Water Away Produces and Sells Types of Plastic Boats

question 76

Essay

Water Away produces and sells types of plastic boats. All three boats are manufactured using a single computer-controlled plastic injection moulding machine.
Boat A Boat B Boat C
Selling price $79.00 $99.00 $149.00
Direct materials 34.00 34.00 43.00
Direct labour 0.40 0.60 1.00
Variable overhead 1.00 2.00 1.00
General overhead 24.00 36.00 60.00
Product Margin $19.60 $36.00 $44.00
Computer-controlled injection moulder:
Machine time required per unit 0.02 hr 0.03 hr 0.05 hr
Daily demand 200 units 120 units 60 units
Daily machine time requirements 4 hrs 3.6 hrs 3 hrs
To meet daily demand for all three products, 10.6 hours would be required on the injection moulder. However, the machine must be attended at all times by a skilled operator who works only a standard 8-hour workday. Therefore, insufficient capacity exists to meet demand for all three products.
The labour cost per unit is determined by multiplying the operator's wage of $20 per hour by the fraction of an hour required to produce a single boat. Direct labour employees are guaranteed a 40-hour work week. General overhead is almost entirely fixed.
a)The production bottleneck is the machine and this bottleneck can be relaxed by inducing the skilled operator to work overtime. Up to how much should the firm be willing to pay per hour in total for the first hour of overtime?
b)The supervisor at the boat company believes that the bottleneck should be relaxed, even if the company only breaks even on the units sold after the capacity limit has been reached. Explain this reasoning.

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