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Unformatted text preview: 19-28 Quality improvement, relevant costs, and relevant revenues.1.By implementing the new method, Tan would incur additional direct materials costs on all the 200,000 units started at the molding operation.Additional direct materials costs = $4 per lamp 200,000 lamps$800,000The relevant benefits of adding the new material are:Increased revenue from selling 30,000 more lamps$40 per lamp 30,000 lamps$1,200,000Note that Tan Corporation continues to incur the same total variable costs of direct materials, direct manufacturing labor, setup labor and materials handling labor, and the same fixed costs of equipment, rent, and allocated overhead that it is currently incurring, even when it improves quality. Since these costs do not differ among the alternatives of adding the new material or not adding the new material, they are excluded from the analysis. The relevant benefit of adding the new material is the extra revenue that Tan would get from producing 30,000 good lamps. An alternative approach to analyzing the problem is to focus on scrap costs and the benefits of reducing scrap.The relevant benefits of adding the new material are:a.Cost savings from eliminating scrap:Variable cost per lamp, $19a30,000 lamps$ 570,000b.Additional contribution margin from sellinganother 30,000 lamps because 30,000 lampswill no longer be scrapped:Unit contribution margin $21b30,000 lamps630,000Total benefits to Tan of adding new material to improve quality...
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