You have just started working for Modern Chair, at new organization that uses a modern, automated approach to the manufacture of a variety of chairs. Using computer-assisted design specifying and ordering materials and scheduling man- ual and machine activities, every chair can be unique, and Modern Chair can offer individual design on demand. Modern Chair controls costs, which are lower than those of competitors who have less automation and less ability to efficiently produce small batches. Nevertheless, the success of the company has led to a problem. Currently, with the economy in what looks to be a temporary boom, there is a shortage of capacity. There are no plans to expand production capacity to meet temporary excess demand. The president asked you for recom- mendations for making the best use of limited production capacity. Your rec- ommendations are to facilitate profit maximization. In your investigation, you realize that there is not much in the way of information on which to base the recommendations. The organization has lit- tle history, and the president has personally made all important decisions. You note, however, that besides the design department that has unlimited capacity, there are two production departments: the rst department assembles the chairs, while the second does the nishing. Although there are 252 differ- ent types of chairs if all styles and nishes are considered, Modern Chair divides them into two types, upholstered and straight back. Using this conceptualization, you allocate production costs according to assembly or nishing. Within each department, you further divide the costs according to upholstered or straight back chairs. You then take the cost for each product category in each department and run simple regressions, and you get the results seen in Exhibit 1. Each department's total available hours are 3,920 hours a year, i.e., 16 hours a day for ve days a week for 49 weeks a year. The assembly depart- ment runs ve identical lines. The yearly capacity is 19,611) operating hours. The finishing department runs four lines for 15,680 hours of available time. An average upholstered chair sells for $147, and the average straight back chair sells for $76. Sales of straight back chairs are unlikely to exceed 25,000 at that price, while that price will restrict upholstered chairs to 25,000. There Exhibit 1 Standard Variable Coefficient Error ASSEMBLY DEPARTMENT With the total costs of upholstered chairs as the dependent variable 1. Constant $ 98,747 $246,868 Independent variable: Time in production hours $27.14 $11.81 12 = 0.55 2. Constant $352,363 $167,922 Independent variable: Direct labour hours $11.74 $10.67 12 = 0.33 With the total costs of straight back chairs as the dependent variable 1. Constant $347,428 $386,031 Independent variable: Time in production hours $21.11 $ 6.60 12 = 0.61 2. Constant $797,318 $346,660 Independent variable: Direct labour hours $ 5.06 $ 5.62 r = 0.35 FINISHING DEPARTMENT With the total costs of upholstered chairs as the dependent variable 1. Constant $ 27,957 $ 8,223 Independent variable: Time in production hours $ 4.74 $ 1.16 r2 = 0.67 2. Constant $ 54,819 $ 10,542 Independent variable: Direct labour hours $ 3.51 $11.70 r2 = 0.31 With the total costs of straight back chairs as the dependent variable 1. Constant $155,850 $141,682 Independent variable: Time in production hours $ 6.18 $ 1.29 r2 = 0.50 2. Constant $347,310 $ 86,828 Independent variable: Direct labour hours $ 3.57 $ 2.75 r2 = 0.33 is sufficient capacity in the assembly department, but not in the finishing department. For each department, the standard hours in production needed to produce the chairs are as follows: Upholstered Straight Back Assembly 0.75 0.50 Finishing 0.45 0.75Modern Chair occupied its current facilities four years ago. The assembly department cost $927,000 for plant and equipment. The finishing department's plant and equipment cost $554,000. About 80 percent was for equipment, while the remaining 20 percent was for the land and buildings. Since then, the capac- ities of the two departments have increased about five or six percent a year. The managers and employees found ways to increase efficiency and effective- ness. In examining the non-manufacturing costs, you find that they are all fixed except the five percent sales commission paid on the sales price of each chair