Budgeted Costs; kaizen improvements. DryPool T-Shirt Factory manufactures plain white and solid colored T-shirts. Inputs include the following:
Price
Quantity
Cost per unit of output
Fabric
$ 6 per yard
1 yard per unit
$6 per unit
Labor
$12 per DMLH
0.25 DMLH per unit
$3 per unit
Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of $0.20 per ounce. The shirts sell for $15 each for white and $20 each for colors. The company expects to sell 12,000 white T-shirts and 60,000 colored T-shirts uniformly over the year.
DryPool has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.00 per ounce. The company would still need three ounces of dye per shirt. DryPool is reluctant to change because of the increase in costs (and decrease in profit) but the Environmental Protection Agency has threatened to fine them $102,000 if they continue to use the harmful but less expensive dye.
Required
1. Given the preceding information, would DryPool be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)
2. Assume DryPool chooses to be environmentally responsible regardless of cost, and it switchs to the new dye. The production manager suggests trying Kaizen costing. If DryPool can reduce fabric and labor costs each by 1% per month, how close will it be at the end of 12 months to the gross profit it would have earned before switching to the more expensive dye? (Round to the nearest dollar for calculating cost reductions)
3. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan.