Question

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $208 with a resulting contribution margin of $72.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,000 a year to inspect the CD players. An average of 1,900 units turn out to be defective - 1,520 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 $180,000. The machine would last for five years and would have salvage value at that time of $21,000. Brisbane would also spend $590,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. This new control system would reduce the number of defective units to 390 per year. 335 of these defective units would be detected and repaired at a cost of $42 per unit. Customers who still received defective players would be given a refund equal to 150% of the purchase price.

Questions 1 & 2 [0 points; unlimited tries]
1. What is the Year 3 cash flow if Brisbane keeps using its current system?  

Tries 0/99

2. What is the Year 3 cash flow if Brisbane replaces its current system?  

Tries 0/99

Answer 1

(1) Year 3 cash flow if Brisbane keeps using its current system

Particulars	Working	Amount($)
Annual inspection		41000
Cost of defective units detected	[1520units * $80]	121600
Cost of defective units undetected	[(1900-1520) *$208] =[380units * $208]	79040
Year 3 cashflow under current system		241640

(2) Year 3 cash flow if Brisbane replaces its current system

Particulars	Working	Amount($)
Annual inspection	[41000+23000]	64000
Cost of defective units detected	[335units * $42]	14070
Cost of defective units undetected	[(390-335) * (208*150%)] =[55units * $312]	17160
Year 3 cashflow under new system		95230