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142.
143.
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144.
Jessica Long, the production manager of Maxim Corporation is frustrated by the
company's policy of not scrapping defective units but reworking them. She has pointed out
several times to senior management that some units are beyond rework and should be
scrapped. According to her, in most cases, it would be cheaper to scrap and build a new
unit from scratch rather than trying to rework a defective unit. However, Peter Crouch, the
CEO, is not convinced. He wants his controller, Melinda Gates, to gather some
information.
After researching the problem, Gates provides the following information:
Selling price:
$132
per unit
Manufacturing costs:
Direct materials
27
Direct labor
32
Variable overhead
24
Variable marketing costs
10
Fixed overhead
32
Reworking costs:
Materials:
$25
Labor:
48
Direct machining costs:
35
Gates also observes that reworking a defective product consumes more labor time than
making a unit from scratch. As a result, for every three units reworked, Maxim forgoes the
production and sale of two units.
Required:
(a) Do you agree with Jessica Long that it is cheaper to scrap than rework a defective
unit? Show your computations.
(b) How can the cost information generated by Gates be useful in reducing the number of
defectives?
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145.
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146.
Thompson Metal Corporation (TMC) supplies various types of machine tools to
manufacturing companies. TMC has always paid a lot of attention to the quality of its
products. Recently, an outside supplier has approached TMC to supply an important and
intricate component of one of its more advanced tools that TMC has been manufacturing
in-house. Sam Weiss, a junior accountant at TMC, has collected the following information
regarding this proposal.
The cost of manufacturing one unit of this component internally are as follows:
Direct materials:
$29.60
Direct labor:
13.00
Variable
overhead:
19.50
(@150% of direct labor
cost)
Fixed overhead:
26.00
(@200% of direct labor
cost)
Total cost:
$88.10
The outside supplier has quoted a price of $90 per unit for supplying this component. The
following is a conversation that took place among the manufacturing manager (Dana
Rice), buyer (Emily Scanlon), and Sam Weiss.
Weiss: I think that we should continue to manufacture internally because we can save
$1.90 per unit on this component.
Rice: According to your report, we would save $1.90 per unit, but I do not agree with those
numbers.
Weiss: What do you mean? I have followed the same costing guidelines this company has
used for years. I have even cross-checked my numbers with historical data and know for
sure that the overhead rates which I have used are correct.
Rice: I am sure you have done your job thoroughly, but I think that our costing system is
archaic. This component is complex and difficult to manufacture. I believe that our
overhead allocation method does not accurately capture the production difficulties and
the additional resources that are devoted to the manufacture of this component. For
example, a significant portion of our quality problems are due to this component. We
spend close to a third of our quality inspection time on just this component alone, but that
is not reflected. These quality problems cause delays in getting this component to the
assembly department, and that causes a delay in getting the final product to the
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147.
Mulvey Corporation manufactures large kitchen appliances. The following represents
financial information for two years:
2016
2017
Sales
$7,840,000
$7,040,000
Costs:
Process Inspection
52,800
60,000
Scrap
57,600
60,200
Quality Training
610,000
440,000
Warranty Repairs
140,000
150,000
Testing Equipment
230,000
230,000
Resolving Customer
Complaints
89,000
108,400
Rework
544,000
390,000
Preventative Maintenance
440,000
304,000
Material Inspection
210,000
150,000
Field Testing
300,000
400,000
Total costs
$2,673,400
$2,292,600
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148.
