Chapter 11, Problem 11.29E

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

	Machining	Finishing
Annual capacity	120,000 units	100,000 units
Annual production	100,000 units	100,000 units
Fixed operating costs (excluding direct materials)	$600,000	$300,000
Fixed operating costs per unit produced($600,000 ÷ 100,000; $300,000 ÷ 100,000)	$6 per unit	$3 per unit

Each cabinet sells for $75 and has direct material costs of $35 incurred at the start of the machining operation. Denver has no other variable costs. Denver can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements.

1. 1. Denver 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 Denver acquire these tools? Show your calculations.

Required

1. 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 $20,000 per year. Should Denver implement the change? Show your calculations.
2. 3. An outside contractor offers to do the finishing operation for 10,000 units at $9 per unit, triple the $3 per unit that it costs Denver to do the finishing in-house. Should Denver accept the subcontractor’s offer? Show your calculations.
3. 4. The Hammond Corporation offers to machine 5,000 units at $3 per unit, half the $6 per unit that it costs Denver to do the machining in-house. Should Denver accept Hammond’s offer? Show your calculations.
4. 5. Denver produces 2,000 defective units at the machining operation. What is the cost to Denver of the defective items produced? Explain your answer briefly.
5. 6. Denver produces 2,000 defective units at the finishing operation. What is the cost to Denver of the defective items produced? Explain your answer briefly.