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Hi, Could you please help me with one quick query on the below question with solution? Having tough time figuring it out, sure am missing something. How in the world do we arrive at Additional Sales from current position, for example: Buy C & B is getting additional sales of 150 units; buying C, B&A is getting additional sales of 250 units? Appreciate your help! Shouldn’t buying C, B & A lead to additonal sales units of 200 and not 250??
Example 1 – Theory of constraints
Demand for a product made by P Ltd is 500 units per week. The product is made in three consecutive processes – A, B, and C. Process capacities are:Process
A
B
C
Capacity per week
400
300
250
The long-run benefit to P Ltd of increasing sales of its product is a present value of $25,000 per additional unit sold per week.
Investigations have revealed the following possibilities:
(1) Invest in a new machine for process A, which will increase its capacity to 550 units per week. This will cost $1m.
(2) Replace the machine in process B with an upgraded machine, costing $1.5m. This will double the capacity of process B.
(3) Buy an additional machine for process C, costing $2m. This will increase capacity in C by 300 units per week.SOLUTION:
Financial viability
Buy C
Additional Sales = 50
$000
Benefit = 50 × $25,000
1,250
Cost
2,000
–––––
Net cost
750
Buy C and B
Additional sales from current position = 150
$000
Benefit = 150 × $25,000
3,750
Cost ($2m + $1.5m)
3,500
–––––
Net benefit
250
Buy C, B and A
Additional sales from current position = 250
$000
Benefit = 250 × $25,000
6,250
Cost ($2m +$1.5m +$1m)
4,500
–––––
Net benefit
1,750
The company will benefit by $1,750,000 by investing in all three machines.
Please do not write ‘urgent’ against questions – it will not get you an answer any quicker (we do not sit at the computer 24 hours a day!!).
If they buy A, B, and C, then the capacity in A will be 550, in B will be 600, and in C will be 550.
Therefore the maximum production capacity will be 550.
However the demand is only 500 and so they would be stupid to produce 550 and will therefore produce 500.Currently the maximum production is 250, and therefore being A, B and C will increase sales by 500 – 250 = 250.
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