PROBLEM 4-16. Value of Loosening a Constraint IL3] For the past 3 years, Rhetor has produced the model X100 stereo speaker. The model is in high demand, and the pany can sell as many pairs as it can produce. The selling price per pair is $900. Variable production are $300, and fixed costs per year are $720,.000. Each pair of speakers requin of assembly time. Currently the company has five assembly workers who are highly skilled and can work a total of 12,500 hours per year. With a tight labor market, the company finds it diffioulh to hire additional assembly workers (at the current rate of $40 per hour) with the skill needed te assemble the X100. Jurgis Rand, the owner of Rhetorix, is considering offering assembly workers an overtime premium of $20 per hour (wages in excess of regular hourly wages) to get them to work more than 12,500 hours per year. In thinking about how much to offer, Jurgis performed the following calculation: costs t rs requires 5 houn Sales (2,500 units $900) Less variable costs (2,500 x $300) Less fixed costs Profit $2,250,000 750,000 720,000 S 780,000 Profit/assembly hours $62.40 per assembly hour ($780,000 12,500) After seeing this calculation, Jurgis decided to offer an overtime premium of $20 per hour to his assembly workers. Jurgis reasoned: "This is a great deal. The workers make an extra $20 per hout and I'l still make an extra $42.40 per hour" The $42.40 is equal to the profit per assembly hour minus the extra labor cost ($62.40-$20.00). REQUIRED a. How much would profit increase if 5 more assembly hours were available at the regular hourty wage for assembly workers? Problems 169 b. Compare your answer in part a to the answer that Jurgis would provide to the question in part a i.e., 562.40 x 5-$312). What is the flaw in Jurgis's calculation of the value of additional assembly time? c. Suppose Jurgis pays assembly workers $20.00 per hour of overtime premium. On average, what will be the incremental benefit to Jurgis of an hour of extra assembly time? PROBLEM 4-17. Constrsints B.O 3j Fleet Valley Shoes produces two models: the Nx100 (a shoe aimed at competitive rumsers and the Mx100 (a shoe aimed at fitness buffs). Sales and costs for the most recent yenrart indicaten: Nx100 Mx100 Sales (pairs) Sales Variable costs 20,000 80,000 $3,000,000 $8,800,000 700,000) (1.200,000) 2,300,000 7,600,000 (20,000) (1,500,000) $2,280,000 $6,100,000 2 hours $37.50 $47.50 Contribution margin Fixed costs Profit Assembly time per pair Profit per assembly hour CM ner assembly hour 3 hours $38.00 $38.33