Production choice under a capacity constraint

Reference no: EM131812323

Production Choice under a Capacity Constraint

Mack DasMesser, CEO of Lloydian Outpatient Surgical, is reviewing the financial results from the most recent fiscal year, trying to decide the profit-maximizing way to use the limited capacity of Lloydian's surgical facilities. Lloydian currently performs three surgical procedures. DasMesser is wondering whether he should change the number of procedures performed, or even drop one procedure altogether. Results from 2009 were:

2009 PROFIT STATEMENT	Proc I	Proc II	Proc III	Total
Contribution margin	764	1,625	924	3,313
Less: procedure-specific fixed costs	131	483	311	925
Contribution toward corporate fixed costs	633	1,142	613	2,388
Less: allocation of corporate fixed costs	658	868	552	2,078
Pre-tax profit	(25)	274	61	310
Pre-tax profit per procedure	(0.78)	2.25	2.18

The accounting department had provided additional information:

2009 CAPACITY DATA	Proc I	Proc II	Proc III	Total
Number of procedures performed	32	122	28
Operating room hours per procedure	3	2	5
Total operating room hours used	96	244	140	480
Maximum demand for procedure	40	150	36

The procedures required different lengths of time in the operating rooms. Lloydian's annual capacity of operating room hours is 480. This capacity was completely used in 2009.

Based on this information, Mack decided to:

Drop Proc I.

Increase the number of Proc IIs to 150.

Increase the number of Proc IIIs to 36.

His reasoning was as follows. Lloydian was losing 0.78 for every Proc I performed. It was not a difficult decision to discontinue performing this service. The only question was how to allocate Lloydian's 480 operating room hours to the other two Procs. This, too, was an easy decision because servicing the maximum demand for Proc II and Proc III required exactly 480 operating room hours, Lloydian's maximum capacity: 150 x 2 + 36 x 5 = 480.

Assuming no projected changes in fixed cost amounts, DasMesser estimated the impact on profits to be:

2009 pre-tax profit	310
+ elimination of loss from Proc I	25
+ profit from extra Proc IIs (150 - 122) x 2.25	63
+ profit from extra Proc IIIs (36 - 28) x 2.18	17
------------------------------------------------------- Projected 2010 pre-tax profit	415

Questions (Requirement):

a. What other considerations might factor into your decision regarding the allocation of the scarce resource of operating room hours?

b. In what sense is breakeven analysis relevant here?

c. What is surprising about your final recommendation?

d. What actions might you consider to further improve the financial success of Lloydian?

e. Summarize the sequence of logic that you would apply in a future similar situation.

Reference no: EM131812323

Questions Cloud

Define frequentist interpretation of probability : Give an intuitive explanation of why X is not Binomial for p1 6= p2 (its distribution is called a mixture of two Binomials).

Discuss about the crisis intervention models : The National Organization for Victim Assistance (NOVA) is one of the oldest crisis response agencies; it was originally established to aid crime victims.

How the fundamentals concepts of risk management apply : How the fundamentals concepts and principals of Risk Management apply at home, at work, in the community, and at critical infrastructure locations.

What is the threshold value at which buying insurance : CSCI358 Security Engineering Assignment. What is the threshold value at which buying insurance would be "worthwhile for both parties", as a function of p

Production choice under a capacity constraint : Mack DasMesser, CEO of Lloydian Outpatient Surgical, is reviewing the financial results from the most recent fiscal year, trying to decide the profit-maximizing

Summarize the breaches in terms of the damage to businesses : Describe each concentration, and list 3 audit check for each. Summarize the breaches in terms of the damage to the businesses and the specifics of the attacks.

Compute the direct materials cost and the conversion : Compute the direct materials cost and the conversion cost per equivalent unit for the department. Using the weighted-average method, assign

Explain how this global societal issue impacts : Provide a clear and concise thesis statement that includes a solution to the global societal issue.

Equivalent units of production : Prepare the department's equivalent units of production with respect to direct materials under each of three separate assumptions using the weighted average

User Account

All Pages