Calculate the differential operating profit or loss

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Reference no: EM131898631

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:

Machine 1 (Cartridge) Machine 2 (Holders)

Monthly capacity 1,000,000 800,000

Monthly production 800,000 800,000

The company could sell 1,000,000 pens per month. The units (cartridge inside of holder) sell for $10.40 each and have a variable cost of $4.10 each. Fixed costs are $4,200,000 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 $1.10 for those produced on the weekend because of the premium paid to labor. Fixed costs would also increase by $820,000 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

Differntial costs:

Variable

Fixed

b-2. Should Playful Pens produce holders on the weekend?

Yes
No

c. Independent of the situation in requirement (b), Playful Pens could expand the capability of machine 2 by adding additional workers to perform ongoing maintenance.

This would increase its capacity by 100,000 holders per month. This would not affect sales price or fixed costs, but would increase variable cost to $4.62 per unit for all units produced.

c-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 cost increase on current production:

Variable cost on new production:

c-2. Should Playful Pens expand Machine 2's capability by adding these additional workers?

Yes
No

Reference no: EM131898631

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