PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 5% of the 62,000 units manufactured per year. The average rejection rate of the industry is 3%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $185,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,700 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. What would be the projected five-year impact on operating profit? Five-year projected effect on operating income 1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting? Yes O No

PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 5% of the 62,000 units manufactured per year. The average rejection rate of the industry is 3%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $185,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,700 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. What would be the projected five-year impact on operating profit? Five-year projected effect on operating income 1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting? Yes O No

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 13E

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PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 6% of the 60,000 units manufactured per year. The average rejection rate of the industry is 4%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $175,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,500 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. What would be the projected five-year impact on operating profit? Five-year projected effect on operating income 1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting? Yes O No
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