Question

Safe Travel produces car seats for children from newborn to 2 years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Safe Travel's only problem with its car seats was stitching in the straps. Safe Travel has discovered a more serious problem with the plastic core of its car seats. An accident can cause the plastic in some of the seats to crack and break, resulting in serious injuries to the occupant. It is estimated that this problem will affect about 250 car seats in the next year. This problem could be corrected by using a higher quality of plastic that would increase the cost of every car seat produced by $25. If this problem is not corrected, Safe Travel estimates that out of the 250 accidents, customers will realize that the problem is due to a defect in the seats in only six cases. Safe Travel's legal team has estimated that each of these six accidents would result in a lawsuit that could be settled for about $675,000. All lawsuits settled would include a confidentiality clause, so Safe Travel's reputation would not be affected. Read the requirements. Requirement 1. Assuming that Safe Travel expects to sell 175,000 car seats next year, what would be the cost of increasing the quality of all 175,000 car seats? Cost of increasing quality of plastic = xx

Answer 1

Solution

Safe Travel

1. Determination of the cost of increasing the quality of all 175,000 car seats:

Cost of increasing quality cost per unit	x	number of units	=	Cost of increasing the quality of plastic
$25	x	1,75,000	=	$4,475,000

Per unit increase in cost = $25

Cost of increasing the quality of all 175,0000 cars =$25 x 175,000 = $4,375,000