Common Paper Supply produces paper cups for a national chain of coffee shops. Twenty-five percent of the paper used to produce the cups comes from post-consumer (recycled) paper. This satisfies the demands of the national coffee chain, which, for public relations reasons, requires a certain percentage of recycled content.
Common Paper has developed a new method that will allow it to increase the percentage of post-consumer material per cup, while reducing the total paper needed per cup. This is a selling feature for the coffee chain and also reduces Common Paper’s costs. The proposed method will reduce the total quantity of paper required per cup of .004 pounds by 15%, but will increase the overall cost of paper per pound from $1.20 per pound to $1.30 per pound.
The new method also requires a one-time charge of $9,000 for re-tooling. Beginning inventory for the year will be 240 pounds and desired ending inventory is 1,200 pounds. Total production for the year is projected at 3,000,000 cups.
If Common Paper implements the new system, what is the expected cost savings for paper purchased during the year?
a. $15,552
b. $45,000
c. $14,508
d. $1,044
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