Problem Quality improvement, relevant costs, and relevant revenues. The Crimson

Question

Problem 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) manufacturing costs incurred up to the molding operation, equals $20 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 testing costs on scrapped parts (fixed) Total Crimson's designers have determined that adding a different type of material to the exi would result in no defective units being produced, but it would increase the variable co the molding department 1. Should Crimson use the new material? Show your calculations. 2. What nonfinancial and qualitative factors should Crimson consider in making the Step-by-step solution

Explanation / Answer

Answer 1. Statement of Incermental Profit if New Raw Material is Used Incremental Profit Sales Revenue of selling 20,000 more Lamps - 20,000 Nos X $40          800,000 Incremental Cost Increase in Variable Cost - $3 X 200,000 Nos          600,000 Net Incremental Profit (Loss)          200,000 The company should use new raw material as it will increase its net operating profit by $200,000. Answer 2. The other qualitative factors should Crimson should consider are: 1. enhanced reputation and increased customer goodwill which could lead to higherfuture revenues through greater unit sales and higher sales prices 2. higher employee morale as a result of higher quality 3. The supplier of raw material can supply the raw material in long run and in what quantities.

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