Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 45

Theory of Constraints

CompDesk, Inc., makes a single model of an ergonomic desk (with chair) for computer usage. The desk is manufactured in building 1, and the chair is manufactured in building 2. Monthly capacities and production levels are as follows:

	Building 1 (Desks)	Building 2 (Chairs)
Monthly capacity	500	400
Monthly production. . . .	400	400

The company will sell a desk only with a chair and can sell 500 desks per month. The units (desk with chair) sell for $300 each and have a variable cost of $125 each.

Required

a. Is there a bottleneck at CompDesk? If so, where is it?

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b. CompDesk’s production supervisors state they could increase building 2’s capacity by 100 chairs per month by producing chairs on the weekend. Producing on the weekend would not affect the sales price. Variable cost per unit would increase by $25 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $10,000 per month. Should CompDesk produce chairs on the weekend?

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c. Independent of the situation in requirement (b), CompDesk could add additional equipment and workers to building 2, which would increase its capacity by 100 chairs per month. This would not affect the sales price or variable cost per unit but would increase fixed costs by $20,000 per month. Should CompDesk add the additional equipment and workers to building 2?

Step 1 of 5

a.

In this case there is bottleneck that is constraint of capacity for chairs and so bottleneck is Building 2. Company can sell desk with chair and so with 400 capacity for chair company can sell only 400 desk even though capacity for desk is 500.