Ontario Audio makes a popular satellite radio receiver for over-the-road trucks and other professional uses. The two major parts of the radio are the electronics (receiver, speaker, and so on) and the metal case housing the radio. The electronics are manufactured at the Santa Rosa Plant, which sends the resulting kits to the company’s Borman Plant. The case is manufactured at the Borman Plant and the electronics kit and completed case are assembled, also at the Borman Plant. Monthly capacities and production levels are as follows:

Ontario Audio does not sell electronic kits or cases separately. The company could sell as many as 1,350 radios per month. The radios (electronics kit assembled and enclosed in the case) sell for $125 per radio and have a variable cost of $62 each. 

Required

a. Is there a bottleneck at Ontario Radio? If so, where is it?

b. The Borman Plant manager tells managers at Ontario Audio that the plant could increase capacity by 300 cases (and radios) per week by producing cases in the evening after the normal shift. Producing in the evening would not affect the sales price or quantity. Variable cost per unit would increase by $20 for those produced in the evening because of the shift differential (overtime pay) for labor. Fixed costs would also increase by $11,000 per month. Should Ontario Audio produce cases (and radios) in the evening?

c. Independent of the situation in requirement (b), Ontario Audio could add additional equipment and workers in the Borman Plant, which would increase its capacity by 300 cases (and radios) per month. This would not affect the sales price or variable cost per unit but would increase fixed costs by $21,000 per month. Should the company add the additional equipment and workers to the Borman Plant?

Transcribed Image Text:

Monthly capacity.. Monthly production.. Santa Rosa Plant (Electronics) 1,350 1,050 Borman Plant (Cases) 1,050 1,050