Question

Hello,

Please take a look at the scenario and question and provide guidance on the question in yellow. This is related to an MBA course in Management Accounting.

Thank you

PIM Industries, Inc., manufactures electronics components. Each unit costs $30 before the final test. The final test rejects, on average, 5% of the 50,000 units manufactured per year. The average rejection rate of the industry is 3%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $100,000 for new adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting that will cost an additional $5,000 in operating cost each year, the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. Calculate the net annual cost of lighting. Net annual cost (cost savings)

Answer 1

Net Annual Cash Saving $ 30,000 Saving Due To Reduction In Rejections (5%-3%) *50000 units *$30 per unit Less: Annual Operating Costs Therefore,Net Annual Cash Saving $ $ 5,000 25,000