Part A

Tank Corporation manufactures and sells 300,000 electrical meters using a capacity of 110,000 machine hours, enough to make 330,000 units each year, which usually includes 30,000 units that have to be reworked. Contribution margin CM - per saleable unit is $8. Additional costs per reworked unit are:

$7

Company engineers have devised a new process that would completely eliminate defects and therefore avoid the need for rework, and would actually increase capacity, however, this will add $315,000 in fixed manufacturing overhead each year.

Required:

1. Determine the impact of the new process if Tank were to produce the same quantity of units as in the past. Clearly show any cost savings and extra costs.

Part B

Assume that Tank has proceeded with the anticipated changes, and is exploring new markets as a result of the engineering changes referred to above aswell as the increase in capacity, and has accepted a proposal to make 20,000 units of a modified version of the meter which will generate $10 of contribution margin per unit.

Required:

2. Should Tank go ahead with this new job? Explain with proof.

3. What other nonfinancial and qualitative factors should be considered in making this decision?