Jessica Long, the Production Manager of Maxim Corporation Is Frustrated

Essay

Jessica Long, the production manager of Maxim Corporation is frustrated by the company's policy of not scrapping defective units but reworking them. She has pointed out several times to senior management that some units are beyond rework and should be scrapped. According to her, in most cases, it would be cheaper to scrap and build a new unit from scratch rather than trying to rework a defective unit. However, Peter Crouch, the CEO, is not convinced. He wants his controller, Melinda Gates, to gather some information.
After researching the problem, Gates provides the following information:
$\begin{array}{lc}\text { Selling price:}&\text { \$ 132per unit}\\\text { Manufacturing costs:}\\\text { Direct materials } & 27 \\\text { Direct labor } & 32 \\\text { Variable overhead } & 24 \\\text { Variable marketing costs } & 10 \\\text { Fixed overhead } & 32\\\text { Reworking costs: } &\\\text { Materials } & \$ 25 \\\text { Labor } & 48 \\\text { Direct machining costs } &35\end{array}$
Gates also observes that reworking a defective product consumes more labor time than making a unit from scratch. As a result, for every three units reworked, Maxim forgoes the production and sale of two units.
Required:
(a) Do you agree with Jessica Long that it is cheaper to scrap than rework a defective unit? Show your computations.
(b) How can the cost information generated by Gates be useful in reducing the number of defectives?