Quality improvement, relevant costs, and relevant revenues. The Crimson Corporation uses multi- colored 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. 0f the 200,000 units started at the molding operation, 20,000 defec- tive 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: $10 per unit Direct materials (variable) Direct manufacturing labor, setup labor, and materials-handling labor (variable) 2 per unit Equipment, rent, and other allocated overhead, including inspection and testing costs on scrapped parts (fixed) Total 8 per unit $20 per unit Crimson's designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $3 per lamp in the molding department.
Quality improvement, relevant costs, and relevant revenues. The Crimson Corporation uses multi- colored 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. 0f the 200,000 units started at the molding operation, 20,000 defec- tive 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: $10 per unit Direct materials (variable) Direct manufacturing labor, setup labor, and materials-handling labor (variable) 2 per unit Equipment, rent, and other allocated overhead, including inspection and testing costs on scrapped parts (fixed) Total 8 per unit $20 per unit Crimson's designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $3 per lamp in the molding department.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Should Crimson use the new material? Show your calculations.
Transcribed Image Text:Quality improvement, relevant costs, and relevant revenues. The Crimson Corporation uses multi-
colored 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. 0f the 200,000 units started at the molding operation, 20,000 defec-
tive 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:
$10 per unit
Direct materials (variable)
Direct manufacturing labor, setup labor, and materials-handling labor
(variable)
2 per unit
Equipment, rent, and other allocated overhead, including inspection
and testing costs on scrapped parts (fixed)
Total
8 per unit
$20 per unit
Crimson's designers have determined that adding a different type of material to the existing direct materials
would result in no defective units being produced, but it would increase the variable costs by $3 per lamp in
the molding department.
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