Reference no: EM13391765
The Wellesley Corporation makes printed cloth in two departments: weaving and printing. Currently, all product first moves through the weaving department and then through the printing department before it is sold to retail distributors for $1,250 per roll. Wellesley provides the following information:
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Weaving
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Printing
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Monthly capacity
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10,000 rolls
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15,000 rolls
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Monthly production
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9,500 rolls
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8,500 rolls
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Direct material cost per roll of cloth processed at each operation
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$500
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$100
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Fixed operating costs
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$2,850,000
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$427,500
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Wellesley can start only 10,000 rolls of cloth in the weaving department because of capacity constraints of the weaving machines. Of the 10,000 rolls of cloth started in the weaving department, 500 (5%) defective rolls are scrapped at zero net disposal value. The good rolls from the weaving department (called gray cloth) are sent to the printing department. Of the 9,500 good rolls started at the printing operation, 950 (10%) defective rolls are scrapped at zero net disposal value. The Wellesley Corporation's total monthly sales of printed cloth equal the printing department's output.
Required
1. The printing department is considering buying 5,000 additional rolls of gray cloth from an outside supplier at $900 per roll, which is much higher than Wellesley's cost to manufacture the roll. The printing department expects that 10% of the rolls obtained from the outside supplier will result in defective products. Should the printing department buy the gray cloth from the outside supplier? Show your calculations.
2. Wellesley's engineers have developed a method that would lower the printing department's rate of defective products to 6% at the printing operation. Implementing the new method would cost $350,000 per month. Should Wellesley implement the change? Show your calculations.
3. The design engineering team has proposed a modification that would lower the weaving department's rate of defective products to 3%. The modification would cost the company $175,000 per month. Should Wellesley implement the change? Show your calculations.