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Quality improvement, relevant costs, and relevant revenues. The Crimson Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year. The demand for lamps is very strong. Crimson will be able to sell whatever output quantities it can produce at $40 per lamp.
Crimson can start only 200,000 units into production in the molding department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped at a net disposal value of zero. Of the 200,000 units started at the molding operation, 20,000 defective units (10%) are produced. The cost of a defective unit, based on total (fixed and variable)
Direct materials (variable) | $10 per unit |
Direct manufacturing labor, setup labor, and materials-handling labor (variable) | 2 per unit |
Equipment, rent, and other allocated |
8 per unit |
Total | $20 per unit |
Crimson’s designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $3 per lamp in the molding department.
- 1. Should Crimson use the new material? Show your calculations.
Required
- 2. What nonfinancial and qualitative factors should Crimson consider in making the decision?
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
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