Reference no: EM132605132

Theory of constraints

Superspeed Motors Ltd. manufactures precision engine blocks for high performance cars. The engine block is the major component of an automotive motor and is usually made from an aluminum alloy.

Superspeed's plant where its engine blocks are made, consists of two departments, Casting and Machining. The molten alloy is first cast into a mold in the Casting Department. The hardened block is removed from the mold and then transferred to the Machining Department where the block is prepared to receive the remaining engine components. The following information provides further details relating to the production process.

• Superspeed's annual capacity is 30,000 units in the Casting Department and 20,000 units in the Machining Department
• The cost of aluminum alloy, which is the only direct material is $600 per engine block.
• All direct material cost is incurred in the Casting Department.
• As there is a high demand for Superspeed's engine blocks, it can sell as many blocks as it produces at a selling price of $1,400 per unit.

Annual fixed costs of operations:

Casting: $850,000

Machining: $685,000

(Note: unit = engine block)

Required

Question a. Due to the high demand for its product, the production manager is concerned with capacity management and quality. Assuming any defective units produced in either department must be destroyed, she would like you to compute the following:

i. The loss that occurs (per unit) if a defective unit is produced in the Casting Department.

ii. The loss that occurs (per unit) if a defective unit is produced in the Machining Department.