Quality improvement. Dover 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 $2,800 per roll. Dover provides the following information: Weaving 20,000 rolls Printing 30,000 rolls Monthly capacity Monthly production Direct material cost per roll of cloth processed at each operation Fixed operating costs 19,000 rolls 17,100 rolls $300 $1,200 $11,400,000 $1,710,000 Dover can start only 20,000 rolls of cloth in the weaving department because of capacity constraints of the weaving machines. Of the 20,000 rolls of cloth started in the weaving department, 1,000 (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 19,000 good rolls started at the printing operation, 1,900 (10%) defec- tive rolls are scrapped at zero net disposal value. The Dover Corporation's total monthly sales of printed cloth equal the printing department's output.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Dover’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 $1,400,000 per month. Should Dover implement the change? Show your calculations.
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