The XYZ Company’s current production processes have a scrap rate of 15% and a return rate of 3%. Scrap costs (wasted materials) are $12 per unit; warranty/repair costs average $60 per unit returned. The company is considering the following alternatives to improve its production processes:
• Option A: Invest $400,000 in new equipment. The new process will also require an additional $1.50 of raw materials per unit produced. This option is predicted to reduce both scrap return rates by 40% from current levels.
• Option B: Invest $50,000 in new equipment, but spend an additional $3.20 on higher-quality raw materials per unit produced. This option is predicted to reduce both scrap and return rates by 90% from current levels.
• Option C: Invest $2 million in new equipment. The new process will require no change in raw materials. This option is predicted to reduce both scrap and return rates by 50% from current levels.
Required
a. Assume that current production levels of 1 million units will continue. Which option do you recommend? Why?
b. Assume that all of the proposed changes will increase product quality such that production will jump to 1.5 million units. Which option do you recommend? Why?
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