20.13    Theory of constraints, throughput contribution, relevant costs. (15 minutes)

Salamanca SA manufactures filing cabinets in two operations: machining and finishing. Additional information is as follows.

 

Machining                         Finishing

 

Annual capacity Annual production	100 000 units 80 000 units	80 000 units 80 000 units
Fixed operating costs	€640 000	€400 000

(excluding direct materials)

Fixed operating costs per unit produced (€640 000 ÷ 80  000;

€400 000 ÷ 80 000)                                                            €8 per unit                        €5 per unit

 

Each cabinet sells for €72 and has direct materials costs of €32 incurred at the start of the machining operation. Salamanca has no other variable costs. Salamanca can sell whatever output it produces. The following requirements refer only to the preceding data; there is no connection between the  situations.

 

1    Salamanca is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1000 units. The annual cost of these jigs and tools is €30 000. Should Salamanca acquire these tools?

2    The production manager of the Machining Department has submitted a proposal to do faster set-ups that would increase the annual capacity of the Machining Department by 10 000 units and cost €5000 per year. Should Salamanca implement the   change?