The Rainbow Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 140,000 units per year. The demand for lamps is very strong. Rainbow will be able to sell whatever output quantities it can produce at $65 per lamp. Rainbow can start only 140,000 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 140,000 units started at the molding operation, 21,000 defective units (15%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $22 per unit, as follows:

Direct materials (variable) $12 per unit

Direct manufacturing labor, setup labor, and materials-handling labor (variable) 2 per unit

Equipment, rent, and other allocated overhead, including inspection and testing

costs on scrapped parts (fixed) 8 per unit

Total $22 per unit

Rainbow's 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

$6 per lamp in the molding department.

REQUIRED

1.	Should Rainbow use the new material? Show your calculations.( Start by calculating the relevant costs of using the new material. Determine the formula, then enter the amounts to calculate the relevant costs.)
2.	What nonfinancial and qualitative factors should Rainbow consider in making the decision?