wwvS ^P?VTent’ rflevant COStS’ and relevant revenues-The Thomas Corporation sells 300,000 V262 valves to the automobile and truck industry. Thomas has a capacity of 110 000 and nan P duCC 3 ValveS per machineTour. V262’s contribution margin per unit is $9.60. Thomas sells only 300,000 valves because 30,000 valves (10% of the good valves) need to be reworked. It takes one machine-hour to rework 3 valves so that 10,000 hours ofcapacity are lost m the rework process. Thomas’s rework costs are $252,000. Rework costs consist of '

766 CHAPTER 19 Direct materials and direct rework labour (variable costs)

Fixed costs of equipment, rent, and overhead allocation

$3.60 per unit

$4.80 per unit Thomas’s process designers have come up with a modification that would maintain the speed of the process and would ensure 100% quality and no rework. The new process would cost $378,000 per year. The following additional information is available:
The demand for Thomas’s V262 valves is 370,000 per year.
The Jackson Corporation has asked Thomas to supply 22,000 T971 valves if Thomas implements the new design. The contribution margin per T971 valve is $12. Thomas can make two T971 valves per machine-hour on the existing machine with 100% quality and no rework.
Required !• Suppose Thomas’s designers implemented the new design. Should Thomas acceptJackson’s order for 22,000 T971 valves? Explain.
2. Should Thomas implement the new design?
3. What nonfinancial and qualitative factors should Thomas consider in deciding whether to implement the new design?