Question

Question 4 (10 Marks) The Brightlight Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year. The demand for lamps is very strong. Brightlight will be able to sell whatever output quantities it can produce at $65 per lamp. Brightlight 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. Of the 200,000 units started at the molding operation, 15,000 defective 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 $25 per unit, as follows: $13 per unit $3 per unit Direct materials (variable) Direct manufacturing labour, setup labour, and materials-handling labour (variable) Equipment, rent, and other allocated overhead, including inspection and testing costs on scrapped parts (fixed) Total $9 per unit $25 per unit Brightlight'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 $4 per lamp in the molding department. Required: a. On financial considerations alone, should Brightlight use the new material? Show your calculations. (6 marks) b. Briefly explain two non-financial and/or qualitative factors that Brightlight should consider in making the decision. (4 marks)

Answer 1

The Budgeted Sales on the current capacity of production would be $ 13,000,000 [200,000 X $65]

Let us consider the proposal on financial considerations first:

Proposal 1 Without using New Material

Total Quantity produced = 200,000

Saleable Quantity = 200000-15000= 185,000

Total Sales [185000 X $65] = 12,025,000

Less: Total Cost [200000 X $25] = 5,000,000

Gross Profit = 7,025,000

Proposal 2 With New Material

Total Quantity produced = 200,000

Saleable Quantity = 200,000-0 = 200,000

Total Sales [200000 X $65] = 13,000,000

Less: Total Cost [200000 X $29] = 5,800,000

Gross Profit = 7,200,000

After considering both the proposals we can say that the Proposal 2 is viable as per the financial performance is concerned as the Proposal 2 provided Gross profit $175,000 more than Proposal 1