Part A
Tank Corporation manufactures and sells 300,000electrical meters using a capacity of 110,000 machine hours, enoughto make 330,000 units each year, which usually includes 30,000units that have to be reworked. Contribution margin –CM - persaleable unit is $8. Additional costs per reworked unitare:
$7
Company engineers have devised a new process that wouldcompletely eliminate defects and therefore avoid the need forrework, and would actually increase capacity, however, this willadd $315,000 in fixed manufacturing overhead eachyear.
Required:
1. Determinethe impact of the new process if Tank were to produce the samequantity of units as in the past. Clearly show any cost savings andextra costs.
Part B
Assume thatTank has proceeded with the anticipated changes, and is exploringnew markets as a result of the engineering changes referred toabove aswell as the increase in capacity, and has accepted aproposal to make 20,000 units of a modified version of the meterwhich will generate $10 of contribution margin perunit.
Required:
2. ShouldTank go ahead with this new job? Explain with proof.
3. Whatother nonfinancial and qualitative factors should be considered inmaking this decision?
