The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $204 with a resulting contribution margin of $70.
Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $42,000 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 $80. 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 $190,000. The machine would last for five years and would have salvage value at that time of $22,000. Brisbane would also spend $450,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $22,000. This new control system would reduce the number of defective units to 400 per year. 330 of these defective units would be detected and repaired at a cost of $43 per unit. Customers who still received defective players would be given a refund equal to 120% of the purchase price.
Questions 1 & 2
1. What is the Year 3 cash flow if Brisbane keeps using its current
system?
2. What is the Year 3 cash flow if Brisbane replaces its current system?
Questions 3 & 4
[NOTE: When computing present values, use the present value
factors from the tables on page 118 in the
Coursepack]
3. Assuming a discount rate of 8%, what is the net present value if
Brisbane keeps using its current system?
4. Assuming a discount rate of 8%, what is the net present value
if Brisbane replaces its current system?
cash flow for current system
Total defective units-detected
=2200-1760
=440units
year 3 cash flow
Annual inspection cost -repairing cost *units repaired- refunded units
= -42000 -(80*1760)-440*204
=-42000-140800-89760
= -272560$
new system cash flow in year 3
annual inspection cost -repairing cost*units repaired - refunded units
= -[42000+22000increase]-330*43-[400-330]*204*120%
= -64000-14190-17136
= -95326
NPV
CURRENT SYSTEM
YEAR | cash flow | pv factor at 8% | presnt value | |
1-5 | -272560 | 3.9927 | -1088250 | |
new system
YEAR | cash flow | pv factor at 8% | presnt value |
1-5 | -95326 | 3.9927 | -380608[95326*3.9927] |
0 | -190000 | 1 | -190000 |
0 | -450000 | 1 | -450000 |
5 | 22000 | 0.6806 | 14973 |
NET PRESENT VALUE | .-1005635$ |
NEW SYSTEM IS BETTER AS IT REULTS IN LOWER CASH OUTFLOW
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $204 with a resulting...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $204 with a resulting contribution margin of $70. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $42,000 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 $80. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $199 with a resulting contribution margin of $79. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $40,500 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,470 of them are detected in the inspection process and are repaired for $85. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $204 with a resulting contribution margin of $80. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $38,500 a year to inspect the CD players. An average of 1,900 units turn out to be defective - 1,330 of them are detected in the inspection process and are repaired for $85. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $190 with a resulting contribution margin of $70. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,500 a year to inspect the CD players. An average of 1,900 units turn out to be defective - 1,330 of them are detected in the inspection process and are repaired for $85. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $195 with a resulting contribution margin of $76. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $42,000 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...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $187 with a resulting contribution margin of $78. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $38,500 a year to inspect the CD players. An average of 2,100 units turn out to be defective 1,680 of them are detected in the inspection process and are repaired for $80. If a defective CD player is not identified in...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $208 with a resulting contribution margin of $77. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,500 a year to inspect the CD players. An average of 1,800 units turn out to be defective - 1,260 of them are detected in the inspection process and are repaired for $85. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $187 with a resulting contribution margin of $80. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $42,000 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,680 of them are detected in the inspection process and are repaired for $75. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $187 with a resulting contribution margin of $78. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $38,500 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,680 of them are detected in the inspection process and are repaired for $80. If a defective CD player is not identified...
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $182 with a resulting contribution margin of $70. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,000 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,680 of them are detected in the inspection process and are repaired for $75. If a defective CD player is not identified...