Question

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 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 $180,000. The machine would last for five years and would have salvage value at that time of $18,000. Brisbane would also spend $470,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $21,000. This new control system would reduce the number of defective units to 400 per year. 345 of these defective units would be detected and repaired at a cost of $46 per unit. Customers who still received defective players would be given a refund equal to 120 % of the purchase price. Questions 1 & 2 [0 points; unlimited tries] 1. What is the Year 2 cash flow if Brisbane keeps using its current system? Submit Answer Tries 0/99 2. What is the Year 2 cash flow if Brisbane replaces its current system? Submit Answer Tries 0/99 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? Submit Answer Tries 0/5 4. Assuming a discount rate of 6 %, what is the net present value if Brisbane replaces its current system? Submit Answer Tries 0/5

Answer 1

1. Inspection = $38,500

Defective repairs = 1680*$80 = $134,400

Refund of Defected pieces not found = (2,100-1680)*187 = $78,540

Total cash outflows in second year = $251,440

Cash Inflow = $78*No. of units sold

(Since units sold are not given, we cannot calculate the total cash inflows. If you want, you can assume the units and take the difference of the two as net cash flow)

2. Outflows-

Depreciation = (180,000-18,000) / 5 = $32,400

Annual inspection costs = 21,000+38,500 = $59,500

Defective Repairs = 345*$45 = $15,525

Players not detected refund = (400-375)*(187*120%) = 25*$224.4 = $5,610

Total cash outflows = $113,035

Contribution = $78*No. of units sold

3. Since units sold are not given, NPV cannot be calculated. Please make sure the question is complete.

(NPV = PV of outflows - PV of inflows)