Managers might be tempted to produc

Managers might be tempted to produce the products with the highest contribution margins or unit sales. Contribution margin is the amount each product contributes to profits and overhead; no fixed costs are considered when making the product mix decision. We call this approach the traditional method. The problem with this approach is that the firm’s actual throughput and overall profitability depend more upon the contribution margin generated at the bottleneck than by the contribution margin of each individual product produced. We call this latter approach the bottleneck method. Example 5.3 illustrates both of these methods.Linear programming (see Supplement D) could also be used to find the best product mix in Example 5.3. It must be noted, however, that the problem in Example 5.3 does not involve significant setup times. Otherwise, they must be taken into consideration for not only identifying the bottleneck but also in determining the product mix. The experiential learning exercise of Min-Yo Garment Company at the end of this chapter provides an interesting illustration of how the product mix can be determined when setup times are significant. In this way, the principles behind the TOC can be exploited for making better decisions about a firm’s most profitable product mix.