HOW TO VALUE A LIFE: CARCO, PRODUCT DEFECTS AND MATH1 Roger, Vice President of C
ID: 355615 • Letter: H
Question
HOW TO VALUE A LIFE: CARCO, PRODUCT DEFECTS AND MATH1 Roger, Vice President of CARCO, is stumped. CARCO's best-selling new model has a problem The model-the Freerider-is a subcompact car priced comparably lower than competitors. Because of this, sales have skyrocketed. This morning, however, Henry Overton, Chief Engineer, stopped by his office and indicated he was deeply troubled. In response to concerns related to a car accident involving the Freerider, Henry has conducted some design research and has discovered a slight problem - the part that connects the gas tank to the engine is defective. To clarify, while Henry called the part "defective," that is not entirely correct. As is, the part works, but it could be improved so that it would not contribute to an explosion in the event of a rear end collision. It would cost only $11 per car to fix the part. Ordinarily this would not be a big deal except for the nature of the problem. The Freerider uses an innovative design that involved placing the engine in the rear of the car. The problem with the defective part is that it could cause the gas tank to explode in the event of a significant rear end collision. To date, 12.5 million Freeriders have been sold in the United States. According to preliminary calculations, 180 burn deaths, 180 serious burn injuries and 2100 burned vehicles could be anticipated. Henry calculated the relevant costs. He assumed $200,000 per life, $67,000 per serious injury and $700 per car. 180 X ($200,000) 180 X ($67,000)+ $2,100 X ($700) $49.5 million. Henry compared this to the cost of a recall 12,500,000 X ($11) $137 million. ASSIGNMENT You are Roger. How do you respond?Explanation / Answer
As mentioned in the case above, already 12.5 million Freeriders have been sold so far. Based on the calculations, the anticipated cost of damages (loss of life, burn injury or burned vehicle) is $49.5M vs Cost of recall of $137M.
Though the cost comparison seems to show that cost of recall is too expensive as compared to cost of losses (in accidents), but there could be serious long-term damage to company's reputation and the potential tangible and intangible losses will easily outweigh the cost of recall. These would include:
If I were Roger, I would have taken the following steps:
Now, let's calculate when the cost of recall can be recovered. Let us assume that each car sells at $700 (as assumed in the case of insurance value for burnt car). Also, let us assume that the company usually makes a profit of 10% on each car (so $70 per car). So in order to recover the $137M cost of recall, the company will have to sell 1.96 million cars in future ($137M divided by $70). Given the success of the car (12.5M sales till date), this number is very much achievable in near future.
Therefore, Roger should go ahead with the product recall.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.