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    What are the additional costs of choosing the new process?
    Worrix Corporation manufactures and sells 3,000 premium quality multimedia projectors at $12,000 per unit e
    ach year. At the current production level, the firm's manufacturing costs include variable costs of $2,500
    per unit and annual fixed costs of $6,000,000. Additional selling, administrative, and other expenses, not
    including 15 percent sales commissions, are $10,000,000 per year.

    The new model, introduced a year ago, has experienced a flickering problem. On average the firm reworks
    40 percent of the completed units and still has to repair under warranty 15 percent of the units shipped. The
    additional work required for rework and repair causes the firm to add additional capacity with annual fixed
    costs of $1,800,000. The variable costs per unit are $2,000 for rework and $2,500, including transportation
    cost, for repair.

    The chief engineer, Patti Mehandra, has proposed a modified manufacturing process that will almost
    entirely eliminate the flickering problem. The new process will require $12,000,000 for new equipment and i
    nstallation and $3,000,000 for training. Patti believes that current appraisal costs of $600,000 per year and
    $50 per unit can be eliminated within one year after the installation of the new process. The firm currently
    inspects all units before shipment. Furthermore, warranty repair cost will be only $1,000 for no more than 5
    percent of the units shipped.

    Worrix believes that none of the fixed costs of rework or repair can be saved and that a new model will be
    introduced in three years. The new technology will most likely render the current equipment obsolete.

    The accountant estimates that repairs cost the firm 20 percent of its business.

    Units 3000 Selling price $12000
    Costs Old option New manufacturing process
    Variable cost/unit $2,500
    Annual Fixed Cost $6,000,000
    Additional selling, Administrative and other expenses $100,000,000
    Sales Commisions 15 % of sales
    Appraisal cost $600,000
    Variable appraisal cost/unit $50

    Rework 40% of completed unit
    Repair under warranty 15% of units shipped
    Fixed cost of repairs $1,800,000
    Variable cost/unit Reworked $2,000
    Variable cost/unit repaired $2,500

    new equipment fixed cost $12,000,000
    Warranty repair cost for 5% of the units shipped

    What are the additional costs of choosing the new process?

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    Solution Summary

    This posting contains relevant cost analysis for an existing and a new process.