21 May SHOULD CARLYLE ACCEPT THE OFFER?
Theory of Constraints, Throughput Contribution, and Relevant Costs of
Quality (16 marks)
Carlyle Industries manufactures chemical compounds for lawn fertilizer in two departments:
mixing and packing. Additional information on the two departments follows.
Mixing Packing Capacity per hour 150 kg 250 boxes Monthly capacity 24,000 kg 40,000 boxes Monthly production 20,000 kg 38,000
Fixed operating costs $55,000 $85,500
Fixed operating cost (per kg or box) $2.75 $2.25
Each box requires 500 g of mixed chemical compound. Because the packing department has a capacity of only 40,000 boxes per month, the mixing department can only make a maximum 20,000 kg per month. All costs are fixed other than direct materials since this is an automated facility. The company incurs $40,000 in direct materials for the mixing departments and $57,000 in direct materials for the packing department. The packing department makes only 38,000 boxes from 20,000 kg of chemical. There is a loss of 5% of the direct materials mixture when the product is packed. Each box of fertilizer sells for $10. Consider each of the following requirements independently from each other.
Required
a. An outside contractor makes the following offer. If Carlyle will supply the contractor with
2000 kg of mixed chemical, the contractor will manufacture 3800 boxes of fertilizer
(allowing for the normal loss of 5% of direct materials) at $4.5. Should Carlyle accept the offer? Show calculations. (6 marks)
b. Another company offers to prepare 2000 kg of chemical mixture a month from direct materials that Carlyle supplies. The company will charge $2.50 per kg of mixture.
Should Carlyle accept the offer? Show calculations. (5 marks)
c. Carlyle’s engineers have devised a method that would improve quality in the packing department. They estimate that the chemical currently being lost would be saved. The modification would costs $15,000 per month. Should Carlyle implement this new
method? Show calculations. (5 marks)
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