CAPITAL BUDGETING The Brisbane Manufacturing Company produces a single model of

Question

CAPITAL BUDGETING

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for S181 with a resulting contribution margin of $75. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends S38, 000 a year to inspect the CD players. An average of 1, 800 units turn out to be defective - 1, 440 of them are detected in the inspection process and are repaired for $75. 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. Competitors are expected to improve their quality control systems in the future, so if Brisbane does not improve its system, sales volume is expected to fall by 480 CD players a year for the next four years. In other words, it will fall by 480 units in the first year, 960 units in the second year, etc.. The proposed quality control system involves the purchase of an x-ray machine for 5290, 000. The machine would last for four years and would have salvage value at that time of $22, 000. Brisbane would also spend $780, 000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by S25, 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 S46 per unit. Customers who still received defective players would be given a refund equal to one-and-a-fourth times the purchase price.

Explanation / Answer

This question is already skipped twice for the reason that total sales in Units is not provided.

Sales in units is necessary to solve the question.

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