DryPool T-Shirt Factory manufactures plain white and solid colored T-shirts. Inputs
include the following:
Price Quantity Cost per unit of output
Fabric $6 per yard 1 yard per unit $6 per unit
Labor $12 per DLH 0.25 DLH per unit $3 per unit
Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of $0.20 per
ounce. The shirts sell for $15 each for white and $20 each for colors. The company
expects to sell 12,000 white T-shirts and 60,000 colored T-shirts uniformly over the year.
DryPool has the opportunity to switch from using the dye it currently uses to using an
environmentally friendly dye that costs $1.00 per ounce. The company would still need
three ounces of dye per shirt. DryPool is reluctant to change because of the increase in
costs (and decrease in profit) but the Environmental Protection Agency has threatened to
fine them $102,000 if they continue to use the harmful but less expensive dye.
a) Given the preceding information, would DryPool be better off financially by
switching to the environmentally friendly dye? (Assume all other costs would
remain the same.)
b) Assume DryPool chooses to be environmentally responsible regardless of cost,
and it switches to the new dye. The production manager suggests trying Kaizen
costing. If DryPool can reduce fabric and labor costs each by 1% per month, how
close will it be at the end of 12 months to the gross profit it would have earned
before switching to the more expensive dye? (Round to the nearest dollar for
calculating cost reductions)