Question

Playful Pens, Inc., makes a single model of a pen. The cartridge for the pen (which contains the ink) is manufactured on one machine. The cartridge holder (which you hold when you use the pen) is manufactured on another machine. Monthly capacities and production levels are as follows:

	Machine 1 (Cartridge)	Machine 2 (Holders)
Monthly capacity	1,000,000	800,000
Monthly production	800,000	800,000

The company could sell 1,000,000 pens per month. The units (cartridge inside of holder) sell for $11.20 each and have a variable cost of $4.30 each. Fixed costs are $4,600,000 per month.

Required:

a. Is there a bottleneck at Playful Pens on Machine 1 or Machine 2?

	Machine 1
	Machine 2

b. Playful Pens's production supervisors state they could increase machine 2's capacity by 200,000 per month by producing holders on the weekend. Producing on the weekend would not affect the sales price. Variable cost per unit would increase by $1.30 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $860,000 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 Playful Pens produce holders on the weekend?

	Yes
	No

c. Independent of the situation in requirement (b), Playful Pens could expand the capability of machine 2 by adding additional workers to perform ongoing maintenance. This would increase its capacity by 100,000 holders per month. This would not affect sales price or fixed costs, but would increase variable cost to $4.86 per unit for all units produced.

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

c-2. Should Playful Pens expand Machine 2's capability by adding these additional workers?

	Yes
	No

Answer 1

a.Yes Machine 2 is a bottleneck for Playful Inc as it can produce only 800,000 holders which is same as the demand
b.1-Calculation of Differential Operating Profit/(Loss)
Differential Revenue(200,000 pens*$11.20)	$                           22,40,000
Differential Cost:
Variable(1,000,000 pens*$1.30)	$                          -13,00,000
Fixed	$                            -8,60,000
Net Differential operating profit	$                                80,000
b.2. YES Playful pens should produce the holders on weekend as it results into Profit
c.1-Calculation of Differential Operating Profit/(Loss)
Differential Revenue(100,000 pens*$11.20)	$                           11,20,000
Differential Cost:
Variable cost increase on current production(100,000 pens*$4.30)	$                            -4,30,000
Variable cost increase on new production(100,000 pens*$4.86)	$                            -4,86,000
Net Differential operating profit	$                             2,04,000
c.2. YES it should employ the additional worker