Question – Theory of constraints, throughput contribution, quality, relevant costs. Aardee Industries manufactures
pharmaceutical products in two departments: Mixing and Tablet-Making. Additional information on the
two departments follows. Each tablet contains 0.5 gram of direct materials.
The Mixing Department makes 200,000 grams of direct materials mixture (enough to make 400,000
tablets) because the Tablet-Making Department has only enough capacity to process 400,000 tablets.
All direct material costs are incurred in the Mixing Department. Aardee incurs $156,000 in direct
material costs. The Tablet-Making Department manufactures only 390,000 tablets from the 200,000
grams of mixture processed; 2.5% of the direct materials mixture is lost i …Read Moren the tablet-making process.
Each tablet sells for $1. All costs other than direct material costs are fixed costs. The following
requirements refer only to the preceding data. There is no connection between the requirements.
1. An outside contractor makes the following offer: If Aardee will supply the contractor with 10,000
grams of mixture the contractor will manufacture 19,500 tablets for Aardee (allowing for the normal
2.5% loss of the mixture during the tablet-making process) at $0.12 per tablet. Should Aardee accept
the contractor’s offer? Show your calculations.
2. Another company offers to prepare 20,000 grams of mixture a month from direct materials Aardee
supplies. The company will charge $0.07 per gram of mixture. Should Aardee accept the company’s
offer? Show your calculations.
3. Aardee’s engineers have devised a method that would improve quality in the Tablet-Making
Department. They estimate that the 10,000 tablets currently being lost would be saved. The
modification would cost $7,000 a month. Should Aardee implement the new method? Show your
4. Suppose that Aardee also loses 10,000 grams of mixture in its Mixing Department. These losses
can be reduced to zero if the company is willing to spend $9,000 per month in quality-improvement
methods. Should Aardee adopt the quality-improvement method? Show your calculations.
5. W hat are the benefits of improving quality in the Mixing Department compared with improving
quality in the Tablet-MakingDepartment? …Read Less
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