Product Attic is being produced on both
Product Attic is being produced on both first and second shifts by company Andrews. Compare the incremental cost of purchasing an additional unit of first shift capacity with the additional labor costs of producing that unit on second shift. It costs $2.42/unit in labor to produce Attic on first shift, second shift labor costs are 50% higher. At the current automation level of 9.0 it costs $42.00/unit of first shift capacity. Assume the only fixed costs of purchasing first shift capacity will be Depreciation on a 15 year straight line. Ignore material costs and SG&A expenses which are the same on both shifts. Which of the following statements are true?
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Producing units on first shift is always more profitable than second shift because second shift labor rates are higher.
At the current automation level it would be less profitable to pay second shift rates than to buy more capacity.
At the current automation level it would be more profitable to pay second shift rates than to buy more capacity.
It is always more profitable to produce on second shift rather than buying more capacity.
