Reference no: EM132746610

Relevant Cost Analysis: Quality-Improvement Program

Problem 1: An automobile manufacturer plans to spend $1 billion to improve the quality of a new model. The manufacturer expects the quality-improvement program to eliminate the need for recall and reduce the costs for other warranty repairs. The firm's experience had been, on average, 1.5 recalls for each new model at a cost of $300 per vehicle per recall. The average cost per recall, if one is needed, is expected to increase by 10% for the new model. Costs for other warranty repairs are expected to decrease from $200 to $80 per unit sold. Sales of the new model were expected to be 500,000 units without the quality-improvement program. The company believes that the well-publicized quality-improvement program will increase total sales to 650,000 units. If there is a profit per unit on any incremental sales attributable to the quality-improvement program, is the $1 billion expenditure justified?