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 $327 each and have a variable cost of $134 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 $34 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $21,800 per month.

b-1. Calculate the differential operating profit (loss). (Losses and amounts to be deducted should be indicated with a minus sign.)

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 $15,900 per month.

c-1. Calculate the differential operating profit (loss). (Losses and amounts to be deducted should be indicated with a minus sign.)

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

Answer 1

SOLUTION =

BOTTLENECK IS REFER TO SHAPE OF BOTTLE A STAGE OF PRODUCTION IN ANY DEPARTMENT WHEN SOME CONGESTION OCCURES OR DEMAND OF PRODUCT IS MORE THAN PRODUCTION CAPACITY.

INFORMATION PROVIDED >

1)SALE PRICE PER UNIT = $ 327

2)VARIABLE COST PER UNIT = $134

a) A BOTTLENECT IS IN BUILDING 1, WHERE PRODUCTION IS ONLY 400 DESKS.

b1) .CALCULATION OF DIFFERENTIAL OPERATING PROFIT (LOSS)

REVENUE FROM 100 UNITS =$32,700

(100*$327)

LESS:-

VARIABLE COST ($134+34)*100 =-16,800

FIXED COST = -21,800

DIFFERENTIAL OPERATING PROFIT(LOSS) = $ (5,900)

b2) DUE TO DECREASE IN OPERATING PROFIT IT IS BETTER FOR COMPANY TO NOT PRODUCE DESKS ON THE WEEKEND.

c1) CALCULATION OF DIFFERENTIAL OPERATING PROFIT

REVENUE FROM 100 UNITS = $32,700

(100*327)

LESS:-

VARIABLE COST ($134*100) -13,400   

FIXED COST -15,900

DIFFERENTIAL OPERATING PROFIT(LOSS) $3,400

c2) DUE TO INCREASE IN DIFFERETIAL OPERATING PROFIT IT IS BETTER FOR COMPANY TO GO WITH SECOND OPTION.