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    The Brightlight Corporation Uses Multicolored Molding To Make Plastic Lamps

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    Elliot Richard
    Brightlight Corporation produces plastic lamps using multicolored molding. They have the capacity to produce 150,000 lamps per year but 15,000 lamps are defective, costing $25 per unit to produce. A new material could eliminate defects but increase costs by $4 per lamp. Calculations show the benefits of $675,000 exceed the costs of $600,000, so Brightlight should use the new material. Non-financial factors like gaining expertise, reputation, and employee morale should also be considered.

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    The Brightlight Corporation Uses Multicolored Molding To Make Plastic Lamps

    Uploaded by

    Elliot Richard
    287 views2 pages
    Brightlight Corporation produces plastic lamps using multicolored molding. They have the capacity to produce 150,000 lamps per year but 15,000 lamps are defective, costing $25 per unit to produce. A new material could eliminate defects but increase costs by $4 per lamp. Calculations show the benefits of $675,000 exceed the costs of $600,000, so Brightlight should use the new material. Non-financial factors like gaining expertise, reputation, and employee morale should also be considered.

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    The Brightlight Corporation Uses Multicolored Molding to Make Plastic Lamps

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    Brightlight Corporation produces plastic lamps using multicolored molding. They have the capacity to produce 150,000 lamps per year but 15,000 lamps are defective, costing $25 per unit to produce. A new material could eliminate defects but increase costs by $4 per lamp. Calculations show the benefits of $675,000 exceed the costs of $600,000, so Brightlight should use the new material. Non-financial factors like gaining expertise, reputation, and employee morale should also be considered.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    287 views2 pages

    The Brightlight Corporation Uses Multicolored Molding To Make Plastic Lamps

    Uploaded by

    Elliot Richard
    Brightlight Corporation produces plastic lamps using multicolored molding. They have the capacity to produce 150,000 lamps per year but 15,000 lamps are defective, costing $25 per unit to produce. A new material could eliminate defects but increase costs by $4 per lamp. Calculations show the benefits of $675,000 exceed the costs of $600,000, so Brightlight should use the new material. Non-financial factors like gaining expertise, reputation, and employee morale should also be considered.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    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:

    Direct materials (variable) $13 per unit


    Direct manufacturing labor, setup labor, and materials-handling     
    labor (variable)     3 per unit
    Equipment, rent, and other allocated overhead, including inspection and      
    testing costs on scrapped parts (fixed)     9 per unit
    Total $25 per unit

    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?

    SOLUTION

    (30 min.) Quality improvement, relevant costs, and relevant revenues.

    1. By implementing the new method, Brightlight would incur additional direct materials
    costs on all the 150,000 units started at the molding operation.

    Additional direct materials costs = $4 per lamp × 150,000 lamps $600,000

    The relevant benefits of adding the new material are:

    Increased revenue from selling 15,000 more lamps


    $45 per lamp × 15,000 lamps $675,000

    Note that Brightlight 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. Because these costs do not differ with the addition of new material or not, they
    are excluded from the analysis. The relevant benefit of adding new material is the extra revenue
    that Brightlight would get from producing 15,000 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, $16 × 15,000 lamps
    a
    $240,000
    b. Additional contribution margin from selling
    another 15,000 lamps because 15,000 lamps
    will no longer be scrapped:   $435,000
      Unit contribution margin $29 × 15,000 lamps
    b

    Total benefits to Brightlight for adding new material to improve quality $675,000
    a
    Note that only the variable scrap costs of $16 per lamp (direct materials, $13 per lamp; direct manufacturing
    labor, setup labor, and materials handling labor, $3 per lamp) are relevant because improving quality will
    save these costs. Fixed scrap costs of equipment, rent, and other allocated overhead are irrelevant because
    these costs will be incurred whether Brightlight Corporation adds or does not add the new material.
    Contribution margin per unit:
    b

    Selling price $45.00


    Variable costs:
    Direct materials costs per lamp $13.00
    Molding department variable manufacturing costs
       per lamp (direct manufacturing labor, setup labor, and materials handling labor) 3.00
    Variable costs   16.00
    Unit contribution margin $29.00

    On the basis of quantitative considerations alone, Brightlight should use the new material.
    Relevant benefits of $675,000 exceed the relevant costs of $600,000 by $75,000.

    2. Other nonfinancial and qualitative factors that Brightlight should consider in making a
    decision include the effects of quality improvement on
    a. gaining manufacturing expertise that could lead to further cost reductions in the future;
    b. enhanced reputation and increased customer goodwill which could lead to higher future
    revenues through greater unit sales and higher sales prices; 
    c. and higher employee morale as a result of higher quality.

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