Berti Manufacturing Corporation makes an electronic components in two departments, Machining and Assembly. The monthly capacity is 80,000 units in the Machining Department and 100,000 units in the Assembly Department. The only variable cost of the product is direct material of $400 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Berti can sell as many units of this electronic component as it produces at a selling price of $500 per unit.

Required:

a. Bertis Assembly managers believe that they could increase the capacity in their department by 20,000 units if they could increase fixed costs by $1,000,000. Should the money be spent? Explain.

b. An outside contractor offers to do machining for 15,000 units for $1,000,000. Should Berti accept the offer from the subcontractor? Show calculations.

c. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain.