Jorge Manufacturing Corporation makes an electronic component in two departments, Machining and Assembly. The capacity per month is 200,000 units in the Machining Department and 250,000 units in the Assembly Department. The only variable cost of the product is direct material of $200 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Jorge can sell as many units of this electronic component as it produces at a selling price of $500 per unit.

Required:

Jorges Machining managers believe that they could increase the capacity in their department by 30,000 units, if they were able to increase fixed costs by $6,000,000. Should the money be spent? Explain.

An outside contractor offers to do assembly for 20,000 units at a cost of $1,500,000. Should Jorge accept the offer from the subcontractor? Show calculations.

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