The Tan Corporation uses multicolor molding to make plastic lamps. The molding o

Question

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) $16 per unit Direct manufacturing labor, setup labor, and materials-handling labor (variable)

Explanation / Answer

capacity =200000/year price =40$ defective =30000 repairing operation per defective =25$ 16 per labour 3 per equipment 6 per unit total costs =25 $ /unit so the cost with out add on = 25+3.75 =28.75$ with the add on cost =25+4=29 1>so Tan should not use the new material the non financial and qualitative factors to be considered were the quality of the unit after re moulding.is it being completely defective free or not are the qualities of the units same or not in both the cases cheers :)

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