Dream TravelDream Travel produces car seats for children from newborn to 2 years

Question

Dream TravelDream Travel produces car seats for children from newborn to 2 years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically,

Dream TravelDream Travel's only problem with its car seats was stitching in the straps. Dream TravelDream Travel

has discovered a more serious problem with the plastic core of its car seats. An accident can cause the plastic in some of the seats to crack and break, resulting in serious injuries to the occupant. It is estimated that this problem will affect about 350 car seats in the next year. This problem could be corrected by using a higher quality of plastic that would increase the cost of every car seat produced by $40. If this problem is not corrected, Dream Travel estimates that out of the 350 car seats affected, customers will realize that the problem is due to a defect in the seats in only three cases. Dream Travel's legal team has estimated that each of these three accidents would result in a lawsuit that could be settled for about $750,000. All lawsuits settled would include a confidentiality clause, so Dream Travel's reputation would not be affected.

Requirement 1. Assuming that Dream TravelDream Travel expects to sell 175,000 car seats next year, what would be the cost of increasing the quality of all 175,000 car seats? The cost of increasing the quality of all 175,000 car seats is?

Explanation / Answer

The cost of increasing the quality of 175000 car seats:

=175000*$40

=$7000000

Since the additional cost of using high quality plastic is $40, this is the cost of increasing quality.

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