A fire recently destroyed a substantial portion of Manley Company’s production capacity. It will be many months before capacity can be restored.

During this period, demand for the firm’s products will exceed the company’s ability to produce them. Per unit data on the firm’s three major products is summarized as follows.

Fixed costs have been allocated to the products on the basis of the labor hours required to produce each product. The major capacity constraint is the availability of time on a processing machine. Each unit of Product A and Product C requires 2 hours of processing on the machine, whereas Product B requires 3 hours.

REQUIRED

A. If demand for each of the products is greater than the firm’s ability to meet that demand, which product should the firm produce first? If enough capacity exists to produce two products, which product should be produced second?

B. Assume that the firm has enough capacity to meet the demand of the two products you identified in part (A). If estimated demand for the next product to be produced exceeds capacity by 1,000 units, what is the maximum amount the firm would be willing to pay to increase capacity?

C. Management adopted your plan from part (A). Shortly thereafter, a strategically important customer requested that the firm supply 500 units of Product D, which has been discontinued but could be produced again if needed. Management wants to meet the customer’s request to maintain goodwill, but wants to know the cost before making the decision. In the past, Product D sold for $40, incurred $22 in variable costs, was allocated $4 of fixed costs, and required 1.5 hours of processing on the machine. What is the opportunity cost of accepting the order?

Transcribed Image Text:

Product Selling price Variable costs Fixed costs $80 40 15 Operating profit 25 $95 30 20 $45 $70 25 10 $35