A pharmaceutical company produces tablets in two departments, Mixing and Forming. Each tablet contains 0.5 grams of direct materials. Other information on the two departments follows:
Mixing Forming
Monthly capacity 300,000 grams 400,000 tablets
Monthly production 200,000 grams 390,000 tablets
Fixed operating costs $16,000 $39,000
Fixed operating cost per unit $0.08 per gram $0.10 per tablet
All direct materials costs ($156,000) are incurred in the Mixing Department. The Forming Department manufactures only 390,000 tablets from 200,000 grams of mixture processed; 2.5% of the direct materials mixture is lost in the tablet forming process. Each tablet sells for $1. All costs other than direct materials are fixed.
REQUIRED:
(a) The pharmaceutical company is considering how to motivate workers to improve their productivity (monthly production). One proposal is to evaluate and compensate workers in the Mixing and Forming Departments on the basis of their productivities. Do you think the new proposal is a good idea? Explain briefly
(b) An outside contractor offers to manufacture 19,500 tablets for the company from 10,000 grams of mixture supplied by the company from the Mixing Department (i.e. allowing for the normal 2.5% loss during the tablet forming process), at $0.12 per tablet. Show workings whether this proposal should be accepted.