Question

IntelPrint manufactures and sells 25,000 ​high-technology printing presses each year. The variable and fixed costs of rework and repair are as​ follows:

Variable	Fixed	Total
	Cost	Cost	Cost
Rework cost per hour	$78	$125	$203
Repair costs
Customer support cost per hour	38	50	88
Transportation cost per load	340	115	455
Warranty repair cost per hour	95	150	245

IntelPrint's current presses have a quality problem that causes variations in the shade of some colors. Its engineers suggest changing a key component in each press.

The new component will cost $ 40 more than the old one. In the next​ year, however, IntelPrint expects that with the new component it will​ (1) save 10,000 hours of​ rework, (2) save

950 hours of customer​ support, (3) move 300 fewer​ loads, (4) save 5,400 hours of warranty​ repairs, and​ (5) sell an additional 100 printing​ presses, for a total contribution margin of

$1,100,000. IntelPrint believes that even as it improves​ quality, it will not be able to save any of the fixed costs of rework or repair. IntelPrint uses a​ 1-year time horizon for this decision because it plans to introduce a new press at the end of the year.

Requirements:

1.	Should IntelPrint change to the new​ component? Show your calculations.
2.	Suppose the estimate of 100 additional printing presses sold is uncertain. What is the minimum number of additional printing presses that IntelPrint needs to sell to justify adopting the new​ component?
3.	What other factors should managers at IntelPrintI consider when making their decision about changing to a new​ component? Requirement 1. Should IntelPrint change to the new​ component? Show your calculations. Begin by selecting the formula and calculating the relevant cost amount. x = Relevant costs x =

Answer 1

Calculation of Net advantage of changing Component
Cost of change: $40 X 25,000		$ 1,000,000.00
Advantages
Additional CM generated through sales	$ 1,100,000.00
Variable rework cost savings	$      780,000.00
(10,000*78)
Variable customer support savings	$        36,100.00
(950*38)
Savings in transportation costs for parts	$      102,000.00
(300*340)
Savings in warranty repair costs	$      513,000.00	$ 2,531,100.00
(95*5400)
Net advantage of changing component		$ 1,531,100.00

2)

Net advantage of changing component	$ 1,531,100.00
Additional CM generated through sales	$ 1,100,000.00
Additional TCM generated without additional sales	$      431,100.00

Thus no additional Sales are needed.

3)Few Other Factors which need to be considered are below-

1)Quality of the Product.

2) Interest cost in order to purchase the new component.

3) Manpower availabilty to operate the new component.