Capacity restrictions (i.e. limited resources) often change the way that managers make decisions. For example, consider a retailer that has limited space (measured by square meters) in its store. What guideline should the retailer use in deciding which new products should be prioritised in order to maximise profit? How would this differ, say, for a concert promoter that desires to bring a rock group to an arena-type facility?

(b) Clarke Auto Parts Company manufactures replacement parts for car repairs. The company recently installed a flexible manufacturing system (FMS), which has significantly changed the production process. The installation of the new FMS was not anticipated when the current year's budget and cost structure were developed. The installation was hastened by several major breakdowns in the company's old production machinery.

The new system was very expensive, but management expects it to cut the labour time required by a substantial amount. Management also expects the new equipment to allow a reduction in direct material waste. On the negative side, the FMS requires a more highly skilled labour force to operate it than was needed for the company's old equipment.

The cost variance report overleaf was prepared for the month of June, the first full month after the equipment was installed.

Clarke Auto Parts Company Cost Variance Report June

Direct material:

Standard cost $602 450

Actual cost 598 700

Direct material price variance 150 U

Direct material quantity variance 3 900 F

Direct labour:

Standard cost $393 000

Actual cost 383 800

Direct labour rate variance 4 800 U

Direct labour efficiency variance 14 000 F

Manufacturing overhead:

Applied to work in process $400 000

Actual cost 408 000

Variable overhead spending variance 8 000 U

Variable overhead efficiency variance 10 000 F

Fixed overhead budget variance 30 000 U

Fixed overhead volume variance 20 000 F

The company budgets and applies manufacturing overhead on the basis of direct labour hours.

Required:

Identify Four variances that are likely to have been influenced by the purchase of the new flexible manufacturing. Provide a brief explanation of how each variance is affected.

c) Airlines sometimes offer reduced rates during certain times of the week to members of a businesspersons family if they accompany him or her on trips. How does the concept of relevant costs enter into the decision by the airline to offer reduced rates of this type?