 Hello and welcome to this session. This is Professor Farhad in which we will discuss utilization of constraint resources. Constraint means limited. You don't have enough of a particular resource. Now, in the real world, we always have constraint resources. We don't have unlimited resources. Otherwise, if we do have unlimited resources, we don't even have to study economics because we can do whatever we want to. That's in La La Land. In the real world, you would always have a limited resource of some sort. And the goal of any company is to produce and sell as many product as they can. That's fine. The problem could be, you might have constraint resources that's limiting you, that's not allowing you to produce and sell as many units as you need. And these are called bottleneck or bottlenecks. You could have more than one bottleneck. Now, why is it called a bottleneck? Well, simply put, let's take a look at those two bottles that are filled in M&M. One of them, we have plenty of M&M. The goal is to transfer the M&M's from the bottle to the jar. Notice, this has a larger bottleneck. We can produce more, we can transfer faster. This have a small bottleneck. The small bottleneck, it's gonna slow you down. So anything that limits your capacity to produce is called the bottleneck. And this is why it's called the bottleneck because it's gonna squeeze you. Now, every company will have some sort of a bottleneck, no way around it. That bottleneck could be labor. Now, most companies, they experience shortage in labor. Anywhere you go, people, they have a science for hiring. Could be time, you don't have enough time. For example, for my company, I wish I had more time during the day to produce more. It could be machine hours, it could be anything. Whatever is limiting you, whatever is slowing you down, that's your bottleneck. Now, we established that we have a bottleneck. At the end, we're gonna see what can you do to improve your bottleneck. But what should you do now? What should you do? What should you do about the bottleneck? Here's what you have to do. Produce and sell the units with the contribution margin per unit, per constrained resource. Now, I did not say just contribution margin because students, what they would do, they would look, okay, I'm gonna produce the highest contribution margin. No, it's the highest contribution margin per constrained resources. So what gives you the highest contribution margin giving your constrained resource? And don't worry, we'll look at an example. In this way, you will maximize your total contribution margin. Another picture of a constrained resource is basically traffic. Think when you leave the toll on a highway. Maybe it's like 10, you have 10 tolls. And as soon as you leave, the road will go back to three or four lanes. So notice what's gonna happen. It's gonna slow it down. This is another example of a bottleneck. And notice what it looks like. It looks like a bottle, like a bottleneck. And this is what we mean by a constrained resource. Think also the idea of a chain. The strength of a chain, it's as strong as its weakest link. So to improve, to make the chain stronger, you have to strengthen its weakest link. And the weakest link is the bottleneck. So the company is as good as their weakest link, which is their bottleneck. The best way to illustrate this concept is to use numbers to show you how to produce giving constrained resources. Before we look at an example, most likely you are a student or a CPA candidate. That's why you are watching. I'm glad you are watching, but you need to go a step further for farhatlectures.com, where you will find additional resources, lectures, multiple choice through false exercises that's gonna help you do better. Whether you are studying for your CPA exam or you are taking accounting courses. If you have not connected with me on LinkedIn, social media, please do so. Like this recording, share it with other, connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at this example. Adam Company is selling two product. One is a premium product and one is a generic product. Whatever it is, just one is a premium, one is a generic. And here's some additional data about the product. For the premium product, Adam is selling each unit for $50. The variable expense is 26. Therefore, the contribution margin is 24. The current demand per week for the premium product is 2000 unit, the contribution margin ratio, which is the contribution margin divided by sales is 48%. And we need one minute of processing on machine time A, on machine A to produce the premium unit. The generic unit, we're selling each unit for 40. The variable expenses is 25. Give us the contribution margin of 15. And there's a demand of 2,200 units for the generic product. The contribution margin ratio is 38%. And it takes us half a minute on machine A to produce the generic product. Now here we are ignoring the fixed cost. And the assumption is we have enough capacity for the fixed cost. The fixed cost is not an obstacle. The fixed cost is not a bottleneck. What we're gonna be assuming is the bottleneck here is machine A. So we have a limited amount of machine A. We only have 2,400 minutes when we use machine A at its 100% capacity. So we can only produce, use it for 