Please help me, I checked the solution but I don't understand.

Would you please explain what is the logic of the solution?

I don't understand why we need to add the current amount that we already sell to Amlan (120,000 unit) tack in to calculate Contribution Margin.

I found the solution from another source, it is not the same method. That makes me more confused. Which one is the correct one?

Problem TQM at the Stowbridge Division The Stowbridge Division is analyzing expanding its total quality management program. It already has a TQM program in place. However, one of its customers, Amlan Equipment, is asking all suppliers to become ISO 9000 qualified, a process that certifies that the firm meets various standards. Once suppliers are ISO 9000 qualified, Amlan can reduce its inspection costs. Not all of the suppliers will be certified, and those that are will receive more business from Amlan. Amlan purchases a stainless steel rotor from Stowbridge. After earning ISO 9000 certification Stowbridge estimates that it will have to incur the following annual incremental costs as long as it wants to maintain its certification: Annual Incremental Costs to Be ISO 9000 Certified Training Inspection Prevention $74,000 $96,000 $62,000 Direct materials +10% Direct labor +15% To manufacture the current quality of the rotors (before ISO 9000 certification), the budgeted selling price and standard cost data per rotor follow Selling price $14.00 Less standard costs: $ 4.30 Direct materials Direct labor 2.40 Manufacturing overhead (all fixed) Selling and administrative (all variable) 2.05 1.60 Unit cost $10.35 Unit profit 3.65 Unless Stowbridge receives ISO 9000 certification, it will lose Amlan's business of 120,000 units per year. Management estimates that the higher quality of the rotor that meets quality criteria will allow Stowbridge to add 14,000 rotors to its existing sales from new and continuing customers. Stowbridge is currently selling 480,000 rotors per year, including the Amlan sales. The 480,000 current sales amount to 63 percent of plant capacity. The additional 14,000 units sold can be manu- factured without excee ding plant capacity. The higher-quality process after ISO 9000 certification is received would apply to all the rotors produced Required: Should Stowbridge seek ISO 9000 certification? Support your recommendation with an analysis of the costs and benefits of certification Step 1 of 5A Total Quality Management: Under this technique, the entire management team and the workers of the company are told to provide quality services to the customers. The entire team of the company works for the improvement of the products, services rendered by the company, their internal controls, and most importantly the culture of the company. Comment Step 2 of 5 In the present case, the annual costs incurred on the certification by the company and the bifurcation of cost and selling price related to the product is also provided. The company in the present case is thinking of expanding its business line. This decision is simply based upon the careful analysis of both profit and the cost. If the company is able to generate revenue from the expanded quantity then the company shall opt for the expansion Compute the amount of additional revenue from expansion with the help of MS-Excel as follows: A Particulars Amount 1 2 Sales (In units) 120000 3 Additional Sales (In units) 4 Total Sales (In units) 5 Contribution Margin 14000 =+B2+B3 5.7 6 Less: 7 Additional Costs -Training Cost Inspection Cost 10 - Prevention Cost 11- Direct Materials Cost 74000 8 96000 62000 212420 12 (S4.30*S494,000*10% 177840 13 - Direct Labor Cost 14 ($2.40*S494,000*15%) =SUM(B8B13) =OLE_LINK1-C15 15 Total Additional Costs 16 Net Additional Amount of Revenue Comment Step 3 of 5A The result of the above calculations is as follows Particulars Amount Sales (In units) 120000 Additional Sales (In units) 14000 Total Sales (In units) 134000 Contribution Margin $763.800.00 $5.70 Less: Additional Costs |- Training Cost Inspection Cost $74,000.00 $96,000.00 - Prevention Cost $62,000.00 - Direct Materials Cost $212,420.00 (S4.30 $494,000*10%) $177.840.00 - Direct Labor Cost ($2.40 $494,000*15%) Total Additional Costs $622,260.00 $141,540.00 Net Additional Amount of Revenue Therefore the additional amount of revenue from expansion comes out to be $141,540 Comment Step 4 of 5A Working Notes: Compute the amount of contribution margin as follows: Contribution Margin = Selling Price - Direct Materials- Direct Labor-Selling and Administrative $14- $4.30-$2.40-$1.60 $5.70 So the amount of Contribution Margin per unit of sales comes out to be $5.70. Comment Step 5 of 5 Compute the amount of units sold after expa as follows: Total Units Units Currently Sold+ Units Increased Due to Expansion 480,000+14,000 =494.000 So the total number of units comes to be 494,000 Nelli Mw alilino Problem 14-10 Stowbridge Divison TQM of rotors before IS0 9000 Volume 480,000 Amount Total for Per Unit Year Particulars 14.00 6,720,000 Selling Price Direct Material 4.30 2,064,000 1,152,000 Direct Labour 2.40 Mfq Overhead (Fixed) 2.05 984,000 Variable Overheads 1.60 768,000 10.35 4,968,000 Total Cost 1,752,000 Unit Profit 3.65 Stowbridge Divison TQM of rotors with ISO 9000 Stowbridge Divison TQM of rotors with ISO 9000 Volume Volume 494.000 480000 761,000 76190S Amount Total for Per Unit Year Amount Old Cost Delta Partioulars Particulars Per Unit Total for Year Selling Price 10,654,000 Selling Price 14.00 6,916,000 14.00 14.00 Direct Material Direct Material 4.30 3,599,530 4.73 2,336,620 0.43 4.73 2.76 Direct Labour 1,363,440 2.40 0.36 Direct Labour 2.76 2,100,360 Mfg Overhead (Fixed) Mfq Overhead (Fixed) 2.05 1,012,700 2.05 2.05 1,560,050 Additional Cost of ISO 9000 232,000 Additional Cost of ISO 9000 232,000 0.47 0.47 0.30 Variable Overheads 1.60 790,400 1.60 Variable Overheads 1.60 1,217,600 10.35 Total Cost Total Cost 11.61 5,735,160 1.26 11.44 8,709,540 Unit Profit 2.39 1,180,840 3.65 (1.26) Unit Profit 2.56 1,944,460 It is assumed that the number of more units vill be sold due to improved Quality and ISO 9000. The capacity used is by selling 480,000 is only 63 per cent If more unitere sold it vill improve the profit of Stovbride Division and It is benefical to ao for ISO 9000 Certification