Designer Frames makes bicycle frames in two processes, tubingand welding. The tubing process has a capacity of 125,000 units peryear; welding has a capacity of 150,000 units per year. Costinformation follows:
Design of product and process costs | $100,000 |
Inspection and testing costs | 42,500 |
Scrap cost per unit (all in the tubing dept.) | 34.00 |
The company enjoys high demand for its products. Designer Framescan sell whatever output it can produce for the market price of $55per frame. Designer Frames can start only 125,000 units intoproduction in the tubing department because of capacity constraintson the tubing machines. The company scraps all defective unitsproduced in the tubing department. Of the 125,000 units started inthe tubing operation, 12,500 units (10 percent) are scrapped at theend of the production process. Scrap costs, based on total (fixedand variable) manufacturing costs incurred in the tubing operation,equal $34.00 per unit as follows:
Direct materials (variable) | $17.50 |
Direct manufacturing, setup, and materials handling labor(variable) | 6.50 |
Depreciation, rent, and other overhead (fixed) | 10.00 |
| $34.00 |
The “$10 fixed cost” is the portion of the total fixed costs of$1,250,000 allocated to each unit, whether good or defective. Thegood units from the tubing department are sent to the weldingdepartment. Variable manufacturing costs in the welding departmentare $2.00 per unit. There is no scrap in the welding department.Therefore, Designer Frames’ total sales quantity equals the tubingdepartment’s output. Designer Frames incurs no other variablecosts. Designer Frames’ designers have discovered that using adifferent type of material in the tubing operation would reducescrap to zero, but it would increase the variable costs per unit inthe tubing department by $2.25. Recall that only 125,000 units canbe started each year.
Required:
- What is the additional direct materials cost of implementingthe new method?
The additional direct material costfor implementing the new method would be $2.25 per unit and a totalof $281,250.
b. What is the additional benefit to DesignerFrames from using the new material and improving quality?
c. Should Designer Frames use the newmaterials?
d. Draft brief note to management describingother nonfinancial and qualitative factors should Designer Framesconsider in making the decision?
