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Production Under Constraint

RMR Corporation consists of the Semiconductor Division and the Process-Control Division, each of which operates as a profit center. The Semiconductor Division produces two electronic components, the new high-performance Super Chip and an older product called Okay Chip. These two products have the following cost characteristics:

Super Chip Okay Chip
Material Parts $ 2 Parts $1
Labor 2 hours @ $14 28 ½ hour @ $14 7

The Semiconductor Division's capacity is 50,000 labor hours per year.

Only one customer has developed a product utilizing Super Chip. This customer orders a maximum of 15,000 Super Chips per year, at a price of $60 per chip. If RMR chooses not to meet its entire demand, the customer will buy all the Super Chips that Semiconductor is willing to sell. The remainder of Semiconductor's capacity is devoted to Okay Chip, for which there is unlimited demand at a selling price of $12 per chip.

The Process-Control Division produces only one product, a process-control unit, which uses a circuit board imported from Ireland at a price of $60. The process-control unit's costs are:

Process-Control Unit
Material Circuit board $60
Labor 5 hours @ $10 50

The current market price for the process-control unit is $132. The Process-Control Division expects to sell 5,000 units this year.

With minor modifications, a single Super Chip could be substituted for the circuit board currently used by the Process-Control Division. The modification would require one additional hour of labor by Process-Control's staff, for a new total of 6 hours per process-control unit.

All overhead support costs of the two divisions are fixed, and will remain unchanged regardless of the actions taken by the divisions.

1. What is the constraining factor in the Semiconductor Division?

2. What are the two alternative courses of action for RMR as a whole? (One of these actions requires a transfer of Super Chips from Semiconductor to Process-Control; the other does not.) For each course of action, specify the number of Super Chips that Semiconductor would sell externally, the number of Okay Chips that Semiconductor would sell externally, the number of process-control units that Process-Control would sell with circuit boards, and the number of process-control units that Process-Control would sell with Super Chips.

3. Which of the two courses of action you identified in requirement 2 is better financially for RMR?

4. If demand for the process-control unit rises to 12,000 units at a price of $132 per unit, how many of the 12,000 units should be produced using Super Chips? Explain.

Solution Summary

The solution explains decision making under production constraints.