Question: Quality improvement, relevant costs, and relevant revenues. The Crimson Corporation uses multicolored molding to make plastic lamps. The molding operation has a capacity of 200,000 units per year. The demand for lamps is very strong. Crimson will be able to sell whatever output quantities it can produce at $40 per lamp. Crimson can start only 200,000 units into production in the molding department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped at a net disposal value of zero. Of the 200,000 units started at the molding operation, 20,000 defective units (10%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $20 per unit, as follows:
Crimson's designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $3 per lamp in the molding department.
1. Should Crimson use the new material? Show your calculations.
2. What nonfinancial and qualitative factors should Crimson consider in making the decision?