| Assessment 3 Part 3: Quality Improvement |
| Scenario: |
| Bonded Fencing, Inc., produces metal gates in two processes: shaping, in which metal is bent to the correct shape, and fastening, in which the bent metal pieces are welded into gates. The shaping process has a capacity of 11,000 units per year; welding has a capacity of 15,400 units per year. Demand is high. At a sales price of $550 per unit, the company can sell whatever output it can produce. Bonded can start only 11,000 units into production in the shaping department because of capacity constraints.1,650 units per year are found to be defective in the shaping department. Defective units are not detected until the end of production. At that point, the defective units are scrapped. Unit costs in the shaping department including good and defective units equal $275 per unit, with an allocation of the total fixed manufacturing costs of $825,000 per year to units. |
| Direct materials (variable) |
$125 |
| Direct manufacturing, setup, and materials handling labor (variable) |
50 |
| Depreciation, rent, and other overhead (fixed) |
75 |
| Total unit cost |
$250 |
| The fixed cost of $75 per unit is the allocation of total fixed costs of the shaping department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the shaping separtment are good or defective.) |
| The good units from the shaping department are sent to the fastening department. Variable manufacturing costs in the fastening department are $75 per unit and fixed manufacturing costs are $550,000 annually. There is no scrap in the fastening department. Therefore, the company’s total sales quantity equals the shaping department’s good output. The company incurs no other variable costs. |
| The company’s designers have discovered that by using a new type of direct material, the company could reduce scrap in the shaping department from 1,650 units to 550 units. Using the new material would increase the direct materials costs to $180 per unit in the Shaping Department for all 11,000 units. Recall that only 11,000 units can be started each year. |
