selling price 120
$/unit with the following data about the available capacity :
( X = Parts ) (Y = Assembly)
Number of units produced per hour 8 parts 2 unit of ( A )
Number of hours available per year 1000 hours 1000 hours
Total operating expenses per year $ 9000 $ 8000
Assume that the material cost = 10 $/part and each unit of ( A ) assembled in
stage ( Y ) requires 5 parts produced in stage ( X ).
1 - What is the maximum number of units produced of ( A )?
2 - Assume that it is possible to increase the capacity of ( Y ) by 250 hours
with additional costs of $ 2000 per year , do you agree ? Why?
3 - Assume that it is possible to increase the capacity of ( X ) by 3000 parts
with additional costs of $ 8000 per year , do you agree ? Why?
4 – Given the improvement in (3), What is the cost of the defected unit ( 5
parts ) in ( X ) and in ( Y ) ? 2
1. The maximum number of units produced of (A) by the company
A. 2,000 B. 1,600 C. 8,000 D. 1,000

(X) (Y)
Units produced / hour 8 parts 2 units
Available Capacity 1,000 hours 1,000 hours
Total production 8,000 parts 2,000 units
Production In units 8,000 / 5 = 1,600 units 2,000 units

Then the maximum number of units produced of (A) = 1,600 units

( X ) stage is the constraint

Throughput / unit = 120 – (5 x $10) = 70 $/unit
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2 . Assume that it is possible to increase the capacity of (Y) by 250
hours with additional costs of $ 2000 per year , do you agree ? Why?
A. No, (Y) is not a constraint B. Yes, increase profit by $33,000
C. No, increase costs by $2,000 D. No, increase idle capacity by 500
units E. (A), (C), and (D).

(2) Since (Y) is not a constraint, then any improvement in (Y) will not be
effective, i.e., no increase in the company sales units.
Increase in the company profit = 0 sales x 60 $/unit = 0
Additional costs = ($2,000)
Decrease in the company profits = ($2,000)
Disagree, because improvements in (Y) will decrease company
profits by $2,000 and add to the idle capacity in (Y) 250 hours x 2
units/hour = 500 units.
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3. Assume that it is possible to increase the capacity of ( X ) by 3000 parts with additional costs of $ 8000 per
year , do you agree ? Why?
A. No, (X) is not a constraint and increase costs by $8,000
B. Yes, increase sales by 400 units and increase profit by $20,000.
C. Yes, increase sales by 600 units and increase profit by $34,000.
D. Yes, increase sales by 400 units and increase profit by $28,000
E. Yes, increase sales by 600 units and increase profit by $42,000
Since (X) is a constraint, then any improvement in (X) will be effective, i.e., increase in the company sales units.
Increase in the capacity of (X) = 3000 parts/5 parts/unit = 600 units
(X) (Y) Current capacity In units 1,600 units 2,000 units
+ Addition to the capacity 600 ------
Proposed capacity 2,200 2,000

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(Y) stage became the constraint

Then the maximum number of units produced of (A) = 2,000 units

Increase in the company sales = 2,000 – 1,600 = 400 units

Increase in the company throughput = 400 units x 70 $/unit =

28,000

Additional costs = (8,000)

Increase in the company profits =

20,000

Agree, improvements in (X) will increase company profits by 20,000.

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4 – Given the improvement in (3), What is the cost of the defected unit ( 5 parts ) in ( X ) and in
(Y)?

A. $40 and $100 B. $100 and $40

C. $40 and $40 D. $100 and $100

Since (X) is not a constraint, then decrease in the capacity of (X) by one unit will not decrease
company sales.
Loss of one unit spoiled in (X) or (Z) = material cost $40 only

Since (Y) is a constraint, then decrease in the capacity of (Y) by one unit will decrease
company sales by one unit.
Loss of a unit spoiled in (Y)=material cost 40 + opportunity lost 60 = $100

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18 – 20. A manufacturing company producing and selling product (A)
that requires two productions stages (X) and (Y) and sold with a selling
price 100 $/unit with the following data about the capacity :
( X = Parts ) ( Y = Assembly )
Number of units /hour 5 parts 2 unit of (A)
Number of hours/ year 1000 hours 500 hours
Total operating exp./ year $ 5000 $ 3000
Material cost = 10 $/part and each assembled unit in stage (Y) requires
4 parts produced in (X).
18. The maximum number of units produced of (A) by the company
A. 1,250 B. 1,000 C. 5,000 D. 500

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19. Assume that it is possible to increase the capacity of (X) by 1200
parts with additional costs of $ 1000 per year , do you agree ? Why?
A) Yes, increase profit by $17,000, and increase sales by 300 units
B) Yes, increase profit by $2,000, and increase sales by 50 units
C) No, (X) is not a constraint. and increase idle capacity by 300 units.
D) No, increase costs by $1,000 E) (C) and (D) only

