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, 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

Four different approaches how to solve the product mix



Classic approach – highest margin (accounant) – 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)

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

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
•20 is capacity of machine B  to produce Q
Machine B  (20)

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

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