Question

CompDesk, Inc., makes a single model of an ergonomic desk (with chair) for computer usage. The desk is manufactured in building 1, and the chair is manufactured in building 2. Monthly capacities and production levels are as follows.

	Building 1 (Desks)	Building 2 (Chairs)
Monthly capacity	400	500
Monthly production	400	400

The company will sell a desk only with a chair and can sell 500 desks per month. The units (desk with chair) sell for $279 each and have a variable cost of $118 each.

Required:

a. Is there a bottleneck at CompDesk in Building 1 or Building 2?

b. CompDesk’s production supervisors state they could increase building 1’s capacity by 100 desks per month by producing desks on the weekend. Producing on the weekend would not affect the sales price. Variable cost per unit would increase by $18 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $18,600 per month.

b-1. Calculate the differential operating profit (loss).

b-2. Should CompDesk produce desks on the weekend?

c. Independent of the situation in requirement (b), CompDesk could add additional equipment and workers to building 1, which would increase its capacity by 100 desks per month. This would not affect the sales price or variable cost per unit but would increase fixed costs by $14,300 per month.

c-1. Calculate the differential operating profit (loss).

c-2. Should CompDesk add the additional equipment and workers to building 1?

Answer 1

Solution:

a)

Building 1

Explanation:

The company will sell a desk only with a chair and can sell 500 desk per month that means also 500 chairs a month and because building 1 monthly capacity is only 400 desks which means 400 chairs & desks could be produced however we can sell 500 desk & chairs thus building 1 (desks) is a bottleneck at compdesk inc.

b)

b1)

Preparation of differential cost schedule is as follows:

Particulars	Amount
Differential revenue ($279*100)	$27,900
Differential costs:
Fixed	($18,600)
variable(100*[$118+$18])	($13,600)
Net differential operating profit	($4,300)

b2)

No compdesk inc should not produce the desk as it is resulting in net operating loss of ($4,300)

c)

c1)

Preparation of differential cost schedule is as follows:

Particulars	Amount
Differential revenue ($279*100)	$27,900
Differential costs:
Fixed	($14,300)
variable(100*$118)	($11,800)
Net differential operating profit	$1,800

c2)

Yes, compdesk should add equipment and workers to building1 as it is resulting in net operating profit of $1,800

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