20. Back to the original data, assume that it is possible to increase the
capacity of (Y) by 200 hours with additional costs of $ 1500 per year ,
do you agree ? Why?
A) No, (X) is not a constraint and increase costs by $1,500
B) Yes, increase profit by $13,500, and increase sales by 250 units
C) Yes, increase profit by $22,500, and increase sales by 400 units
D) No, Increase Idle capacity by 400 units E) (A) and (D) only
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A Company produces two products and selected data are shown
below:
Product (1) Product (2)
Selling Price/Unit 60 50
Variable Cost/Unit 36 35
Current Demand (units) 2000 2200
Processing Time/Unit 2 Hours 1 Hour

A Machine has a capacity of 5000 hours, required:

1.What plan would maximize profits?

2.The maximum profit using CM / unit and CM / hour
3.Up to how much the Company should be willing to pay above
the usual wage to obtain 1 more hour?
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Total Hours required for the expected demand =
Product (1) = 2,000 X 2 = 4,000 hours
Product (2) = 2,200 X 1 = 2,200 hours
Total Hours required 6,200 hours

The available capacity 5,000 hours is not sufficient to satisfy total hours
required for demand 6,200 hours, then something must be cut back.
Which products should be cut back and by how much?

1- Decision based on the contribution margin per a unit of the product.

Product (1) Product (2)

Selling Price/Unit 60 50
Variable Cost/Unit 36 35
Contribution margin / unit 24 15
1st 2nd
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Therefore, the company will produce all 2,000 units (total demand)
for product (1) since it is the more profitable, and the remaining
capacity will be used to produce products (2) as follow:
Available Hours 5,000 hours
Time to produce Product (1) 2,000 x 2 hours/unit = 4,000 hours
Time Remained to produce Products (2) 1,000 hours
÷ Processing Time/Unit of product (2) 1 hour/unit

Units produced of Product (2) 1, 000 units

Product (1) Product (2)
Demand (per month) 2,000 2,200
Units of product in optimal mix 2,000 1,000
Unmet Demand 0 1,200

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Production plan: product (1) = 2,000 units x $24 = $ 48,000
Product (2) = 1,000 units x $15 = $ 15,000
Total contribution margin $ 63,000

2- Decision based on the contribution margin per a unit of the

limited resource (constraint) , which is labor hours in this example

Product (1) Product (2)

Selling Price/Unit 60 50
Variable Cost/Unit 36 35
Contribution margin / unit 24 15
÷ hours / unit 2 hours 1 hour
Contribution margin / hour 12 15
2nd 1st

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Therefore, the company will produce all 2,200 units (total demand)
for product (2) since it is the more profitable, and the remaining
capacity will be used to produce products (1) as follow:
Available Hours 5,000 hours
Time to produce Product (2) 2,200 x 1 hours/unit = 2,200 hours
Time Remained to produce Products (1) 2,800 hours
÷ Processing Time/Unit of product (1) 2 hour/unit

Units produced of Product (1) 1, 400 units

Product (1) Product (2)

Demand (per month) 2,000 2,200
Units of product in optimal mix 1,400 2,200
Unmet Demand 600 0
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Production plan: product (1) = 1,400 units x $24 = $ 33,600
Product (2) = 2,200 units x $15 = $ 33,000
Total contribution margin $ 66,600
Total contribution margin $66,000 of the production plan based on the
contribution margin per a unit of the limited resource (constraint) , is
better than total contribution margin $63,000 of the production plan
based on the contribution margin per a unit of production.
Total CM using CM/Unit Total CM using CM/Hour
Product (1) =1,400 unitsx24 $/unit=$33,600 2,800 hours x 12 $/hour = $33,600
Product (2) =2,200 unitsx15 $/unit=$33,000 2,200 hours x 15 $/hour = $33,000
$66,600 $66,600

3- What is the maximum payment to 1 hour over time?

Product (1) is not completed, then the overtime hour will be
assigned to produce Product (1). Therefore, the maximum payment for
one hour more = 12 $/hour which is the CM / hour used to produce
Product
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(1).
Question ( 5 )
Chairs Tables
Selling Price / Unit 80 400
Variable Cost / Unit 30 200
Board Feet / Unit 2 10
Monthly Demand 600 100
The company’s supplier of hardwood will only be able to supply
2,000 board feet this month, required:

1.What plan would maximize profits?

2.The maximum profit using CM / unit and CM / feet
3.Up to how much the Company is willing to pay above the usual
price to obtain more hardwood.

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