Perkins Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered:
$\begin{array}{ll}
\text { Finished products need to be inspected before shipping } & \text { Estimated cost: } \$ 45,000 \
\text { Production equipment needs upgrading } & \text { Estimated cost: } \$ 400,000
\end{array}$

Perkins knows that if it undertakes this program, it will be able to reduce warranty repair costs by $25,000. They also know they will be able to avoid lost profits by retaining customers, but they cannot quantify that benefit with any degree of precision. Should Perkins go ahead with the quality program?
A) Yes, they should, regardless of any other considerations.
B) No, they should not.
C) They should, only if the benefit of avoiding lost profits is estimated to be over $420,000.
D) They should, only if the benefit of avoiding lost profits is estimated to be over $445,000.

Question

Perkins Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered:
$\begin{array}{ll}
\text { Finished products need to be inspected before shipping } & \text { Estimated cost: } \$ 45,000 \
\text { Production equipment needs upgrading } & \text { Estimated cost: } \$ 400,000
\end{array}$

Perkins knows that if it undertakes this program, it will be able to reduce warranty repair costs by $25,000. They also know they will be able to avoid lost profits by retaining customers, but they cannot quantify that benefit with any degree of precision. Should Perkins go ahead with the quality program?
A) Yes, they should, regardless of any other considerations.
B) No, they should not.
C) They should, only if the benefit of avoiding lost profits is estimated to be over $420,000.
D) They should, only if the benefit of avoiding lost profits is estimated to be over $445,000.

Quizplus · Accepted Answer

The total cost of the quality program is $45,000 + $400,000 = $445,000. The company will be able to reduce warranty repair costs by $25,000, so the net cost of the program will be $445,000 - $25,000 = $420,000. The company should go ahead with the program only if the benefit of avoiding lost profits is estimated to be over $420,000.

Perkins Company Has Been Experiencing Lost Sales and High Returns