Panda Print manufactures and sells 20,000 high-technology printing presses each
ID: 2577333 • Letter: P
Question
Panda Print manufactures and sells 20,000 high-technology printing presses each year. The variable and fixed costs of rework and repair are as follows:
Panda Print’s current presses have a quality problem that causes variations in the shade of some colors. Its engineers suggest changing a key component in each press. The new component will cost $50 more than the old one. In the next year, however, Panda Print expects that with the new component it will (1) save 11,000 hours of rework, (2) save 1,000 hours of customer support, (3) move 190 fewer loads, (4) save 5,400 hours of warranty repairs, and (5) sell an additional 180 printing presses, for a total contribution margin of $1,620,000. Panda Print believes that even as it improves quality, it will not be able to save any of the fixed costs of rework or repair. Panda Print uses a 1-year time horizon for this decision because it plans to introduce a new press at the end of the year.
Requirements:
1. Should Panda Print change to the new component? Show your calculations.
2. Suppose the estimate of 180 additional printing presses sold is uncertain. What is the minimum number of additional printing presses that Panda Print needs to sell to justify adopting the new component?
3. What other factors should managers at Panda Print consider when making their decision about changing to a new component?
Variable Fixed Total Cost Cost Cost Rework cost per hour Repair costs 84 $120$ 204 Customer support cost per hour Transportation cost per load Warranty repair cost per hour 35 360 94 65 115 120 100 475 214Explanation / Answer
Answer 1. Statement of Incremental Profit If New Component is Used Incremental Revenue Additional CM through Increase in sales 1,620,000 Savings in Costs: Variable Rework Costs - 11,000 Hrs X $84 924,000 Variable Customer Support - 1,000 Hrs X $35 35,000 Variable Transportation - 190 Loads X $360 68,400 Variable Warranty Repair - 5,400 Hrs X $94 507,600 3,155,000 Incremental Costs Cost of Change - $50 X 1 X 20,000 Units (1,000,000) Net Incremental Profit (Loss) 2,155,000 Yes, Panda should use the new component. Answer 2. Total Savings in Costs 1,535,000 Aadditional Cost 1,000,000 Net Savings 535,000 There is no need for additional printing presses as savings are more than the costs. Answer 3. Other Factors should be considered: 1. Supply of the component 2. The labor can be trained further to save the costs.
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