Problem:
Theory of constraints, throughput contribution, relevant costs. Colorado Industries manufactures electronic testing equipment. Colorado also installs the equipment at customers’ sites and ensures that it functions smoothly. Additional information on the Manufacturing and Installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment):
Annual capacity
Equipment manufactured and installed
| Equipment Manufactured |
Equipment Installed |
| 400 units per year |
300 units per year |
| 300 units per year |
300 units per year |
Colorado manufactures only 300 units per year because the Installation Department has only enough capacity to install 300 units. The equipment sells for $40,000 per unit (installed) and has direct materials cost of $15,000. All costs other than direct materials cost are fixed. The following requirements refer only to the preceding data. There is no connection between the requirements.
1) Colorado’s engineers have found a way to reduce equipment manufacturing time. The new method would cost an additional $50 per unit and would allow Colorado to manufacture 20 additional units a year. Should Colorado implement the new method? Show your calculations.
2) Colorado’s designers have proposed a change in direct materials that would increase direct material cost by $2,000 per unit. This change would enable Colorado to install 320 units of equipment each year. If Colorado makes the changes, it will implement the new design on all equipment sold. Should Colorado use the new design? How your calculations.
3) A new installation technique has been development that will enable Colorado’s engineers to install 10 additional units of equipment a year. The new method will increase installation costs by $50,000 each year. Should Colorado implement the new technique? Show your calculations.
4) Colorado is considering how to motivate workers to improve their productivity (output per hour). One proposal is to evaluate and compensate workers in the Manufacturing and Installation department on the basis of their productivities. Do you think the new proposal is a good idea? Explain briefly.