Theory of constraints, throughput margin, relevant costs.
Response to the following problem:
The Mayfield Corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information:
Each cabinet sells for $72 and has direct material costs of $32 incurred at the start of the machining operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements.
Required:
1. Mayfield is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1,000 units. The annual cost of these jigs and tools is $30,000. Should Mayfield acquire these tools? Show your calculations.
2. The production manager of the machining department has submitted a proposal to do faster setups that would increase the annual capacity of the machining department by 10,000 units and would cost $5,000 per year. Should Mayfield implement the change? Show your calculations.
3. An outside contractor offers to do the finishing operation for 12,000 units at $10 per unit, double the $5 per unit that it costs Mayfield to do the finishing in-house. Should Mayfield accept the subcontractor's offer? Show your calculations.
4. The Hunt Corporation offers to machine 4,000 units at $4 per unit, half the $8 per unit that it costs Mayfield to do the machining in-house. Should Mayfield accept Hunt's offer? Show your calculations.