Lappalainen Oy manufactures pharmaceutical products in two departments: Mixing and Tablet Making. Additional information on the two

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Lappalainen Oy manufactures pharmaceutical products in two departments: Mixing and Tablet Making. Additional information on the two departments follows. Each tablet contains 0.5 gram of direct materials.
Lappalainen Oy manufactures pharmaceutical products in two departments: Mixing and

The Mixing Department makes 200 000 grams of direct materials mixture (enough to make 400 000 tablets) because the Tablet-Making Department has only enough capacity to process 400 000 tablets. All direct materials costs are incurred in the Mixing Department. Lappalainen incurs ‚¬156 000 in direct materials costs. The Tablet-Making Department manufactures only 390 000 tablets from the 200 000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making process. Each tablet sells for ‚¬1. All costs other than direct materials costs are fixed costs. The following requirements refer only to the preceding data; there is no connection between the situations.
Required
1. An outside contractor makes the following offer: if Lappalainen will supply the contractorwith 10 000 grams of mixture, the contractor will manufacture 19 500 tablets for Lappalainen (allowing for the normal 2.5% loss during the tablet-making process) at ‚¬0.12 per tablet. Should Lappalainen accept the contractor's offer?
2 Another firm offers to prepare 20 000 grams of mixture per month from direct materials Lappalainen supplies. The company will charge ‚¬0.07 per gram of mixture. Should Lappalainen accept the company's offer?
3 Lappalainen's engineers have devised a method that would improve quality in the tablet-making operation. They estimate that the 10 000 tablets currently being lost would be saved. The modification would cost ‚¬7000 a month. Should Lappalainen implement the new method?
4 Suppose that Lappalainen also loses 10 000 grams of mixture in its mixing operation. These losses can be reduced to zero if the company is willing to spend ‚¬9000 per month on quality-improvement methods. Should Lappalainen adopt the quality-improvement method?
5 What are the benefits of improving quality at the mixing operation compared with the benefits of improving quality at the tablet-making operation?

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Management and Cost Accounting

ISBN: 978-1405888202

4th edition

Authors: Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, George Foster

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