Sustainability and
SUSTAINABILITY
Sandler Industries manufactures plastic bottles for the food industry. On average, Sandler pays $72 per ton for its plastics. Sandler’s waste-disposal company has increased its waste-disposal charge to $54 per ton for solid and inert waste. Sandler generates a total of 500 tons of waste per month.
Sandler’s managers have been evaluating the production processes for areas to cut waste. In the process of making plastic bottles, a certain amount of machine “drool” occurs.
Machine drool is the excess plastic that drips off the machine between molds. In the past, Sandler has discarded the machine drool. In an average month, 140 tons of machine drool are generated.
Management has arrived at three possible courses of action for the machine drool issue:
- 1. Do nothing and pay the increased waste-disposal charge
- 2. Sell the machine drool waste to a local recycler for $15 per ton.
- 3. Reengineer the production process at an annual cost of $70,000. This change in the production process would cause the amount of machine drool generated to be reduced by 40% each month. The remaining machine drool would then be sold to a local recycler for $15 per ton.
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Managerial Accounting (5th Edition)
- Jolene Askew, manager of Feagan Company, has committed her company to a strategically sound cost reduction program. Emphasizing life-cycle cost management is a major part of this effort. Jolene is convinced that production costs can be reduced by paying more attention to the relationships between design and manufacturing. Design engineers need to know what causes manufacturing costs. She instructed her controller to develop a manufacturing cost formula for a newly proposed product. Marketing had already projected sales of 25,000 units for the new product. (The life cycle was estimated to be 18 months. The company expected to have 50 percent of the market and priced its product to achieve this goal.) The projected selling price was 20 per unit. The following cost formula was developed: Y=200,000+10X1 where X1=Machinehours(Theproductisexpectedtouseonemachinehourforeveryunitproduced.) Upon seeing the cost formula, Jolene quickly calculated the projected gross profit to be 50,000. This produced a gross profit of 2 per unit, well below the targeted gross profit of 4 per unit. Jolene then sent a memo to the Engineering Department, instructing them to search for a new design that would lower the costs of production by at least 50,000 so that the target profit could be met. Within two days, the Engineering Department proposed a new design that would reduce unit-variable cost from 10 per machine hour to 8 per machine hour (Design Z). The chief engineer, upon reviewing the design, questioned the validity of the controllers cost formula. He suggested a more careful assessment of the proposed designs effect on activities other than machining. Based on this suggestion, the following revised cost formula was developed. This cost formula reflected the cost relationships of the most recent design (Design Z). 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