Chapter 19, Problem 19.31P

Quality improvement, relevant costs, and relevant revenues. The Tristan Corporation sells 250,000 V262 valves to the automobile and truck industry. Tristan has a capacity of 150,000 machine-hours and can produce two valves per machine-hour. V262’s contribution margin per unit is $7. Tristan sells only 250,000 valves because 50,000 valves (20% of the good valves) need to be reworked. It takes 1 machine-hour to rework two valves, so 25,000 hours of capacity are used in the rework process. Tristan’s rework costs are $550,000. Rework costs consist of the following:

• Direct materials and direct rework labor (variable costs): $5 per unit
• Fixed costs of equipment, rent, and overhead allocation: $6 per unit

Tristan’s process designers have developed a modification that would maintain the speed of the process and ensure 100% quality and no rework. The new process would cost $538,000 per year. The following additional information is available:

• The demand for Tristan’s V262 valves is 400,000 per year.
• The Colton Corporation has asked Tristan to supply 27,000 T971 valves (another product) if Tristan implements the new design. The contribution margin per T971 valve is $12. Tristan can make one T971 valve per machine-hour with 100% quality and no rework.

1. 1. Suppose Tristan’s designers implement the new design. Should Tristan accept Colton’s order for 27,000 T971 valves? Show your calculations.

Required

1. 2. Should Tristan implement the new design? Show your calculations.
2. 3. What nonfinancial and qualitative factors should Tristan consider in deciding whether to implement the new design?