Playful Pens, Inc., makes a single model of a pen. The cartridge for the pen (wh

Question

Playful Pens, Inc., makes a single model of a pen. The cartridge for the pen (which contains the ink) is manufactured on one machine. The cartridge holder (which you hold when you use the pen) is manufactured on another machine. Monthly capacities and production levels are as follows: Monthly capacity Monthly production 1,000,000 800,000 800,000 800,000 The company could sell 1,000,000 pens per month. The units (cartridge inside of holder) sell for $8.40 each and have a variable cost of $3.60 each. Fixed costs are $3,200,000 per month Required: a. Is there a bottleneck at Playful Pens on Machine 1 or Machine 2? Machine 1 Machine 2 b. Playful Pens's production supervisors state they could increase machine 2's capacity by 200,000 per month by producing holders on the weekend. Producing on the weekend would not affect the sales price. Variable cost per unit would increase by $.60 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $720,000 per month b-1. Calculate the differential operating profit (loss).(Losses and amounts to be deducted should be indicated with a minus sign.) Differential revenues Differential costs: Variable Fixed

Explanation / Answer

a.Machine 2 is the bottleneck activity

b-1. Differential revenue - 1680000

Differential costs:

variable - 840000

Fixed - 720000

Differential gain - 120000

b- 2 Yes, it should produce pens on weekend.

c-1.

Differentail revenue - 840000

Differentail costs:

Variable cost increase on current production - 336000

Variable cost on new roduct - 402000

Net operating gain = 102000

c-2 Yesit should expand machine 2 capacity by adding additional workers.

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