The Brightlight Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 150,000 units per year. The demand for lamps is very strong. Brightlight will be able to sell whatever output quantities it can produce at $45 per lamp.
Brightlight can start only 150,000 units into production in the molding department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped at a net disposal value of zero. Of the 150,000 units started at the molding operation, 15,000 defective units (10%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $25 per unit, as follows:

Required

Brightlight’s designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $4 per lamp in the molding department.
1. Should Brightlight use the new material? Show your calculations.
2. What nonfinancial and qualitative factors should Brightlight consider in making the decision?

Transcribed Image Text:

Direct materials (variable) Direct manufacturing labor, setup labor, and materials-handling labor (variable) Equipment, rent, and other allocated overhead, including inspection and testing costs on scrapped parts (fixed) Total $13 per unit 3 per unit 9 per unit $25 per unit