Question

19-23 Quality improvement, relevant costs, relevant revenues. AquaPro produces water purifiers for the household. Business is good but Derek, the manager, has noticed that customers complain because they find leakages in the plastic nozzles used. AquaPro provides a warranty for each machine and charges $115 for each of them. AquaPro installed 5,000 machines last month and 20% of them have experienced this leakage problem. Each repair costs $35 for the company. Derek believes that the problem can be eliminated by adding an extra check valve (costing $2.5/ma- chine). This will reduce the number of purifiers produced every month by a 100 (in order to accommodate the price of the extra check value), but will lower the number of the machines experiencing a leakage from 20% to 5%. 1. Do you think that AquaPro should implement Derek’s idea? Answer with calculations. 2. What are the nonfinancial and qualitative factors that AquaPro may consider in deciding whether to implement the new design?

Answer 1

Calculations:	20% leakage	5% leakage
1.Machines installed	5000	4900
2.% of leakage problem	20%	5%
3.No.of leaking m/cs (1*2)	1000	245
4. Non-leaking m/cs. (1-3)	4000	4655
5. Warranty revenue from non-leaking m/cs(4* $115)	460000	535325
6. Net of costs-warranty Revenue for leaking m/cs.:
Revenue/costs per m/c:
Warranty fees revenue	115	115
Less: Repair costs	35	35
Less: Cost of extra check valve		2.5
7.Net income per m/c	80	77.5
8.Total net revenue for leaking m/cs(3*7)	80000	18987.5
9.Total revenue under the option(5+8)	540000	554312.5
From the above, it is recommended
AquaPro should implement Derek’s idea
as revenues are more

2.Nonfinancial and qualitative factors that AquaPro may consider in deciding whether to implement the new design may be:

a. the efficiency of the check-values

b. continuity in the availablity of check-valves