20.18 Quality improvement, relevant costs and relevant revenues . (30 min) One way to present the alternatives is via a decision tree as shown below. Implement new design Do not implement new design Make T971 Do not make T971 The idea is to first evaluate the best action that Carmody should take if it implements the new design (that is, make or not make T. Carmody can then compare the best mix of products to produce if it implements the new design against the status quo of not implementing the new design. 1 Carmody has capacity constraints. Demand for V valves (370,000 valves) exceeds production capacity of 330,000 valves (3 valves per hour × 110,000 machine- hours. Since capacity is constrained, Carmody will choose to sell the product that maximises contribution margin per machine-hour (the constrained resource. Contribution margin per machine-hour for V = €8 per valve × 3 valves per hour = €24 Contribution margin per machine-hour for T = €10 per valve × 2 valves per hour = €20. Carmody should reject Clohisey’s offer and continue to manufacture only V valves. 2 Now, compare the alternatives of (1) not implementing the new design versus (2) implementing the new design. By implementing the new design, Carmody will save 10,000 machine-hours of rework time. This time can then be used to make and sell 30,000 (3 values per hour × 10,000 hours) additional V valves. The relevant costs and benefits of implementing the new design areas follows The relevant costs of implementing the new design €(315,000) Relevant benefits
