Quality improvement, theory of constraints. The Wellesley Corporation makes printed 1. Incremental revenues, cloth in two departments: Weaving and Printing. Direct material costs are Wellesley’s only

$5,625,000 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:

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%) defec-
960 | cuapter is tive 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 inéurred up to ‘the end of the printing operation, equals $930 per roll, calculated as follows:

‘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.

REQUIRED 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 man- ufactured 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 Depart- ment'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.LO1

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Weaving Monthly capacity 10,000 rolls Printing 15,000 rolls Monthly production 9,500 rolls 8,550 rolls Direct material cost per roll of cloth processed at each operation $ 500 $ 100 Fixed operating costs $2,850,000 $427,500 Fixed operating cost per roll ($2,850,000, 9,500 rolls; $427,500, 8,550 rolls) $ 300 per roll $ 50 per roll