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. Monthly capacity Monthly production Building 1 (Desks) 600 600 Building 2 (Chairs) 750 600 The company will sell a desk only with a chair and can sell 750 desks per month. The units (desk with chair) sell for $300 each and have a variable cost of $125 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 150 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 $50 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $30,000 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 150 desks per month. This would not affect the sales price or variable cost per unit but would increase fixed costs by $22,500 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

Answer a.
Yes there is bottelneck at Building 1 of capacity (Desks - 600 Nos).
Answer b-1.
Differential Revenues
Sale of Desk & Chairs - 150 Nos X $300		45,000
Differential Costs
Fixed Cost	-30,000
Variable - ($125 + $50) X 150 Nos	-26,250	-56,250
Differential Operating Profit (Loss)		-11,250
Answer b-2.
No - The company should not produce Desks at the Weekend.
Answer c-1
Differential Revenues
Sale of Desk & Chairs - 150 Nos X $300		45,000
Differential Costs
Fixed Cost	-22,500
Variable - $125 X 150 Nos	-18,750	-41,250
Differential Operating Profit (Loss)		3,750
Answer c-2
Yes - The company should add the additional equipment and
workers to building 1.