The Harvest Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 100,000 units per year. The demand for lamps is very strong. Harvest will be able to sell whatever output quantities it can produce at $ 50 per lamp. Harvest can start only 100,000 units into production in the molding department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped at a net disposal value of zero. Of the 100,000 units started at the molding operation, 10,000 defective units (10%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $ 24 per unit, as follows:
Direct materials (variable)................ $ 12 per unit
Direct manufacturing labor, setup labor, and materials-handling
labor (variable) )................... 2 per unit
Equipment, rent, and other allocated overhead, including inspection
and testing costs on scrapped parts ( fixed) )....... 10 per unit
Total) ....................... $ 24 per unit
Harvest’s designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $ 3 per lamp in the molding department.
1. Should Harvest use the new material? Show your calculations.
2. What nonfinancial and qualitative factors should Harvest consider in making the decision?