Cost-of-Quality Improvement—Relevant Cost Analysis PIM Industries Inc. manufactureselectronics 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 wouldcost $100,000 to install adequate lighting in the assembly department, which would be useful for5 years. With adequate lighting (which will cost an additional $5,000 of operating costs per year), thefirm expects to reduce its rejection rate to no higher than the industry average.Required1. Should the firm install the lighting? That is, what would be the projected five-year impact on operatingprofit? (Show calculations.)2. What other considerations might affect this decision?3. What is the primary role of the management accountant in this decision context?
Cost-of-Quality Improvement—Relevant Cost Analysis PIM Industries 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 to install adequate lighting in the assembly department, which would be useful for
5 years. With adequate lighting (which will cost an additional $5,000 of operating costs per year), the
firm expects to reduce its rejection rate to no higher than the industry average.
Required
1. Should the firm install the lighting? That is, what would be the projected five-year impact on operating
profit? (Show calculations.)
2. What other considerations might affect this decision?
3. What is the primary role of the
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