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Metallic, Inc., produces metal gates in two processes: bending, in which metal is bent to the...

Metallic, Inc., produces metal gates in two processes: bending, in which metal is bent to the correct shape, and welding, in which the bent metal pieces are welded into gates. The bending process has a capacity of 19,500 units per year; welding has a capacity of 24,500 units per year. Demand is strong. At a sales price of $760 per unit, the company can sell whatever output it can produce.

Metallic can start only 19,500 units into production in the Bending department because of capacity constraints. At present, 2,925 units are found to be defective in the Bending department each year. Defective units are not detected until the end of production in the Bending department. At that point, the 2,925 defective units are scrapped. Unit costs in the Bending department for both good and defective units equal $427 per unit, including an allocation of the total fixed manufacturing costs of $1,482,000 per year to units.

Direct materials (variable) $ 263
Direct manufacturing, setup, and materials handling labor (variable) 88
Depreciation, rent, and other overhead (fixed) 76
Total unit cost $ 427

The fixed cost of $76 per unit is the allocation of total fixed costs of the bending department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the bending department are good or defective.)

The good units from the bending department are sent to the welding department. Variable manufacturing costs in the welding department are $68 per unit and fixed manufacturing costs are $570,000 per year. There is no scrap in the welding department. Therefore, the company's total sales quantity equals the bending department's good output. The company incurs no other variable costs.

The company's designers have discovered that, by using a new type of direct material, the company could reduce scrap in the bending department from 2,925 units to 975 units. Using the new material would increase the direct materials costs to $351 per unit in the bending department for all 19,500 units. Recall that only 19,500 units can be started each year.

Required:

a. Compute profit under each alternative. Assume that inspection and testing costs of $273,000 per year will be reduced by $20,000 with the new materials. Fixed costs in the bending department will remain the same whether 16,575 or 18,525 units are produced.

b. Should Metallic use the new material and improve quality?

Yes
No

Solutions

Expert Solution

ekkarill92 answered 1 year ago
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