Sailing Unlimited makes small sailboats. The average monthly demand is 50 boats. The plant operates 300 hours a month. It takes 3 hours to manufacture a boat once it is taken up for production. Each boat sells for $15,000 and consumes variable costs of $12,000. In addition to the variable costs, inventory carrying costs of $200 per boat per hour of manufacturing cycle time are also incurred by the company.
By incurring extra variable costs (primarily direct labor) of $500 per boat, the company will be able to reduce the manufacturing time for each boat from 3 hours to 2 hours. The average demand and the capacity will not change. Should the company implement this action?