The Ethan Corporation sells200,000V262 valves to the automobile and truck industry. Ethan has a capacity of120,000machine-hours and can produce two valves per machine-hour. V262's contribution margin per unit is$9.Ethansells only200,000valves because40,000valves(20%of the good valves) need to be reworked. It takes one machine-hour to rework two valves, so20,000hours of capacity are used in the rework process. Ethan's rework costs are

$320,000.Rework costs consist of the following:

 

Direct materials and direct rework labor(variable costs):$2per unit

Fixed costs ofequipment, rent, and overheadallocation:$6per unit

Ethan'sprocess designers have developed a modification that would maintain the speed of the process and ensure100% quality and no rework. The new process would cost$424,000per year. The following additional information isavailable:

The demand forEthan'sV262 valves is270,000per year.

TheColtonCorporation has askedEthanto supply26,000T971 valves(another product) ifEthanimplements the new design. The contribution margin per T971 valve is$9.Ethancan makeoneT971valvepermachine-hour with100% quality and no rework.

1.	Suppose Ethan's designers implement the new design. Should Ethan accept Colton's order for 26,000 T971valves? Show your calculations.
2.	Should Ethan implement the newdesign? Show your calculations.
3.	What nonfinancial and qualitative factors should Ethan consider in deciding whether to implement the newdesign?

Answer rating: 100% (QA)

Ethan Corporation Decision Analysis 1 Accepting Coltons Order for T971 Valves With the new design no rework Ethans capacity 120000 machinehours T971 v... View the full answer