Reference no: EM13500140

Problem 28. Quality Improvement, Relevant costs, and Relevant Revenues. The Tan Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year. The demand for lamps is very strong. Tan will be able to sell whatever output quantities it can produce at $40 per lamp. Tan 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, 30,000 defective units (15%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $25 per unit, as follows:

Direct materials(variable)

Direct manufacturing labor, setup labor, and materials handling labor (variable)

Equipment, rent and other allocated overhead, including inspection and testeing costs on scrapped parts(fixed)

Total

Tan's designers have determined that adding a different type of material to the existing diect materials would result in no defective units being produced, but it would increase the variable costs by $4 per lamp in the Molding Department.

1. Should Tan use the new material? Show your calculations.
2. What nonfinancial and qualitative factors should Tan consider in making the descision.