Theory of constraints, throughput contribution, quality, relevant costs.
Lappalainen Oy manufactures pharmaceutical products in two departments: Mixing and Tablet Making. Additional information on the two departments follows. Each tablet con- tains 0.5 gram of direct materials.
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Mixing |
Tablet Making |
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Capacity per hour
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150 grams
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200 tablets
|
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Monthly capacity (2000 hours available
|
|
|
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in each of mixing and tablet making)
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300 000 grams
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400 000 tablets
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Monthly production
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200 000 grams
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390 000 tablets
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Fixed operating costs (excluding direct materials)
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€16 000
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€39 000
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Fixed operating costs per tablet (€16 000 ÷ 200 000; €39 000 ÷ 390 000) €0.08 per gram €0.10 per tablet
The Mixing Department makes 200 000 grams of direct materials mixture (enough to make 400 000 tablets) because the Tablet-Making Department has only enough capacity to process 400 000 tablets. All direct materials costs are incurred in the Mixing Department. Lappalainen incurs €156 000 in direct materials costs. The Tablet-Making Department man- ufactures only 390 000 tablets from the 200 000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet-making process. Each tablet sells for €1. All costs other than direct materials costs are fixed costs. The following requirements refer only to the preceding data; there is no connection between the situations.
Required
1. An outside contractor makes the following offer: if Lappalainen will supply the contractor with 10 000 grams of mixture, the contractor will manufacture 19 500 tablets for Lappalainen (allowing for the normal 2.5% loss during the tablet-making process) at €0.12 per tablet. Should Lappalainen accept the contractor's offer?
2. Another firm offers to prepare 20 000 grams of mixture per month from direct materials Lappalainen supplies. The company will charge €0.07 per gram of mixture. Should Lappalainen accept the company's offer?
3. Lappalainen's engineers have devised a method that would improve quality in the tablet-making operation. They estimate that the 10 000 tablets currently being lost would be saved. The modification would cost €7000 a month. Should Lappalainen implement the new method?
4. Suppose that Lappalainen also loses 10 000 grams of mixture in its mixing operation. These losses can be reduced to zero if the company is willing to spend €9000 per month on quality-improvement methods. Should Lappalainen adopt the quality-improvement method?
5. What are the benefits of improving quality at the mixing operation compared with the benefits of improving quality at the tablet-making operation?