Question

3 Theory of Constraints (20 pts) requires two separate processes, casting the steel into bumpers, then chrome plating the bumpers. They have orders for more bumpers than they have ever been able to manufacture. Recently they have instituted a quality management program to improve production ef It has been somewhat successful. The can now cast 14,000 bumpers monthly (15% improvement Ironwoman Inc. makes car bumpers. Production ficiencies. ). Chrome plating is a delicate operation: they have improved production to 11,000 bumpers a month (still an 8% improvement). They sell the finished bumpers for $400 each. The bumpers have a full absorption costing (GAAP cost of goods manufactured, fixed and variable) of $350: $100 fixed and $250 variable) IMPORTANT~ each of the following questions is COMP DENT of one another In answering one, you should ignore the others, Just use the data in the openingpa agraph Now please answer thefollowing YOUR ANSWER MUST INCLUDE THE FINANCIAL EFFECTS ON INCOME SUPPORTING YOUR CONCLUSIONS FORHEMS 1-3 BELOW (iten.#4 onlyrequires anarrative answer): 1. Ironwoman has had a consultant propose that if they hired him he could further improve production efficiency in plating, resulting in the ability to plate a total of 12,000 bumpers monthly. He would charge the company and $100,000 per month for his services. Should they hire him? Some design changes have been proposed that would increase the number of bumpers that could be chrome plated by 320 per month. But it would cost an additional $5 per bumper (for all bumpers plated, not just the additional 320) Should they go ahead with the design changes? 2. They have found a way to decrease scrap in plating by 100 bumpers per month. Of the variable costs, plating has approximately $160 of variable cost per bumper. The cost of this production improvement would be for equipment reconfiguration costing $275,000. The reconfiguration would have to be completely redone every two years for another$275000, as they come out with new models then. Should they do thin 3. Ironwoman has a plan to motivate employees. It would put an incentive compensation plan to work for all employees. Employees would be paid bonuses based on their productivity and improvements in productivity. Comment about the plan and give a verbal cost/benefit appraisal of it. 4.

Answer 1

data of the question for understanding:-

two process for manufacturing bumpers

1) casting which has a capacity to produce 14000 bumpers

2) plating which has a capacity to produce 11000 bumpers

selling price =$ 400 per bumper

fixed cost = $100

variable cost = $ 250

answer 1. if hired ironwoman it will increase plating bumper by 1000 per month

additional selling revenue of 1000 bumper = 1000*400 = 400,000

less:additional variable cost of 1000 bumper = 1000*250 = 250,000

less:consultant's salary = 100,000

increase in revenue $ 50,000

it is $ 50,000 profitable if we hire the consultant.

answer 2. design change in plating

increase in revenue (320*400) = $ 128000

less: increase in variable cost of 320 bumpers (320*250) = $ 80,000

less: additional designing cost ( 11320*5) = $56600

decrease in revenue = ($ 8000)

change in designing of plating will lead to decrease in revenue by $8000. this option is not benificial.

Answer 3. installing reconfiguration equipment

increase in selling revenue ( 100*400) = $40,000

less: increase in variable cost (100*160)    = $16,000

less: depreciation per month of new equipment ( 275000/2/12) = $11458

increase in revenue $ 12542

it will increase revenue by $ 12542 so this option is beneficial.

Answer 4. as given in the question casting department has improved their productivity by 15% on the other hand plating department has improved only 8% so there must be a chance to improve productivity at least 15%.

for this improvement company needs to motivate employees by giving bonus and other incentives.

if plating department improve their capacity by 15% then it can produced ( 11000/108)*115 = 11713 units

additional units are 11713-11000= 713

increase in revenue = 713*400 = $ 285200

less: increase in variable cost = 713* 250 = $ 178250

additional revenue = $ 106950

company can give bonus $106950 ( maximum) to their employees in which company will have no profit and loss.