Question

CI manufactures car doors using two main process operations Stamping & Pressing and information on the business is as shown below:-

		STAMPING	PRESSING
ANNUAL CAPACITY		6,000 hrs	6,000 hrs
Capacity per hr		20 units	15 units
Annual production		90,000 units	90,000 units
Department Fixed Costs		$720,000	$$1,080,000
DOOR SALES
Selling Price per unit	$100
Direct Cost per unit	$40

Identify the constraint(s) if any

Analyze the company’s cost and income structure

Can you identify if there is idle capacity and if so can you quantify this?

How much is the company losing from unused capacity?

Do you have any recommendations for improvement?

Answer 1

Solution 1:

Constraints are hours available in Stamping and Pressing department. Both department is having annual capacity of 6000 hours only.

Solution 2:

Cost and income structure:

Variable cost per unit = $40

Total fixed costs = $720,000 + $1,080,000 = $1,800,000

Computation of Income - CI Manufacturers
Particulars	Amount
Sales (90000*$100)	$9,000,000.00
Variable costs (90000*$40)	$3,600,000.00
Contribution margin	$5,400,000.00
Fixed costs	$1,800,000.00
Net operating income	$3,600,000.00

Solution 3:

Annual capacity of stamping = 6000 hours

Capacity per hour = 20 units

Total time required for 90000 units = 90000 / 20 = 4500 hours

Idle capacity = 6000 - 4500 = 1500 hours or 1500*20 = 30000 units

Therefore idle capacity in stamping is 4500 hours or 30000 units.

There is no idle capacity in Pressing department as full capacity of 6000 hours required to product 90000 units (6000*15)

Solution 4:

Amount comapny is losing from unsed capacity = Contribution margin of 30000 units

= 30000 * ($100 - $40) = $1,800,000

Solution 5:

Stamping department idle capacity can be used only when capacity of pressing department is increased. Therefore company should engage more machines/equipment in pressing department so that overall production could be increased and idle capacity of stamping could be utilized.