Theory of constraints, throughput contribution, quality, relevant costs. Aardee Industries manufactures pharmaceutical products in two departments—Mixing and TabletMaking. Additional information on the two departments follows. Each tablet contains 0.5 gram of direct materials.

Mixing Tablet-Making Capacity per hour Monthly capacity (2,000 hours available in each ofmixing and tablet-making)

Monthly production Fixed operating costs (excluding direct materials)

Fixed operating costs per unit

($19,200 + 200,000; $46,800 -s- 390,000)

150 grams 300,000 grams 200,000 grams

$ 19,200

$ 0.096 per gram 200 tablets 400,000 tablets 390,000 tablets

$ 46,800

$ 0.12 per tablet The Mixing Department makes 200,000 grams of direct materials mixture (enough to make 400,000 tablets) because the Tablet-Making Department has only enough capac¬

ity to process 400,000 tablets. All direct materials costs are incurred in the Mixing Department. Aardee incurs $187,200 in direct materials costs. The Tablet-Making Department manufactures only 390,000 tablets from the 200,000 grams of mixture processed; 2.5 A of the direct materials mixture is lost in the tablet-making process. Each tablet sells for $1.20. All costs other than direct materials costs are fixed costs. The follow¬

ing requirements refer only to the preceding data; there is no connection between the situations.

Required 1. An outside contractor makes the following offer: ifAardee will supply the contractor with 10,000 grams of mixture, the contractor will manufacture 19,500 tablets for Aardee

(allowing for the normal 2.5% loss during the tablet-making process) at $0,144 per tablet. Should Aardee accept the contractor’s offer?
2. Another firm offers to prepare 20,000 grams of mixture a month from direct materials Aardee supplies. The company will charge $0,084 per gram of mixture. Should Aardee accept the company’s offer?
3. Aardee’s engineers have devised a method that would improve quality in the tablet¬
making operation. They estimate that the 10,000 tablets currently being lost would be saved. The modification would cost $8,400 a month. Should Aardee implement the new method?
4. Suppose that Aardee also loses 10,000 grams of mixture in its mixing operation. These losses can be reduced to zero if the company is willing to spend $10,800 per month in quality improvement methods. Should Aardee adopt the quality improvement method?
5. What are the benefits of improving quality at the mixing operation compared with the benefits of improving quality at the tablet-making operation?