20.20 Theory of constraints, throughput contribution, quality, relevant costs. (30–40 min) 1 Direct materials costs to produce 390,000 tablets = €156,000 Direct materials costs per tablet = €156,000 = €0.40 per tablet Selling price per tablet = €1.00 Unit throughput contribution = Selling price − Unit direct materials costs
= €1.00 − €0.40 = €0.60 per tablet Tablet making is a bottleneck operation. Hence, producing 19,500 more tablets will generate additional operating income. Additional operating income per contractor-made tablet = Unit throughput contribution − Additional operating costs per tablet = €0.60 − €0.12 = €0.48 Increase in operating income, €0.48 × 19,500 = €9,360. Hence, Lappalainen should accept the outside contractor’s offer. Increase in operating income, €0.48 × 19,500 = €9,360. Hence, Lappalainen should accept the outside contractor’s offer. [AQ17] 2 Operating costs for the Mixing Department area fixed cost. Contracting out the mixing activity will not reduce Mixing Department costs but will cost an additional €0.07 per gram of mixture. Mixing more direct materials will have no effect on throughput contribution since tablet making is the bottleneck operation. Therefore, Lappalainen should reject the company’s offer. 3 The benefit of improved quality is €10,000. Lappalainen is using the same quantity of direct materials as before, so it incurs no extra direct materials costs. The 10,000 extra tablets produced generate additional revenue of €10,000 (€1 × 10,000 tablets) a month. The modification costs €7,000 per month, which results in a net gain of €3,000. 4 €156,000 Cost per gram of mixture = = €0.78 per gram 200,000 Cost of 10,000 grams of mixture = €0.78 × 10,000 = €7,800 Benefit from better mixing quality €7,800 per month Cost of improving the mixing operation €9,000 per month €390,000