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Quality improvement : Theory of constraints

The Wellesley Corporation's total monthly sales of printed cloth equal the Printing Department's output. Each requirement refers only to the preceding data. There is no connection between the requirements.

1)The Printing Department is considering buying 5,000 additional rolls of gray cloth from an outside supplier at $900 per roll. The Printing Department manager is concerned that the cost of purchasing the gray cloth is much higher than Wellesley's cost of manufacturing it. The quality of the gray cloth acquired from outside is very similar to that manufactured in-house. The Printing Department expects that 10% of the rolls obtained from the outside supplier will be scrapped. Should the Printing Department buy the gray cloth from the outside supplier? Show your calculations.

2)Wellesley's engineers have developed a method that would lower the Printing Department's scrap rate to 6% at the printing operation. Implementing the new method would cost $350,000 per month. Should Wellesley implement the change? Show your calculations.

3)The design engineering team has proposed a modification that would lower the Weaving Department's scrap rate to 3%. The modification would cost the company $175,000 per month. Should Wellesley implement the change? Show your calculations.

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Quality improvement, theory of constraints. The Wellesley Corporation makes printed cloth in two operations, weaving and printing. Direct materials costs are Wellesley's only variable costs. The demand for Wellesley's cloth is very strong. Wellesley can sell whatever output quantities it produces at $1,250 per roll to a distributor who markets, distributes, and provides customer service for the product.
Weaving Printing
Monthly capacity 10,000 rolls 15,000 rolls
Monthly production 9,500 rolls 8,550 rolls
Direct materials cost per roll of cloth processed at each operation $500 $100
Fixed operation costs
Fixed operating cost per roll $2,850,000 $427,500
($2,850,000 / 9,500; $427,500 / 8,550) $300 per roll $50 per roll

Wellesley can start only 10,000 rolls of cloth in the Weaving Department because of capacity constraints of the weaving machines. If the weaving operation produces defective cloth, the cloth must be scrapped and yields zero net disposal value. Of the 10,000 rolls of cloth started at the weaving operation, 500 rolls (5%) are scrapped. Scrap costs per roll, based on total (fixed and variable) manufacturing costs per roll incurred up to the end of the weaving operation, equal $785 per roll as follows:

Direct materials cost per roll (variable) $500
Fixed ...

Solution Summary

Excel file contains solution of a relevant costing problem.

$2.19