Problem 1 Constraining Resources

Blair Corporation makes filing cabinets and has two main departments in the manufacturing process. Information for the two departments is as follows:

	Machining	Finishing
Annual Capacity	120,000	120,000
Annual Production	100,000	100,000
Fixed Operating Costs	$600,000	$300,000
Fixed Costs Per Unit	$6.00	$3.00

Selling Price Per Unit $75.00

Direct Material Cost Per Unit $35.00

Issue # 1:

Blair has discovered some new tools that would increase production by 1,150 units. The tools cost $35,000. Should Blair invest in the new tools? What is the increase / decrease in operating income?

What is the increase in revenue?
What is the increase in variable costs (direct materials)?
What is the increase in contribution margin?
What is the increase in fixed costs?
What is the increase in operating income?
Should Blair invest in the tools?

Issue # 2

An outside contractor has offered to do the finishing operation for an additional 10,000 units and will charge $9.00 per unit. Should Blair accept the offer? How much will Blair make (or lose) on this proposal?

What is the increase in revenue?
What is the increase in variable costs (direct materials)?
What is the increase in finishing costs (from outside contractor)?
What are the total variable costs?
What is the increase in contribution margin?
Should Blair invest in the tools?