Theory of constraints, throughput margin, relevant costs. The Pierce Corporation manufac...

Theory of constraints, throughput margin, relevant costs. The Pierce Corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information:

Each cabinet sells for $70 and has direct material costs of $30 incurred at the start of the machining operation. Pierce has no other variable costs. Pierce can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements.

1. Pierce is considering using some modern jigs and tools in the finishing operation that would increase

annual finishing output by 1,150 units. The annual cost of these jigs and tools is $35,000. Should Pierce

acquire these tools? Show your calculations.

2. The production manager of the Machining Department has submitted a proposal to do faster setups

that would increase the annual capacity of the Machining Department by 9,000 units and would cost

$4,000 per year. Should Pierce implement the change? Show your calculations.

3. An outside contractor offers to do the finishing operation for 9,500 units at $9 per unit, triple the $3 per

unit that it costs Pierce to do the finishing in-house. Should Pierce accept the subcontractor’s offer?

Show your calculations.

4. The Hammond Corporation offers to machine 5,000 units at $3 per unit, half the $6 per unit that it costs

Pierce to do the machining in-house. Should Pierce accept Hammond’s offer? Show your calculations.

5. Pierce produces 1,700 defective units at the machining operation. What is the cost to Pierce of the

defective items produced? Explain your answer briefly.

6. Pierce produces 1,700 defective units at the finishing operation. What is the cost to Pierce of the

defective

items produced? Explain your answer briefly.