Palmateer Industries Makes an Electronic Component in Two Departments, Machining

Essay

Palmateer Industries makes an electronic component in two departments, Machining and Assembly. The capacity per month is 30,000 units in the Machining Department and 20,000 in the Assembly Department. The only variable cost of the product is the direct material of $100 per unit. All direct material cost is incurred in the Machining Department. All other costs of operating the two departments are fixed costs. Palmateer can sell as many units of this electronic component as it produces at a selling price of $300 per unit.
Required:
Assuming any defective unites produced in either department must be scrapped:
a. Compute the loss that occurs if a defective unit is produced in the Machining Department.
b. Compute the loss that occurs if a defective unit is produced in the Assembly Department.
c. How do your answers in parts (a) and (b) relate to the theory of constraints? Explain.