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Homework answers / question archive / The Brisbane Manufacturing Company produces a single model of a CD player
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $200 with a resulting contribution margin of $70.
Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $40,500 a year to inspect the CD players. An average of 2,200 units turn out to be defective: 1,540 of them are detected in the inspection process and are repaired for $80. If a defective CD player is not identified in the inspection process, the customer who receives it is given a full refund of the purchase price.
The proposed quality control system involves the purchase of an x-ray machine for $200,000. The machine would last for four years and would have salvage value at that time of $20,000. Brisbane would also spend $460,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. Brisbane expects this new control system to reduce the number of defective units to 390 per year. 335 of these defective units would be detected and repaired at a cost of only $43 per unit. Customers who still receive defective players will be given a refund equal to 120% of the purchase price.
Assuming a discount rate of 8%, what is the net present value if Brisbane replaces its current system?
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