## Presentation on theme: "© 2009 Pearson Prentice Hall. All rights reserved.19-1 Charles T. Horngren Srikant M. Datar George Foster Madhav Rajan Christopher Ittner Cost Accounting."— Presentation transcript:

19-2 This presentation includes: Exercises 19-18, 19-20, 19-22

© 2009 Pearson Prentice Hall. All rights reserved.19-3 Exercise 19-18 Costs of quality, ethical considerations Safe Rider has discovered a more serious problem with the plastic core of its car seats. An accident can cause the plastic in some of the seats to crack and break, resulting in serious injuries to the occupant. It is estimated that this problem will affect about 200 car seats in the next year. This problem could be corrected by using a higher quality of plastic that would increase the cost of every car seat produced by \$25. If this problem is not corrected, Safe Rider estimates that out of the 200 accidents, customers will realize that the problem is due to a defect in the seats in only two cases. Safe Rider’s legal team has estimated that each of these two accidents would result in a lawsuit that could be settled for about \$750,000. All lawsuits settled would include a confidentiality clause, so Safe Rider’s reputation would not be affected.

© 2009 Pearson Prentice Hall. All rights reserved.19-4 Question 1: Assuming that Safe Rider expects to sell 100,000 car seats next year, what would be the cost of increasing the quality of all 100,000 car seats? Cost of improving quality of plastic \$25 × 100,000 = \$2,500,000

© 2009 Pearson Prentice Hall. All rights reserved.19-5 Question 2: What will be the total cost of the lawsuits next year if the problem is not corrected? Total cost of lawsuits 2 × \$750,000 = \$1,500,000

© 2009 Pearson Prentice Hall. All rights reserved.19-6 Question 3: Safe Rider has decided not to increase the quality of the plastic because the cost of increasing the quality exceeds the benefits (saving the cost of lawsuits). What do you think of this decision? (Note: Because of the confidentiality clause, the decision will have no effect on Safe Rider’s reputation.)

© 2009 Pearson Prentice Hall. All rights reserved.19-7 While economically this may seem like a good decision, qualitative factors should be more important than quantitative factors when it comes to protecting customers from harm and injury. If a product can cause a customer serious harm and injury, an ethical and moral company should take steps to prevent that harm and injury. The company’s code of ethics should guide this decision.

© 2009 Pearson Prentice Hall. All rights reserved.19-8 Exercise 19-20 Quality improvement, relevant costs, relevant revenues TechnoPrint manufactures and sells 20,000 high-technology printing presses each year. The variable and fixed costs of rework and repair are as follows:

© 2009 Pearson Prentice Hall. All rights reserved.19-9 More information TechnoPrint’s current presses have a quality problem that causes variations in the shade of some colors. Its engineers suggest changing a key component in each press. The new component will cost \$55 more than the old one. In the next year, however, TechnoPrint expects that with the new component it will (1) save 12,875 hours of rework, (2) save 900 hours of customer support, (3) move 200 fewer loads, (4) save 7,000 hours of warranty repairs, and (5) sell an additional 150 printing presses, for a total contribution margin of \$1,800,000. TechnoPrint believes that even as it improves quality, it will not be able to save any of the fixed costs of rework or repair. TechnoPrint uses a one-year time horizon for this decision, because it plans to introduce a new press at the end of the year.

© 2009 Pearson Prentice Hall. All rights reserved.19-11 Relevant costs over the next year of choosing the new lens =\$1,100,000 (\$55  20,000 copiers ) The expected relevant benefits of \$3,568,000 exceed the expected relevant costs of the new lens of \$1,100,000, Photon should introduce the new lens. Note that the opportunity cost benefits in the form of higher contribution margin from increased sales is an important component for justifying the investment in the new lens.

© 2009 Pearson Prentice Hall. All rights reserved.19-12 Question 2: Suppose the estimate of 150 additional printing presses sold is uncertain. What is the minimum number of additional printing presses that TechnoPrint needs to sell to justify adopting the new component? The incremental cost of the new lens of \$1,100,000 is less than the incremental savings in rework and repair costs of \$1,768,000 (\$1,030,000 + \$36,000 + \$72,000 + \$630,000). Thus, it is beneficial for TechnoPrint to invest in the new lens even without making any additional sales.

© 2009 Pearson Prentice Hall. All rights reserved.19-13 Exercise 19-22 Waiting time, service industry The registration advisors at a small Midwestern university (SMU) help 4,000 students develop each of their class schedules and register for classes each semester. Each advisor works for 10 hours a day during the registration period. SMU currently has 10 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it takes an average of 12 minutes per student. During the registration period, the 10 advisors see an average of 300 students a day.