The Carson Corporation sells 250,000 V262 valves to the automobile and truck industry. Carson has a capacity of 150,000 machine- hours and can produce 2 valves per machine- hour. V262’ s contribution margin per unit is $ 10. Carson sells only 250,000 valves because 50,000 valves (20% of the valves sold) need to be reworked. It takes one machine- hour to rework 2 valves, so 25,000 hours of capacity are used in the rework process. Carson’s rework costs are $ 450,000. Rework costs consist of the following:
• Direct materials and direct rework labor (variable costs): $ 5 per unit
• Fixed costs of equipment, rent, and overhead allocation: $ 4 per unit Carson’s process designers have developed a modification that would maintain the speed of the process and ensure 100% quality and no rework. The new process would cost $ 736,000 per year. The following additional information is available:
• The demand for Carson’s V262 valves is 320,000 per year.
• The Brady Corporation has asked Carson to supply 17,000 T971 valves (another product) if Carson implements the new design. The contribution margin per T971 valve is $ 15. Carson can make one T971 valve per machine- hour with 100% quality and no rework.
1. Suppose Carson’s designers implement the new design. Should Carson accept Brady’s order for 17,000 T971 valves? Show your calculations.
2. Should Carson implement the new design? Show your calculations.
3. What nonfinancial and qualitative factors should Carson consider in deciding whether to implement the new design?