Product mix and TOC



P (50)
Q (50)
R (55)
S (52)
Machine A (6)
 Machine A (8)
Machine A (10)
Machine B (10)
Machine A (5)
 Machine A (5)
Machine B  (20)
RM=5
RM=10
RM=10
RM=10
RM=5
RM=5
RM=5
8 hours /day=480 min, cost/hour/resource=10 USD
To produce P or Q->20 minutes of B (bottleneck)
To produce R or  S->30 minutes of B (bottleneck)

Product
Price
Material
Work (min USD)
Profit
P
50
20
36 min (6 USD)
50-20-6=24
Q
50
25
38 min (6,33 USD)
50-25-6,33=18,67
R
55
25
35 min (5,83 USD)
55-25-5,83=24,17
S
52
20
35 min (5,83 USD)
52-20-5,83=26,17
Based on Prof. James R. Holt, Washington State University
Two workers are always needed
to produce each of the four products

Four different approaches how to solve the product mix



Classic approach – highest margin (accountant) – S product
•52*16 pcs - 20*16 pcs - 2 workers*8 hours*10 USD/hour = 352 USD/day
•Where 16= 480/30=16 = 480/(20+10)
•20+ 10 is capacity of machine B to produce S
Machine B (10)
Machine B  (20)
Product
Price
Material
Work (min USD)
Profit
P
50
20
36 min (6 USD)
50-20-6=24
Q
50
25
38 min (6,33 USD)
50-25-6,33=18,67
R
55
25
35 min (5,83 USD)
55-25-5,83=24,17
S
52
20
35 min (5,83 USD)
52-20-5,83=26,17

Marketing approach – highest selling price R product
•55*16 pcs - 25*16 pcs - 2 workers*8 hours*10 USD/hour = 320 USD/day
•Where 16= 480/30=16 = 480/(20+10)
•20+ 10 is capacity of machine B to produce R
Product
Price
Material
Work (min USD)
Profit
P
50
20
36 min (6 USD)
50-20-6=24
Q
50
25
38 min (6,33 USD)
50-25-6,33=18,67
R
55
25
35 min (5,83 USD)
55-25-5,83=24,17
S
52
20
35 min (5,83 USD)
52-20-5,83=26,17

Production approach – highest machine efficiency Q product
•50*24 pcs - 25*24 pcs - 2 workers*8 hours*10 USD/hour = 440 USD/day
•Where 24= 480/ 20 (the quantity of the product)
•20 is capacity of machine B  to produce Q
Machine B  (20)
Product
Price
Material
Work (min USD)
Profit
P
50
20
36 min (6 USD)
50-20-6=24
Q
50
25
38 min (6,33 USD)
50-25-6,33=18,67
R
55
25
35 min (5,83 USD)
55-25-5,83=24,17
S
52
20
35 min (5,83 USD)
52-20-5,83=26,17

TOC approach – highest use of bottleneck P product
•50*24 pcs - 20*24 pcs - 2 workers*8 hours*10 USD/hour = 560 USD/day
•Where 24= 480/ 20
•20 is capacity of machine B to produce P product
Product
Price
Material
Work (min USD)
Profit
P
50
20
36 min (6 USD)
50-20-6=24
Q
50
25
38 min (6,33 USD)
50-25-6,33=18,67
R
55
25
35 min (5,83 USD)
55-25-5,83=24,17
S
52
20
35 min (5,83 USD)
52-20-5,83=26,17

Results
•Accounting approach S $352 100%
•Sales-Higher Sales Price R $320     90%
•Production-Efficiency Q $440   125%
•TOC  approach P $560  159%
•