The Brisbane Manufacturing Company produces a single model of a CD player. Each

Question

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $189 with a resulting contribution margin of $71.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $39,500 a year to inspect the CD players. An average of 2,200 units turn out to be defective - 1,760 of them are detected in the inspection process and are repaired for $75. If a defective CD player is not identified in the inspection process, the customer who receives it is given a full refund of the purchase price.

The proposed quality control system involves the purchase of an x-ray machine for $180,000. The machine would last for five years and would have salvage value at that time of $22,000. Brisbane would also spend $570,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. This new control system would reduce the number of defective units to 360 per year. 300 of these defective units would be detected and repaired at a cost of $49 per unit. Customers who still received defective players would be given a refund equal to one-and-a-half times the purchase price.

Questions 3 & 4 [5 points each; 5 tries each]
3. Assuming a discount rate of 6%, what is the net present value if Brisbane keeps using its current system?

4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system?

Explanation / Answer

3.

4.

Since the proposed system has a life of 5 years we consider the loss under the present system for 5 years Present system Number of defective CDs per year 2200 defective CDs detected at inspection 1760 Cost of repair per CD -75 Total cost of repair -132000 Number of CDs replaced 440 Contribution margin per CD -71 Loss of contribution for replaced CDs -31240 Total Cost of Defectives per year in the current system -163240 Discount rate 6% Present value of an annuity for 5 years @6% 4.212 Net Present value of the current system for 5 years -687567 Note : Since the company is replacing the CD s the company will lose the contribution margin each CD will earn had it been sold. We have shown the cost as a negative figure.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.