the management at transco company is considering a proposal to install a third produ 544842

Decision to Add a New Department

C 5. The management at Transco Company is considering a proposal to install a third production department in its factory building. With the company’s existing production setup, direct materials are processed through the Mixing Department to produce Materials A and B in equal proportions. The Shaping Department then processes Material A to yield Product C. Material B is sold as is at $20.25 per pound. Product C has a selling price of $100.00 per pound. There is a proposal to add a Baking Department to process Material B into Product D. It is expected that any quantity of Product D can be sold for $30.00 per pound.

Costs per pound under this proposal appear at the top of the next page.

1. If (a) sales and production levels are expected to remain constant in the foreseeable future and (b) there are no foreseeable alternative uses for the factory space, should Transco Company add a Baking Department and produce Product D, if 100,000 pounds of D can be sold? Show calculations of incremental revenues and costs to support your answer.

2. List at least two qualitative reasons why Transco Company may not want to install a Baking Department and produce Product D, even if this decision appears profitable.

3. List at least two qualitative reasons why Transco Company may want to install a Baking Department and produce Product D, even if it appears that this decision is unprofitable. (CMA adapted)