Now let's turn to a second GnG landscape example and we'll change up the product a little bit, and talk about watering cans. GnG produces two types of watering cans. Both products are manufactured using the same capacity. And we, of course, have per unit financial information for both the Deluxe and the Ultimate versions of our watering cans. The selling price is 15 and 35, respectively. Direct materials are 2 and 8. Direct labor of 2 and 5 and variable overhead 4 and 10. And just like before, the labor wages that we pay are at a rate of $10 per hour, regardless of which product the employees are working on. Now the question would be, which is GnG's most profitable product? And we would rely, again, on our contribution margin per unit number to make that determination. The contribution margin that we earn for each Deluxe watering can is 7 and it's 12 for the Ultimate. So the Ultimate product is our most profitable product given that we have no internal constraints and, or demand is our most constrained resource. Now, suppose that labor is our most constrained resource. Now, which is GnG's most profitable product? Well, again, we need to convert our contribution margin measure into something more useful for this scenario. The contribution margin on a per-unit basis for Deluxe is $7, while it's $12 for Ultimate. The question would be how much is our contribution per our unit of scares resource or in this case, labor? So, what we need is hours per unit that's available to us. We were not given the number of hours per unit directly, but we do know that employees are paid $10 per hour and we know how much direct labor resources are required for each unit of each type of a watering can. In a case of the Deluxe product, we have $2 worth of direct labor for each unit that we produce. That's two-tenths of the hourly wage that we pay. So, it must be that we use two-tenths of an hour for each unit of the Deluxe watering can. If we were to divide the contribution margin that we earn per unit by the hours per unit that we require to create a Deluxe watering can, we would have a contribution per hour of $35. Put another way, because it only takes us two-tenths of an hour to produce a Deluxe watering can, in one hour we could produce five watering cans. For each of those five Deluxe watering cans, we would get $7 and that is $35 for that hour. A similar approach can be used for the Ultimate watering can. For that, the direct labor that we spend per unit is $5. That sounds like half an hour worth of labor wages. So, it must take us a half an hour to complete one Ultimate watering can. The $12 that we earn per unit in terms of contribution margin divided by the hours per unit that are required to create one Ultimate watering can is $24. Again, put another way, if it takes us a half an hour to create one watering can, we could probably do two in an hour. That's 2 units worth of contribution margin that we get in that hour or 12 times the 2 equal to the $24 that is displayed there. So looking at our products, if labor is our most constrained resource, we would find that the Deluxe watering can yields a higher contribution per labor hour relative to the Ultimate watering can and that we would deem as our most profitable product given that labor is our most constrained resource. Now, let's suppose the following that demand is not constrained. There are 5,000 labor hours available and there are 6,000 machine hours available. The Deluxe watering can requires one machine hour and the Ultimate watering can requires two machine hours. Basically, this scenario introduces multiple potential constraints. We have constraints on labor hours and machine hours. Demand, as noted is not constraint. So in a sense, in this problem, we're not told which is our most constrained resource. We need to be able to identify that and then rely on a measure that focuses on that most constrained resource to identify our most profitable product, and choose the course of action that is best for our organization. But in this situation, we're not told that, we have to figure that out. Now looking at the provided information, it looks like on the surface that we have fewer labor hours than we do machine hours, 5,000 versus 6,000. And like I said on the surface, it looks like the labor hours are the more constrained resource, but this is not valid. Because it's not about the total number of hours of different types that are available, it's what we do with those hours. So given the information, we have to identify which is our most constrained resource and it takes some analysis to do that. So to determine which resources most constrained, let's focus on labor for a second. We were told that the Deluxe watering can, we can do five units in an hours time. We'll use two-tenths of an hour per unit. So in one hour, we can create five Deluxe watering cans. If we were to take all of our available labor time, all 5,000 hours and use it just to produce Deluxe watering cans, we would produce for each of those hours, 5 deluxe cans and that would yield 25,000 units in total. For the Ultimate version, we can create two units per hour. If we were to take all 5,000 hours of our labor time and use it completely for Ultimate watering can production, we could produce 10,000 Ultimate watering cans. So in a sense, what I'm suggesting here is that if we were to use all of our labor resources, we could produced either 25,000 Deluxe watering cans or 10,000 Ultimate watering cans. Now of course, we could produced some of both, but these are the most that we could produced with our labor resources of each type. Let's compare that to how many units that we can produced of each type using the machine time? We were told that the deluxe product requires one hour for each unit. So, we can create one unit per hour. If we were to use all of our machine time, that is all 6,000 hours and create only deluxe watering cans, we could produce 6,000 deluxe watering cans with all of that machine time. On the Ultimate side, we require 0.5 units per hour. That's because we had two hours per unit. If we were to use all 6,000 hours to create Ultimate watering cans, we would have 6,000 hours x 0 .5 per hour or 3,000 Ultimate watering cans. So as you can see, when we used up all of our labor, we can produced more of Deluxe and Ultimate watering cans than before we were to used up our machine time. So from this example, we can identify machine time as our most constrained resource. Put another way, we run out of machine time before we run out of labor time. So now knowing that machine time is our most constrained resource, we can return to our financial information to calculate which of the two products is our most profitable product. Provided information in terms of the contribution margin is the same, as it was before. $7 for the Deluxe and $12 for the Ultimate. The machine hours per unit required for Deluxe and Ultimate are one hour and two hours, respectively. And so the $7 of contribution margin per unit divided by the machine hours required for each Deluxe watering can is $7 of contribution margin per machine hour. Because it requires two machine hours per unit for the Ultimate watering can, we earn $6.00 in contribution margin per machine hour allocated towards ultimate production. And so from this, we learned that the Deluxe product when machine time is aren't the most limited resource is the more profitable product. So from this, we learn that given that machine time is our most constrained resource, the Deluxe version of the watering can is our most profitable product. Now, let's have a checkpoint just to make sure that we're all on the same page. So, let's close up this example with a few additional thoughts. First of all, in the real world, the scenario can often be more complex than we have in our examples, but the basic principles that we have identified are the same. Using measures in the intermediate and short-term to maximize the profitability and productivity of the capacity that we have. We have obviously identified more of a financial perspective. And oftentimes, we have suggested that one product is our more preferred product. Now obviously, there are other considerations such as strategy. Perhaps we don't want to be a single product firm and allocate all of our resources towards one type of clay pot or one type of watering can and it may actually be more profitable to be able to offer more than one type of product, because our consumers bundle them. Those factors we have ignored for right now, we've assumed them away. But essentially, those strategic consideration are always there. And of course, in the long-term, our list of feasible options is broader than what we focused on. We can perhaps always invest in different types or broader capacities. We've ignored those options for now, because of the difference in time horizon. Again, our focus is on maximizing the capacity that we have and dealing with the constraints in an intermediate and short-term fashion.