. Use of Capacity. Bucien Specialty Compounds manufactures chemical compounds for industrial use. Department 23 produces related products-Pre and Post. Pre can be sold for \(\$ 3\) per pound or processed further and sold as Post. Pre can also be bought at a market price of \(\$ 3\) per pound plus \(\$ 0.25\) per pound for hauling. One pound of Pre is used to produce one pound of Post. Post has been selling for \(\$ 7.20\) for several years but has recently fallen to \(\$ 6.80\) per pound. Production could be Pre only, Pre and Post, or Post only.

Department 23 's available capacity is 1,500 ton hours. (Processing one ton for one hour is a ton hour.) It takes three hours to process 10 pounds of Pre and Post -one hour for Pre and two for Post.

Marcia Bailey, marketing vice-president, has analyzed the markets and costs. She thinks that Post production should be halted when its price falls below \(\$ 6.55\) per pound. At that point, the profit from a pound of Post would be less than two times the profit from a pound of Pre. She says this is important since Post uses twice as much production time as Pre. She cites the following data:

Direct materials and labor costs are variable. Manufacturing overhead is fixed and is allocated to products by budgeting the total overhead for the coming year and dividing it by the total ton hours of capacity available.
\section*{Required:}
1. Is Ms. Bailey correct? Why or why not?
2. Recommend a production plan given current prices.
3. Suggest a market price decision rule to guide production.

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Department 23 Analysis of Pre: Selling price, net of any selling costs Direct materials and labor.. Manufacturing overhead.. Operating profit per pound.. Department 23 Analysis of Post: Selling price, net of any selling costs Cost of 1 pound of Pre (from above).. Additional direct materials and labor. Manufacturing overhead.... Operating profit per pound.... $1.95 $ 3.00 .60 2.55 $ 45 $6.80 $2.55 1.90 1.20 5.65 $ 1.15