Q3 Part A

Polaris 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 re- worked unit : $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:

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

Part B

Assume that Polaris has proceeded with the anticipated changes, and is explor-

ing new markets as a result of the engineering changes referred to above, along

with 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:

Should Polaris go ahead with this new job? Show proof, and explain.

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