Question

Please assist

Each year, Worrix Corporation manufactures and sells 2,900 premium quality multimedia projectors at $11.900 per unit. At the current production level, the firm's manufacturing costs include variable costs of $2,400 per unit and annual fixed costs of $5,900,000. Selling, administrative, and other expenses (not including 15% sales commissions) are $9,900,000 per year. The new model, introduced a year ago, has experienced a flickering problem. On average, the firm reworks 40% of the completed units and still has to repair under warranty 15% of the units shipped. The additional work required for rework and repair caused the firm to add additional capacity with annual fixed costs of $1,700,000. The variable costs per unit are $1,900 for rework and $2,400, including transportation cost, for repair. The chief engineer, Patti Mehandra, has proposed a modified manufacturing process that will almost entirely eliminate the flickering problem. The new process will require $11.900,000 for new equipment including installation cost) and $2.900,000 for training. The firm currently inspects all units before shipment. Patti believes that current appraisal costs of $599,900 per year and $49 per unit can be eliminated within 1 year after the installation of the new process. Furthermore, if the new investment is made, warranty repair cost per unit are estimated to be only $2,100,for no more than 5% of the units shipped. Worrix believes that none of the fixed costs of rework or repair can be saved and that a new model will be introduced in 3 years. This new technology would most likely render obsolete the equipment the company purchased a year ago The accountant estimates that warranty repairs now cause the firm to lose 20% of its potential business. Required: 1. What is the total required initial investment cost (cash outlay) associated with the new manufacturing process? 2. What is the total expected change (ie., increase or decrease) in cost of quality over the next 3 years from using the new manufacturing process being proposed? 3. Based solely on financial considerations, should Worrix invest in the new process? Specifically: (a) What is the cumulative (ie, 3- year) estimated change in pretax cash flow assuming the new system is implemented? (b) What is the estimated payback period for the proposed investment? (c) What is the estimated pretax internal rate of return (IRR) for the proposed investment? (Use the built-in IRR function in Excel to answer this question.) (Round your "IRR" answer to 2 decimal places.) 1. Required initial investment cost (cash outlay) 2. Expected change in cost of quality 3a Expected change in pretax cash flow 3b. Estimated pay back period is less than 3c. Estimated pretax internal rate of retur (IRR) %

Answer 1

1. Initial Cost for New manufacturing process:

new process	11,900,000.00
Training	2,900,000.00
Total Cost	14,800,000.00

2. Total Cost after 3 Year if New manufacturing process proposed

Particulars	Year 1	Year 2	Year 3	Total cost after 3 Year
Installation Cost	11,900,000.00
Training	2,900,000.00
Saving	(599,900.00)	(599,900.00)	(599,900.00)
Emilinated cost @49 Per unit of 2900 Unit	(142,100.00)	(142,100.00)	(142,100.00)
Warrenty Cost @2100 of unit shipped I.e 1740 units	182,700.00	182,700.00	182,700.00
Total Cost	14,240,700.00	(559,300.00)	(559,300.00)	13,122,100.00

Cost after rework & repair

	Total Capacity	Rework	Unit Shipped	Repair 15% of unit shipped
Unit	2900	1160	1740	261
Particular	Year 1	Year 2	Year 3	Total cost after 3 Year
Rework cost	1,700,000.00	1,700,000.00	1,700,000.00	5,100,000.00
Variable cost for rework @1900 per unit	2,204,000.00	2,204,000.00	2,204,000.00	6,612,000.00
Transportation cost for warranty goods @2400	626,400.00	626,400.00	626,400.00	1,879,200.00
				13,591,200.00

Total saving of cost if new manufacturing process implemented = 13,591,200 - 13,122,100 = 469,100