Chapter 6, Problem 6.36P

Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA) manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following:

*For colored T-shirts only

Budgeted sales and selling price per unit are as follows:

	Budgeted Sales	Selling Price per Unit
White T-shirts	10,000 units	$12 per T-shirt
Colored T-shirts	50,000 units	$15 per T-shirt

USA has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.25 per ounce. The company would still need 4 ounces of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company $130,000 if it continues to use the harmful but less expensive dye.

1. 1. Given the preceding information, would USA be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)
2. 2. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to the new dye. The production manager suggests trying Kaizen costing. If USA can reduce fabric and labor costs each by 1% per month on all the shirts it manufactures, by how much will overall costs decrease at the end of 12 months? (Round to the nearest dollar for calculating cost reductions.)
3. 3. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan?