20-31 Quality improvement, relevant costs, and relevant revenues. The Azure Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 220,000 units per year. The demand for lamps is very strong. Azure will be able to sell whatever output quantities it can produce at $35 per lamp.

Azure can start only 220,000 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 220,000 units started at the molding operation, 44,000 defective units (20%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $26 per unit, as follows:

Direct materials (variable) $17 per unit Direct manufacturing labor, setup labor, and materials-handling labor (variable) 3 per unit Equipment, rent, and other allocated overhead, including inspection and testing costs on scrapped parts (fixed) 6 per unit Total $26 per unit Azures 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 $11 per lamp in the molding department.

Should Azure use the new material? Show your calculations.

What nonfinancial and qualitative factors should Azure consider in making the decision?