1. After you prepared the operating budget for the first quarter, Lockden learned that one of the two molding machines used by the company needs a major overhaul soon. Since the company is considering cost reduction strategies in response to the economic uncertainty, this news was unfavorable. But Lockden realized that the overhaul is important and has decided to do the overhaul during the first quarter of 2020. The overhaul will cost US$100,000,7 and the machine will not be operational during the overhaul (i.e., the entire duration of the first quarter). The company is exploring the viability of the following options to handle this operational challenge:

Option 1: Lockitt, Inc. will run the functional molding machine two shifts per day, instead of

one. Since LB075 labor is paid hourly, this proposal will not change the labor hours required. But the company must pay a higher wage rate to the employees in the second shift, causing the average LB075 rate to increase to $45 per hour. Changing to two shifts will increase the monthly fixed manufacturing overhead costs by $15,000. Assume that this change has no impact on LH075 labor.

Option 2: An engineer has suggested that the company should increase the batch size of the functional machine to 100 units during the overhaul of the other machine. To accommodate the large batch size, settings of the functional molding machine need to be changed to reduce the number of functions it performs. As a result, additional work will have to be completed using manual finishing labor. Under this scenario, LH075 time required per unit will change to 15 minutes.

1. Which of these two options should the company adopt if the decision is strictly based on financial factors (i.e., minimizing cost)? Support your answer with calculations.
2. What is the net incremental cost of the overhaul (compared to the original budget) under the option you recommended above?
3. Given Lockden's desire to pursue cost reduction strategies, he argues that the company should choose the option where costs are minimized. But you realize that other factors besides cost minimization should be considered when making decisions. What other factors should you consider before making this decision?