Reference no: EM131931210
Quality improvement. Trimline Frames makes bicycle frames in two processes, tubing and welding. The tubing process has a capacity of 50,000 units per year; welding has a capacity of 75,000 units per year. Cost information follows:
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Design of product and process costs
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$100,000
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Inspection and testing costs
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42,500
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Scrap costs (all in the tubing dept.)
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175,000
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The company enjoys high demand for its products. Trimline Frames can sell whatever output it can produce for the market price of $60 per frame. Trimline Frames can start only 50,000 units into production in the tubing department because of capacity constraints on the tubing machines.
The company scraps all defective units produced in the tubing department. Of the 50,000 units started in the tubing operation, 5,000 units (10 percent) are scrapped at the end of the production process. Scrap costs, based on total (fixed and variable) manufacturing costs incurred in the tubing operation, equal $38 per unit as follows:
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Direct materials (variable)
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$19
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Direct manufacturing, setup, and materials handling labor (variable)
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9
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Depreciation, rent, and other overhead (fixed)
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10
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$38
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The "$10 fixed cost" is the portion of the total fixed costs of $500,000 allocated to each unit, whether good or defective. The good units from the tubing department are sent to the welding department.
Variable manufacturing costs in the welding department are $3.00 per unit. There is no scrap in the welding department. Therefore, Trimline Frames' total sales quantity equals the tubing department's output. Trimline Frames incurs no other variable costs.
Trimline Frames' designers have discovered that using a different type of material in the tubing operation would reduce scrap to zero, but it would increase the variable costs per unit in the tubing department by $1.50. Recall that only 50,000 units can be started each year.
Required:
a. What is the additional direct materials cost of implementing the new method?
b. What is the additional benefit to Trimline Frames from using the new material and improving quality?
c. Should Trimline Frames use the new materials?
d. What other nonfinancial and qualitative factors should Trimline Frames consider in making the decision?