6-31Budgeted costs, Kaizen improvements. Trendy T-Shirt Factory manufactures plain white and solid-colored T-shirts. Inputs include the following:

Price

Quantity

Cost per unit of output

Fabric

$ 7 per yard

1 yard per unit

$7 per unit

Labor

$14 per DMLH

0.25 DMLH per unit

$3.50 per unit

Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of $0.40 per ounce. The shirts sell for $14 each for white and $18 each for colors. The company expects to sell 12,000 white T-shirts and 60,000 colored T-shirts uniformly over the year.

Trendy has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.25 per ounce. The company would still need 3 ounces of dye per shirt. Trendy is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company $120,000 if it continues to use the harmful but less expensive dye.

Required

1.Given the preceding information, would Trendy be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)

2.Assume Trendy chooses to be environmentally responsible regardless of cost, and it switches to the new dye. The production manager suggests trying Kaizen costing. If Trendy can reduce fabric and labor costs each by 1% per month, how close will it be at the end of 12 months to the profit it would have earned before switching to the more expensive dye? (Round to the nearest dollar for calculating cost reductions.)

3.Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan? (Horngren 237)

Horngren, Charles T., Srikant Datar, Madhav Rajan. Cost Accounting, VitalSource for DeVry University, 15th Edition. Pearson Learning Solutions, 2014-02-01. VitalBook file.