2,400 units. And this is our constraint resource. So machine A is our constraint resource. So for all other machines, we have access capacity. And this is why we determine machine A is the constraint resource. The first question is how many units of each product can be processed through machine A in one minute? Well, let's think about it. For the premium for one unit, one unit in one minute. So for one minute, we can produce one unit. For the generic product, because it takes us half a minute to produce, we can produce two units. What does that mean? Let's think about it from a numerical or from a financial perspective. From a financial perspective, for a minute, if we produce a generic, the product, the premium product, and we produce one unit, we can make a profit of $24. If we use the same minute to produce the generic product, per unit we make $15, but we can produce two, therefore we can make $30 in profit. So notice, although the generic units per unit is less, but they would consume, they will tax less resources. They would require less resources to produce. So in the time of making $24, we can take that minute and make $30. Simply put, the contribution margin per minute, we can compute this, we can take the contribution margin per unit divided by the time required to produce, which is a minute. The contribution margin per one minute is $24 for the premium and $30 for the generic. Now, how are we going to allocate our time to maximize contribution margin for the whole company? Well, let's think about it. We have the weekly demand for the generic is 2,200. And remember, we already established that we need to focus on the generic first. So what we do is we'll take the weekly demand for the generic and produce as many as we can for the generic unit. Well, it's gonna take us half a minute to produce one unit. Therefore, we will consume 1,100 minutes. We will consume 1,100 minute to produce all 2,200 generic. So we will satisfy the demand for the generic units first. And once we use up 1,100 minutes, what's left is 1,300 minutes because we have 2,400 on machine A. We used up the 1,100 for the generic units. We are left with 1,300 units, 300 minutes to produce the premium product. Now, it takes us a minute to produce it. We can produce 1,300. Now, we do have more demand than 1,300, but we cannot satisfy the demand. This is a classic example for the iPhone. When Apple computers produces iPhones, they don't have enough capacity to produce enough iPhone, especially when it first come out to meet older demand. So what they have to do, they have to pick and choose where should they utilize the resources. Then what we do is we can compute now the total contribution margin. If we do so, we maximize the generic and we make 33,000 in total contribution margin for that week. And we can only produce from the premium product 1,300 and we can make 31,200. Together will give us the total contribution margin for the company and that is the max. Now in the real world, the company could have three, four, five different product or maybe 10 different product and various different constrained resources. How do they do this? They use a software and they will kind of basically the software with they will input the information and it will tell them, it will spread out what is the best way to utilize our constrained resources. But this example here is just basically I'll kind of get you familiar with the concept and this is all what you need whether you are a student or a CPA candidate. Now, how to reduce or eliminate bottlenecks? What could you do? Because if you can increase the capacity of the constraint you can increase your production and you can increase sales. Well, there are different methods to do so. If the issue is time, well, work overtime or hire more employees, what else you can do? You can re-engineer the whole product to reduce the bottleneck. That's another way you can do. You can invest more resources. For example, if you remember in the example that we worked the problem was machine A. Well, if we buy another machine A, then we have 4,800 minutes per week. Then we can satisfy the demand for the premium as well as for the generic. Then we might face another constraint or a bottleneck. Also, we can shift resources from non-bottleneck processes. If we have extra employees that they are not really, we're not utilizing their capacity to the max, move them to the bottleneck area to improve the bottleneck area. Improve the process, how we are producing the product. Just re-engineer the process. Don't re-engineer the product because you could also re-engineer the product or re-engineer the process. Minimize the effective unit produced in the bottleneck because every time you produce an effective unit, basically it took the resources then you have to throw it away. Minimize those defective units. So this way all the units produced are good to go. What should you do now? It's great that you have listened to this recording but what you should do is go to Farhat Lectures and work MCQs that's gonna help you improve your knowledge, your understanding of this topic. Invest in yourself, invest in your career, especially if you are an accounting student or a CPA candidate. Good luck, study hard, and of course, stay safe.