Agnello Industries manufactures pharmaceutical products in two departments: mixing and tablet making. Additional information on the two departments follows. Each tablet contains 0.7 gram of direct materials.

The mixing department makes 210,000 grams of direct materials mixture (enough to make 300,000 tablets) because the tablet- making department has only enough capacity to process 300,000 tablets. All direct material costs of $ 147,000 are incurred in the mixing department. The tablet- making department manufactures only 294,000 tablets from the 210,000 grams of mixture processed; 2% of the direct materials mixture is lost in the tablet- making process. Each tablet sells for $ 1.25. All costs other than direct material costs are fixed costs. The following requirements refer only to the preceding data. There is no connection between the requirements.

Required

1. An outside contractor makes the following offer: If Agnello will supply the contractor with 12,000 grams of mixture, the contractor will manufacture 16,800 tablets for Agnello (allowing for the normal 2% loss of the mixture during the tablet- making process) at $ 0.15 per tablet. Should Agnello accept the contractor’s offer? Show your calculations.

2. Another company offers to prepare 21,000 grams of mixture a month from direct materials Agnello supplies. The company will charge $ 0.11 per gram of mixture. Should Agnello accept the company’s offer? Show your calculations.

3. Agnello’s engineers have devised a method that would improve quality in the tablet-making department. They estimate that the 6,000 tablets currently being lost would be saved. The modification would cost $ 6,000 a month. Should Agnello implement the new method? Show your calculations.

4. Suppose that Agnello also loses 6,000 grams of mixture in its mixing department. The company can reduce these losses to zero if it spends $ 10,000 per month in quality- improvement methods. Should Agnello adopt the quality- improvement method? Show your calculations.

5. What are the benefits of improving quality in the mixing department compared with improving quality in the tablet- making department?

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Mixing Tablet Making Capacity per hour 200 grams 120 tablets Monthly capacity (2,500 hours available in each department) 500,000 grams 300,000 tablets Monthly production 210,000 grams 294,000 tablets Fixed operating costs (excluding direct materials) $14,700 $35,280 Fixed operating cost per unit ($14,700 - 210,000 grams; $35,280 - 294,000 tablets) $0.07 per gram $0.12 per tablet