Theory of constraints, throughput margin, and relevant costs. Nevada Industries manufactures electronic testing equipment. Nevada 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):
Nevada manufactures only 250 units per year because the installation department has only enough capacity to install 250 units. The equipment sells for $60,000 per unit (installed) and has direct material costs of $35,000. All costs other than direct material costs are fixed. The following requirements refer only to the preceding data. There is no connection between the requirements.
Required
1. Nevada's engineers have found a way to reduce equipment manufacturing time. The new method would cost an additional $60 per unit and would allow Nevada to manufacture 20 additional units a year. Should Nevada implement the new method? Show your calculations.
2. Nevada's designers have proposed a change in direct materials that would increase direct material costs by $3,000 per unit. This change would enable Nevada to install 280 units of equipment each year. If Nevada makes the change, it will implement the new design on all equipment sold. Should Nevada use the new design? Show your calculations.
3. A new installation technique has been developed that will enable Nevada's engineers to install 7 additional units of equipment a year. The new method will increase installation costs by $45,000 each year.
Should Nevada implement the new technique? Show your calculations.
4. Nevada 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 departments on the basis of their productivities. Do you think the new proposal is a good idea? Explainbriefly.
