Aardee Industries manufactures pharmaceutical products in two departments: Mixing and Tablet-Making. Additional information on the two departments follows. Each tablet contains 0.5 gram of direct materials.
The Mixing Department makes 200,000 grams of direct materials mixture (enough to make 400,000 tablets) because the Tablet-Making Department has only enough capacity to process 400,000 tablets. All direct material costs are incurred in the Mixing Department. Aardee incurs $156,000 in direct material costs.
The Tablet-Making Department manufactures only 390,000 tablets from the 200,000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making process. Each tablet sells for $1. All costs other than direct material costs are fixed costs. The following requirements refer only to the preceding data. There is no connection between the requirements.
1. An outside contractor makes the following offer: If Aardee will supply the contractor with 10,000 grams of mixture, the contractor will manufacture 19,500 tablets for Aardee (allowing for the normal 2.5% loss of the mixture during the tablet-making process) at $0.12 per tablet. Should Aardee accept the contractor’s offer? Show your calculations.
2. Another company offers to prepare 20,000 grams of mixture a month from direct materials Aardee supplies. The company will charge $0.07 per gram of mixture. Should Aardee accept the company’s offer? Show your calculations.
3. Aardee’s engineers have devised a method that would improve quality in the Tablet-Making Department. They estimate that the 10,000 tablets currently being lost would be saved. The modification would cost $7,000 a month. Should Aardee implement the new method? Show your calculations.
4. Suppose that Aardee also loses 10,000 grams of mixture in its Mixing Department. These losses can be reduced to zero if the company is willing to spend $9,000 per month in quality-improvement methods. Should Aardee adopt the quality-improvement method? Show your calculations.
5. What are the benefits of improving quality in the Mixing Department compared with improving quality in the Tablet-Making Department?