PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 5% of the 59,000 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 $170,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,400 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. What would be the projected five-year impact on operating profit? 1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting?
PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 5% of the 59,000 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 $170,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,400 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average.
Required:
- 1-a. What would be the projected five-year impact on operating profit?
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1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting?
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