The Scooter Company normally produces a product called “Scoots”. However, “Scoots” has been temporarilytaken 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 possibleuses 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$275,000 after taxes (taxes are 45%) during this period if it were able to produce and sell “Scoots”. Thecontroller has done a multiple regression analysis of the production process based on weekly costs incurred forthe past six months (26 weeks). This analysis relates total production costs to the number of units produced”b”, the number of direct labor hours used “c”, and the number of machine hours used “d”, with the followingresults:Y-intercept”b” coefficient”c” coefficient”d” coefficientValue$ 375,000$1.50$ 18.20$ 21.40Standard Error$ 26,500$.85$ 3.75$ 8.32t-Value14.151.7631.522.57Adjusted rÂ² = .861Standard Error of the Estimate = $ 31,280One alternative use of the plant facilities is to produce two products called “TEES” and “ROOS”, which have asimilar production process to “Scoots” such that the regression analysis above is applicable to them. Acustomer has indicated that he would be willing to purchase “TEES” at $95 per unit and “ROOS” at $100 perunit but only if the Scooter Company would make both products available in a ratio of 3:7 (TEES:ROOS). Ananalysis of the two products has indicated the following expected inputs:TEESDirect materials:Material “A”Material “B”Direct labor hoursMachine hours$ 12.00$ 7.002.50.6per unitper unithours per unithours per unitROOS$ 6.00$ 4.004.00.2per unitper unithours per unithours per unitREQUIRED:a) How many units of TEES and ROOS would the company have to produce and sell to the above customerin 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 wereto order a total of 60,000 units of TEES and ROOSii) Comment on the reliability of the regression analysis and the advisability of accepting an order for60,000 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 ofunits 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; and20,000 machine hours available?
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