Quality improvement relevant costs, and relevant revenues. The Tan Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year. The demand for lamps is very strong. Tan will be able to sell whatever output quantities it can produce at$40 per lamp. Tan can start only 200,000 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 200,000 units started at the molding operation, 30,000 defective units (15%) are produced. The cost of a defective unit based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $25 per unit as follows:

Tan’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$4 per lamp in the Molding Department.

1. Should Tan use the new material? Show your calculations.

2. What non-financial and qualitative factors should Tan consider in making the decision?

Direct materials (variable) $16 per unit 3 per unit Direct manufacturing labor, setup labor, and materials-handling labor (variable) Equipment, rent and other allocated overhead, including inspection and testing 6 per unit $25 per unit costs on scrapped parts (fixed) Total