Aunt Lydia's Cookies, Inc., prepares frozen gourmet cookies for shipment to upscale grocery stores as well as mailing to web and catalog customers. The company has two workstations, cooking and distribution. The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4,000 dozen cookies, management is considering adding another oven in the cooking station or else having the cooks start to work earlier. The cost of adding another oven in the cooking station would add an average of $8 per hour. The monthly cost of operating the cooking station one more hour each day is $1,500.
The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new oven at the cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen.
Required:
a. What is the total production per month if the change is made?
b. What is the current monthly contribution margin, and the expected monthly product contribution for both of the possible changes? Assume long-run production equals sales.
c. What course of action would you recommend?
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