Question: The Brightlight Corporation uses multicolored
The Brightlight Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 150,000 units per year. The demand for lamps is very strong. Brightlight will be able to sell whatever output quantities it can produce at $45 per lamp.
Brightlight can start only 150,000 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 150,000 units started at the molding operation, 15,000 defective units (10%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $25 per unit, as follows:
Brightlight’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 $4 per lamp in the molding department.
Required
1. Should Brightlight use the new material? Show your calculations.
2. What nonfinancial and qualitative factors should Brightlight consider in making the decision?
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