Question

Dixson Beverages manufactures its own soda pop bottles. The bottles are made from polyethylene terephthalate (PET), a lightweight yet strong plastic. Dixson uses as much PET recycled resin pellets in its bottles as it can, both because using recycled PET helps Dixson to meet its sustainability goals and because recycled PET is less expensive than virgin PET. Dixson is continuing to search for ways to reduce its costs and its impact on the environment. PET plastic is melted and blown over soda bottle molds to produce the bottles. One idea Dixson’s engineers have suggested is to retrofit the soda bottle molds and change the plastic formulation slightly so that 10% less PET plastic is used for each bottle. The average kilograms of PET per soda bottle before any redesign is 0.01 kg. The cost of retrofitting the soda bottle molds will result in a one- time charge of $ 24,478, while the plastic reformulation will cause the average cost per kilogram of PET plastic to change from $ 5.00 to $ 5.30. Dixson’s management is analyzing whether the change to the bottle molds to reduce PET plastic usage should be made. Management expects the following number of soda bottles to be used in the upcoming year:



For the upcoming year, management expects the beginning inventory of PET to be 8,400 kilograms, while ending inventory is expected to be 8,040 kilograms. During the first three quarters of the year, management wants to keep the ending inventory of PET at the end of each quarter equal to 30% of the following quarter’s PET needs.

Requirements
1. Using the original data (before any redesign of soda bottles), prepare a direct materials budget to calculate the cost of PET purchases in each quarter for the upcoming year and for the year in total.
2. Assume that the company retrofits the soda bottle molds and changes the plastic formulation slightly so that less PET plastic is used in each bottle. Now prepare a direct materials budget to calculate the cost of PET purchases in each quarter for the up-coming year and for the year in total for this possible scenario.
3. Compare the cost of PET plastic for Requirement 1 (original data) and for Requirement 2 (making change to using less PET). What is the direct material cost savings from making the change to using less PET? Compare the total of those savings to the cost of retrofitting the soda bottle molds. Should the company make the change? ­Explain yourrationale.


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  • CreatedAugust 27, 2014
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