The Scooter Company Case Study Part C (Only)

The Scooter Company normally produces a product called "Scoots". However, "Scoots" has been temporarily
taken off the market pending the results of a government investigation into the safety of this product.
Management is fully confident that production will be resumed within one week and is investigating possible
uses of the plant facilities during this period of idle capacity.
An investigation of its present operations shows that the company would normally earn operating income of
$275,000 after taxes (taxes are 45%) during this period if it were able to produce and sell "Scoots". The
controller has done a multiple regression analysis of the production process based on weekly costs incurred for
the past six months (26 weeks). This analysis relates total production costs to the number of units produced
"b", the number of direct labor hours used "c", and the number of machine hours used "d", with the following
results:

Y-intercept
"b" coefficient
"c" coefficient
"d" coefficient

Value
$ 375,000
$
1.50
$ 18.20
$ 21.40

Standard Error
$ 26,500
$
.85
$ 3.75
$ 8.32

t-Value
14.15
1.76
31.52
2.57

Adjusted r² = .861
Standard Error of the Estimate = $ 31,280
One alternative use of the plant facilities is to produce two products called "TEES" and "ROOS", which have a
similar production process to "Scoots" such that the regression analysis above is applicable to them. A
customer has indicated that he would be willing to purchase "TEES" at $95 per unit and "ROOS" at $100 per
unit but only if the Scooter Company would make both products available in a ratio of 3:7 (TEES:ROOS). An
analysis of the two products has indicated the following expected inputs:
TEES
Direct materials:
Material "A"
Material "B"
Direct labor hours
Machine hours

$ 12.00
$ 7.00
2.5
0.6

per unit
per unit
hours per unit
hours per unit

ROOS
$ 6.00
$ 4.00
4.0
0.2

per unit
per unit
hours per unit
hours per unit

REQUIRED:
a) How many units of TEES and ROOS would the company have to produce and sell to the above customer
in order to maintain the normal operating income after taxes?
b)Construct a 95% confidence interval of what operating income could be after taxes if the customer were
to order a total of 60,000 units of TEES and ROOS
ii) Comment on the reliability of the regression analysis and the advisability of accepting an order for
60,000 units if there were no alternative uses of the facilities.
c) Another customer has indicated that he is prepared to purchase up to 50,000 units of
"TEES" and/or up to 40,000 units of "ROOS" (in any ratio). What would be Scooter's optimal number of
units to produce and sell to this customer if there are only:
-
$500,000 of Direct Material "A"available; and
$280,000 of Direct Material "B"available; and
20,000 machine hours available?