The company is well known for its quality products—each item is thoroughly tested before it leaves the plant. Workers are highly skilled. The company considers direct labor to be a fixed cost because it does not reduce the workforce when there is a small downturn in business, and it can accommodate production increases of up to 10 percent due to excess capacity.
In the production process, workers in the circuit department prepare circuit boards that are sent to the case department for installation in custom cases. In the past six months, the workers in the circuit department have pursued a number of process improvement initiatives that have resulted in much shorter production times. For example, the Model LE7 amplifier used to require 10.5 standard labor hours in the circuit department, but the standard was revised last month to only 8.4 standard hours.

Assume that the company is reluctant to fire workers in the circuit department even if they are not really needed. (After all, they have just worked hard to improve productivity.) Given the production improvements and the institution of new standards, explain why the circuit department has an incentive to overproduce (i.e., produce more output than can be handled by the case department).

  • CreatedSeptember 23, 2013
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