Throuput and Limiting Factor (Thin Co.)

Question: Throughput and Limiting Factor: Thin Co

Thin Co is a private hospital offering three types of surgical procedures known as A, B and C. Each of them uses a pre-operative injection given by a nurse before the surgery. Thin Co currently rent an operating theatre from a neighbouring government hospital. Thin Co does have an operating theatre on its premises, but it has never been put into use since it would cost $750,000 to equip. The Managing Director of Thin Co is keen to maximise profits and has heard of something called ‘throughput accounting’, which may help him to do this. The following information is available:

1 All patients go through a five step process, irrespective of which procedure they are having:

– step 1: consultation with the advisor;

– step 2: pre-operative injection given by the nurse;

– step 3: anaesthetic given by anaesthetist;

– step 4: procedure performed in theatre by the surgeon;

– step 5: recovery with the recovery specialist.

2 The price of each of procedures A, B and C is $2,700, $3,500 and $4,250 respectively.

3 The only materials’ costs relating to the procedures are for the pre-operative injections given by the nurse, the anaesthetic and the dressings. These are as follows:

Procedure A Procedure B Procedure C

$ per procedure $ per procedure $ per procedure

Pre-operative nurse’s injections 700 800 1,000

Anaesthetic 35 40 45

Dressings 5·60 5·60 5·60

4 There are five members of staff employed by Thin Co. Each works a standard 40-hour week for 47 weeks of the year, a total of 1,880 hours each per annum. Their salaries are as follows:

– Advisor: $45,000 per annum;

– Nurse: $38,000 per annum;

– Anaesthetist: $75,000 per annum;

– Surgeon: $90,000 per annum;

– Recovery specialist: $50,000 per annum.

The only other hospital costs (comparable to ‘factory costs’ in a traditional manufacturing environment) are general overheads, which include the theatre rental costs, and amount to $250,000 per annum.

5 Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures respectively. Time spent by each of the five different staff members on each procedure is as follows:

	Procedure A	Procedure B	Procedure C
	Hours	Hours	Hours
	per procedure	per procedure	per procedure
Advisor	0·24	0·24	0·24
Nurse	0·27	0·28	0·30
Anaesthetist	0·25	0·28	0·33
Surgeon	0·75	1	1·25
Recovery specialist	0·60	0·70	0·74

Part hours are shown as decimals e.g. 0·24 hours = 14·4 minutes (0·24 x 60).

Surgeon’s hours have been correctly identified as the bottleneck resource.

Required:

(a) Calculate the throughput accounting ratio for procedure C.

Note: It is recommended that you work in hours as provided in the table rather than minutes.(6 marks)

(b) The return per factory hour for products A and B has been calculated and is $2,612·53 and $2,654·40 respectively. The throughput accounting ratio for A and B has also been calculated and is 8·96 and 9·11 respectively.

Calculate the optimum product mix and the maximum profit per annum. (7 marks)

*Note: Though, it is mentioned as return per factory hour – it is throughput per bottleneck hr that is given

* For section a) – Remember you are calculating for Procedure C only

* Also for section b) You are doing the ranking as per TPAR

* Nurse, Advisor, Anaesthologist and Surgeon time is limited to 1880 hours

Answer Snapshot:

Part (a)