Five Star Tools is a small family-owned firm that manufactures diamond-coated cutting tools (chisels and saws) used by jewelers. Production involves three major processes. First, steel blanks (tools without the diamond coating) are cut to size. Second, the blanks are sent to a chemical bath that prepares the tools for the coating process. In coating, the third major process, the blanks are coated with diamond chips in a proprietary process that simultaneously coats and sharpens the blade of each tool. Following the coating process, each tool is inspected and defects are repaired or scrapped.

Currently, the chemical bath department is a bottleneck due to intermittent failures related to an antiquated dipping tank. The result is that the department can process only 600 items per hour from the cutting department rather than the 700 items per hour that are normally processed.

Required:

Explain why the cutting department should cut back production from 700 items per hour to 600. Further, explain why if the cutting department does cut back, as it should, it is likely to have an unfavorable labor efficiency variance.