Question

In: Accounting

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold...

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $185 with a resulting contribution margin of $73. 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 1,800 units turn out to be defective - 1,260 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 four years and would have salvage value at that time of $21,000. Brisbane would also spend $590,000 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 370 per year. 300 of these defective units would be detected and repaired at a cost of $50 per unit. Customers who still received defective players would be given a refund equal to 150% of the purchase price.

Questions 1 & 2 [0 points; unlimited tries]

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 [5 points each; 5 tries each] [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 6%, what is the net present value if Brisbane keeps using its current system?

4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system?

Solutions

Expert Solution

(a) Year -3 Cash Flow using Current System
Units Rate Value($) Period Discounting Factor Present value($)
Inspection cost $41,000 3 0.8396 $34,424
no of deffectives 1800
Detected 1260 80 $1,00,800 3 0.8396 $84,632
Undetected 540 185 $99,900 3 0.8396 $83,876
Net cash Flow in Year -3 $2,02,931
(b) Year -3 Cash Flow using Proposed System
Units Rate Value($) Period Discounting Factor Present value($)
Inspection cost $63,000 3 0.8396 $52,895
no of deffectives 370
Detected 300 50 $15,000 3 0.8396 $12,594
Undetected(Refund value 125% 0f present sale price) 70 277.5 $19,425 3 0.8396 $16,309
Net cash Flow in Year -3 $81,798
(c)Present system
Units Rate Value($) Period Discounting Factor Present value($)
Inspection cost $41,000 1 to 5 4.2124 $1,72,708
no of deffectives 1800
Detected 1260 80 $1,00,800 1 to 5 4.2124 $4,24,610
Undetected 540 185 $99,900 1 to 5 4.2124 $4,20,819
Net present value of Inspection /defective cost $10,18,137
(d)Proposed system
Units Rate Value($) Period Discounting Factor Present value($)
Initial investment $1,90,000 0 1 $1,90,000
Worker training $5,90,000 0 1 $5,90,000
Inspection cost $63,000 1 to 5 4.2124 $2,65,381
Salvage Value -$21,000 5 0.7473 -$15,693
no of deffectives 370
Detected 300 50 $15,000 1 to 5 4.2124 $63,186
Undetected(Refund value 150% 0f present sale price) 70 277.5 $19,425 1 to 5 4.2124 $81,826
Net present value of Inspection /defective cost $11,74,700

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