Question

Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA) manufactures plain

white and solid-colored T-shirts. Budgeted inputs include the following:

Price Quantity Cost per unit of output

Fabric	$ 12 per yard	0.50 yard per unit	$6 per unit
Labor	$12 per DMLH	0.25 DMLH per unit	$3 per unit
Dye* *For colored T-shirts only	$0.40 per ounce	5 ounces per unit	$2 per unit

Budgeted sales and selling price per unit are as follows:

Budgeted Sales Selling Price per Unit

	Budgeted Sales	Selling Price per Unit
White T-shirts	13,000 units	$12 per T-shirt
Colored T-shirts	59,000 units	$13 per T-shirt

USA has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.00 per ounce. The company would still need 5 ounces of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company $179,000 if it continues to use the harmful but less expensive dye.

1. Given the preceding information, would USA be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)

2. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to the new

dye. The production manager suggests trying Kaizen costing. If USA can reduce fabric and labor costs

each by 1% per month on all the shirts it manufactures, by how much will overall costs decrease at the

end of 12 months? (Round to the nearest dollar for calculating cost reductions.)

3. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are

there any problems with this plan?

Answer 1

Part 1)

To determine whether USA be better off financially by switching to the environmentally friendly dye, we need to calculate the increase/decrease in costs with the use of new dye as below:

Total Number of Units to Dye [A]	59,000
Difference in Cost [5*(1 - .40)] [B]	3.00
Total Increase in Costs with Use of New Dye (A*B)	$177,000

As the total increase in costs with the use of new dye ($177,000) is less than the fine ($179,000) imposed by the agency, it can be concluded that USA would be better off financially by switching to the environmentally friendly dye.

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Part 2)

The costs associated with the use of Kaizen costing are calculated as follows:

Original Monthly Costs without the use of Kaizen Costing = Total Units/Number of Months*(Fabric Cost per Unit + Labor Cost per Unit)*Number of Months = (59,000 + 13,000)/12*(6 + 3) = $54,000

Total Annual Fabric and Labor Costs without the use of Kaizen Costing = 54,000*12 = $648,000

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Now, we can calculate monthly costs with Kaizen Costing as below:

	Fabric Cost	Labor Cost
Month 1	36,000	18,000
Month 2	35,640	17,820
Month 3	35,284	17,642
Month 4	34,931	17,465
Month 5	34,581	17,291
Month 6	34,236	17,118
Month 7	33,893	16,947
Month 8	33,554	16,777
Month 9	33,219	16,609
Month 10	32,887	16,443
Month 11	32,558	16,279
Month 12	32,232	16,116
Total	$409,014	$204,507

Total Annual Fabric and Labor Costs with Kaizen Costing = 409,014 + 204,507 = $613,522

Difference = Total Annual Fabric and Labor Costs without the use of Kaizen Costing - Total Annual Fabric and Labor Costs with Kaizen Costing = 648,000 - 613,522 = $34,478

With the use of new dye and kaizen costing, the overall costs would increase by $142,522 (177,000 - 34,478). However, these costs are less than the fine imposed by the agency. Therefore, US Apparel would be better off by switching over to new dye.

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Part 3)

The reduction in material cost can be achieved with the use of appropriate quality of fabric and through reduction in wastage of material. Multiple vendors can be used to source materials. With more vendors, the company will be able to negotiate better prices and credit terms. Labor cost can be reduced by hiring properly trained employees or by providing adequate training to employees on a regular basis. Well trained employees would be able to use the material and their time in a more efficient manner, thereby, reducing the wastage of both material and time. Employees should be encouraged to identify non-value adding activities and report them to management on a timely basis.