CMA (IMA) Practice Test 10

Corvane Audio — machine-hour constraint

Corvane Audio builds three wooden-cabinet loudspeakers: the Studio, the Compact and the Outdoor. Every cabinet is cut and routed on one CNC router line, which can run only 15,000 machine hours per quarter. Quarterly demand at current prices would need 19,500 hours, so general manager Leah Okafor must decide which orders to fill. Fixed manufacturing overhead of $375,000 per quarter is applied at $25 per machine hour; it will not change under any of the proposals below.

Two proposals have arrived. First, Harborline Resorts has offered to buy 800 Studio speakers this quarter at $170 each, a one-time order that will not affect regular Studio sales. Each unit needs a custom weatherproof grille that adds $6 of variable cost, and it uses the normal 3 machine hours. The router line is already fully scheduled, so the order would displace regular production.

Second, Baylor Woodcraft has offered to supply the finished cabinet for the Outdoor model at $44 per cabinet. Making the cabinet in-house uses 1 of the Outdoor's 2.5 machine hours and $35 of its $120 variable cost; buying it would free that router hour. The Outdoor's other operations would still run on the router.

Analyst Ravi Sethi notes that the router is the only bottleneck; assembly, finishing and packing all have spare capacity, and Corvane can sell every unit it schedules up to the demand shown.

Okafor has asked Sethi to find the best product mix, evaluate each proposal separately against that plan, and identify the factors beyond the numbers that should shape the final decision.