Your roommate, Joe Thompson, has taken a summer intern position at a local manufacturing company. Because he is a junior majoring in accounting, the company expects him to have a grasp of managerial accounting basics. However, Joe didn’t attend class very often and made only a C 2 in managerial accounting. On his first day, the company president gave Joe a tour of the production facility and talked extensively about one of the company’s direct materials becoming a constrained resource. Because Joe’s entire internship is likely going to revolve around this limited resource and its impact on company decisions, he is in a panic to understand the concept.
Explain to Joe the terms full capacity, excess capacity, and constrained resource. Also briefly explain how a constrained resource could affect special-order and production decisions for his employer.