Budgeted costs, Kaizen improvements. Trendy T-Shirt Factory manufactures plain w

ID: 2444939 • Letter: B

Question

Budgeted costs, Kaizen improvements. Trendy T-Shirt Factory manufactures plain white and solid-colored T-shirts. Inputs include the following: Price Quantity Cost per unit of output Fabric $ 7 per yard 1 yard per unit $7 per unit Labor $14 per DMLH 0.25 DMLH per unit $3.50 per unit

Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of $0.40 per ounce. The shirts sell for $14 each for white and $18 each for colors. The company expects to sell 12,000 white T-shirts and 60,000 colored T-shirts uniformly over the year.

Trendy has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.25 per ounce. The company would still need 3 ounces of dye per shirt. Trendy is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company $120,000 if it continues to use the harmful but less expensive dye.

1. Given the preceding information, would Trendy be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)

2. Assume Trendy chooses to be environmentally responsible regardless of cost, and it switches to the new dye. The production manager suggests trying Kaizen costing. If Trendy can reduce fabric and labor costs each by 1% per month, how close will it be at the end of 12 months to the 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?

Explanation / Answer

Total Cost = Fabric cost + labor cost = 7+3.50 = 10.50

Cost of making white shirt is = 12000*10.50 = 126000

White shirt sells for 12000*14 = 168000

Cost of making colored shirt is = 60000*10.50 = 630000

Colored shirts getting dyed = 60000*1.2 = 72000

Total cost = 630000+72000 = 702000

Colored shirt sells for 60000*18 = 1080000

If environment friendly dye is used cost will be = 60000*3.75 = 225000

So total cost now becomes 630000+225000 = 855000

Hence total cost of producing shirts with old dye is = 126000+702000 = 828000

Total sales = 168000 + 1080000 = 1248000

Profit = 1248000-828000 = 420000

Total cost after implementing new dye is 126000+855000 = 981000

New Profit = 1248000 - 981000 = 267000

From the above calculation we can see that Trendy is making a profit but the margin has reduced. Previously, they were making a profit of 420,000 which now has gone down to 267,000. Hence, they woyld still make a profit but financially it would not make sense as the dip in profit is 153,000 which is more than the threatened fine of 120,000.

Fabric and labor cost reduction can be accomplished by either laying off people or going for a lesser quality fabric which could not be a very good option.