PIM Industnes, Inc., manufactures electronics components Each unit costs $30 bef
ID: 2519838 • Letter: P
Question
PIM Industnes, 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) 1-b Based solely on the short-run relevant cost analysis you performed, should the firm install the lighting? O Yes O No References eBook& Resources Worksheet Difficulty: 2 Medium Learning quality-rel O Type here to search oeExplanation / Answer
Answer for 1a)
Net annual cost of lighting:$20000+$5000=$25000
Total cost for lighting per year allocated:$100000/5 years
=$20000
Operating costs:$5000
Answer for 1b)
My answer is yes.
The reason is after installation of adequate lighting it is assumed that the average rejection rate will be 3% i.e 2% cost saving.
Total savings after installation:
Savingper year-net annual costs
=(50000units×2%×$30)-$25000
=$5000 per annum i.e $25000 for five years.
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