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Gear Replacement with Tooling Investment

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ABC Company is considering replacing a metal gear with a plastic one. The plastic gear will save $0.75 per unit but will require an expenditure of $40,000 for special tooling (each year) to produce the gear. Annual sales are 80,000 units.

A. Should the company convert to the plastic gear? What is the expected financial impact?
B. Suppose that the plastic gear creates additional warranty cost due higher failure rates. During the first year the gear is in service (warranty period) there will be two additional failures for every 1,000 gears sold. The cost to the company is $50 per gear failure. Should the company still convert to the plastic gear? What is the expected financial impact?

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Solution Summary

This solution analyzes a gear replacement with tooling investment involving per unit savings and higher warranty expenses.

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A. The expected financial impact is 80,000 * $0.75 - $40,000 = $20,000. The ...

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