Question

Question 4 (25 marks) The Rapoo Technology Company Ltd (Rapoo) manufactures and sells a hydraulic machine component SB1038. Rapoo sells 500,000 units of SB1038 to the main hydraulic machine manufacturers in China. Rapoo has a capacity of 300,000 machine-hours and can produce two units per machine-hour. SB1038's contribution margin per unit is $14. Rapoo sells only 500,000 units because 100,000 units (20% of the good units) need to be reworked. It takes l machine-hour to rework two units, so 50,000 hours of capacity are used in the reworlk process. Rapoo's rework costs are $1,100,000. Rework costs consist of the following Direct materials and direct rework labor (variable costs): S5 per unit Fixed costs of equipment, rent, and overhead allocation: S6 per unit Rapoo's process designers have developed a modification that would maintain the speed of the process and ensure a 0% defective rate and no rework. The new process would cost S1,076,000 per year. The following additional information is available: The demand for Rapoo's SB1038 in the coming year is 800,000 units. The Lipon Corporation, a key customer of Rapoo, has asked the company to supply 54,000 SB1040 (a modified model of SB1038) if Rapoo implements the new design. The contribution margin per unit of SB1040 is $24. Rapoo can make one unit of SB1040 with one machine-hour with 100% quality and no rework. Required a) Suppose Rapoo's designers implement the new design. Should Rapoo (8 marks) accept Lipon's order for 54,000 SB1040? Show your calculations. Should Rapoo implement the new design? Show your calculations What other benefits can Rapoo expect to obtain if the company decides b) (7 marks) c) (5 marks) to implement the new design? d) Suppose Rapoo decides to implement the new design. Which cost of 5 marks) quality category are the Rapoo managers focusing on? Explain.

Answer 1

		a. If Lipon's order is accepted
			Prodn lost for SB1038	M/c hrs.	SB 1040
		Sales volume	250000/300000*54000	45000
		On Re-work	50000/300000*54000	9000
		Total M/c hrs.		54000	54000
		Contribution/m.c hr		15.03	24
		Total contribution		811620	1296000
					1076000
					220000
		Contribution lost(as shown above)			-811620
		Net loss			-591620
		Accepting Lipon's order results in a LOSS of $ 591620

b. NO.
Accepting Lipon's order(SB 1040) & using the balance available m/c hrs. on SB 1038
	SB 1038	M/c hrs.		SB 1040	Total
Sales volume250000/300000*246000	250000/300000*246000	205000
On Re-work50000/300000*246000	50000/300000*246000	41000
Total M/c hrs.(300000-54000)		246000		54000	300000
Contribution/m.c hr(14*1.67)-(5*1.67)		15.03		24
Total contribution		3697380		1296000	4993380
Less:Fixed costs		1100000		1076000	2176000
Net income		2597380		220000	2817380
Rapoo should NOT implement the new design as it results in decreased total income as shown above.

c. Different advantages include:

Expanded Customer fulfillment due to 0% revamp and

henceforth less time devoured/unit.

Better effectiveness of the machine utilizing the component&

better efficiency

d.Implementing the new structure will diminish all expenses towards re-work, for example,

materials

work time

opportunity cost of gainful work hrs.lost

in general decrease in expenses of fixing the defectives