Question
A fire recently destroyed a substantial portion of Swifty Companys production capacity. It will be many months before capacity can be restored. During this period,
A fire recently destroyed a substantial portion of Swifty Companys production capacity. It will be many months before capacity can be restored. During this period, demand for the firms products will exceed the companys ability to produce them. Per-unit data on the firms three major products is summarized as follows:
Product | A | B | C | ||||
Selling price | $75 | $95 | $71 | ||||
Variable costs | 33 | 31 | 22 | ||||
Fixed costs | 15 | 19 | 9 | ||||
Operating profit | $27 | $45 | $40 |
Fixed costs have been allocated to the products on the basis of the labour 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.
Assume that the firm has enough capacity to meet the demand of products B and C. If estimated demand for the next product to be produced, product A, exceeds capacity by 1,060 units, what is the maximum amount the firm would be willing to pay to increase capacity?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started