Now, it's your turn.

GHI company makes two types of stuffed teddy bears,

a basic model and a premium model.

It projects demand for 8,000 basic bears and 3,000 premium bears next month.

It has a limited number of direct labor hours,

2,000 per month, to use in making its products.

The contribution margin per unit of the basic teddy bear is $10

and it requires 0.2 direct labor hours per bear to make.

The contribution margin per unit of the premium model is $12

and it requires 0.3 direct labor hours to make.

How many of each type of bear should it make during the upcoming month?

Take a few minutes, give it a try,

then come back, meet me at the light board,gm and we'll see how you did.

Okay.

We are back.

And this is your last turn.

So let's make the most of it.

We have a constrained resource, direct labor hours.

We only have 2,000 of them.

We have to decide how many to use to make basic teddy bears,

how many to use to make premium teddy bears.

Our contribution margin per bear is $10 for the basic,

$12 for the premium,

so at first glance it might seem that we'd want to be making these premium teddy bears.

But remember, the basic teddy bears only use 0.2

direct labor hours to make one but it

requires 0.3 direct labor hours to make one premium teddy bear.

And we know that this company wants to get

the most contribution out of every one of those direct labor hours that it possibly can.

So what we want to do,

is we want to find out which of these two products

has the highest contribution margin for

each unit of that constrained resource or

the highest contribution margin for each direct labor hour.

So, let's take a look. The contribution margin per

direct labor hour for a basic teddy bear is $50.

Our $10 divided by our 0.2 Direct labor hours.

Contribution margin per direct labor hour for our premium teddy bears,

$40, $12 divided by 0.3.

So now, we see that if we want to devote

our direct labor hours to that product that will give the most to us for each hour,

we're interested in those basic teddy bears.

So let's think about how we're going to use this 2,000

direct labor hours to maximize the contribution margin here.

So we know we have demand for

8,000 of these basic teddy bears.

So we'll use as much of this 2,000 hours as we can to satisfy that demand.

And if each of these takes 0.2 direct labor hours,

then what we will end up doing is using

1,600 direct labor hours

and throwing that towards the basic teddy bear so

that we can make all 8,000 that we have demand for.

And we know we have 2,000, we've use 1,600.

So what we're going to do is use

the remaining 400 direct labor hours to make premium teddy bears.

Well, how many premium teddy bears can we make using 400 hours?

Well, we've got 400 hours and each teddy bear takes 0.3 direct labor hours to make.

So we can make 1,333 premium teddy bears.

We won't be able to satisfy our demands,

so perhaps maybe I should say these

are the number of teddy bears that we are going to make.