The Wellesley Corporation makes printed cloth in two departments: Weaving and Printing. Direct material costs are Wellesley’s only variable costs. The demand for Wellesley’s cloth is very strong. Wellesley can sell whatever output quantities it produces at $1,250 per roll to a distributor who markets, distributes, and provides customer service for the product. Wellesley provides the following information:
Wellesley can start only 10,000 rolls of cloth in the Weaving department because of capacity constraints of the weaving machines. If the Weaving department produces defective cloth, the cloth must be scrapped and yields zero net disposal value. Of the 10,000 rolls of cloth started in the Weaving department, 500 (5%) defective rolls are produced. The cost of a defective roll, based on total (fixed and variable) manufacturing cost per roll incurred up to the end of the weaving operation, equals $785 per roll, as follows:
Direct material cost per roll (variable)………. $500
Fixed operating cost per roll ($2,850,000 ÷ 10,000 rolls). 285
Total manufacturing cost per roll in Weaving department.. $785
The good rolls from the Weaving department (called grey cloth) are sent to the Printing department. Of the 9,500 good rolls started at the printing operation, 950 (10%) defective rolls are produced and scrapped at zero net disposal value. The cost of a defective roll based on total (fixed and variable) manufacturing cost per unit incurred up to the end of the printing operation, equals $930 per roll, calculated as follows:
Total manufacturing cost per roll in Weaving department…… $785
Printing department manufacturing cost per roll
Direct material cost per roll (variable)…………. $100
Fixed operating cost per roll ($427,500 ÷ 9,500 rolls)…. ….. 45
Total manufacturing cost per roll in Printing department……. 145
Total manufacturing cost per roll……………. $930
The Wellesley Corporation’s total monthly sales of printed cloth equal the Printing department’s output. Each requirement refers only to the preceding data. There is no connection between the requirements.
1. The Printing department is considering buying 5,000 additional rolls of grey cloth from an outside supplier at $900 per roll. The Printing department manager is concerned that the cost of purchasing the grey cloth is much higher than Wellesley’s cost of manufacturing it.
The quality of the grey cloth acquired from the outside supplier is very similar to that manufactured in-house. The Printing department expects that 10% of the rolls obtained from the outside supplier will result in defective products. Should the Printing department buy the grey cloth from the outside supplier? Show your calculations.
2. Wellesley’s engineers have developed a method that would lower the Printing department’s rate of defective products to 6% at the printing operation. Implementing the new method would cost $350,000 per month. Should Wellesley implement the change? Show your calculations.
3. The design engineering team has proposed a modification that would lower the Weaving department’s rate of defective products to 3%. The modification would cost the company $175,000 per month. Should Wellesley implement the change? Show your calculations.