SMPO is a company that produces two types of metal containers for businesses. Type-A is the standard version; Type-B is a special version. Containers are manufactured through three major processes: process-1, process-2, and process-3. In process-1, a large machine is used to cut standard metal sheets into appropriate sizes. In process-2, another device bends the metal into shape. Process-3 involves joining the parts with a combination of soldering and riveting. SMPO's process-1 and process-2 are used for both types of containers. Separate process-3 departments are used for the final stage of production.

The production of one Type-A approximately requires 0.27 hours and 0.34 hours on the process-1 and process-2 machines, respectively. Similarly, the output of one Type-B requires 0.5 hours and 0.48 hours on the process-1 and process-2 machines, respectively. Both the process-1 and process-2 machines can operate for 750 hours each month. The Type-A process-3 department has a monthly capacity of 1,500 units. The Type-B process-3 department has a monthly capacity of only 1,350 units. Currently, SMPO is producing and selling 350 units of Type-A and 1,300 units of Type-B per month.

Type-A containers are sold for $1,790, and Type-B containers are sold for $1,995. SMPO's operation is relatively small in the industry, and management believes it cannot increase prices beyond these levels because of the competition. However, the marketing department believes that SMPO can sell as much as it can produce at these prices.

(a) Assume that management just met to discuss next month's operating plan. Although the containers are selling well, the company's overall profitability might be a concern. The plant's chief accountant advised that the current production of Type-A containers be cut back. He said, "Type-A containers are sold for $1,790 per unit, but our costs are $1811. Even though we're selling only 350 units a month, we're losing money on each one. We should decrease the production of Type-A." The data analyst disagreed. He said that the problem was the Type-A process-3 department trying to absorb a significant overhead with a small production volume. "The Type-A units are contributing to overhead. Even though the production doesn't cover all the fixed costs, we'd be worse off with lower production." Make a recommendation to management, with a short verbal argument supporting the accountant or the data analyst.

(b) Would the company be willing to pay $300 for five extra Type-A process-3 capacity units? Explain.

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