Refer to information in Exercise 10- 12 in answering this question. Safe Travel 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 250 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 Travel estimates that out of the 250 accidents, customers will realize that the problem is due to a defect in the seats in only six cases. Safe Travel’s legal team has estimated that each of these six accidents would result in a lawsuit that could be settled for about $ 675,000. All lawsuits settled would include a confidentiality clause, so Safe Travel’s reputation would not be affected.

Required

1. Assuming that Safe Travel expects to sell 175,000 car seats next year, what would be the cost of increasing the quality of all 175,000 car seats?

2. What will be the total cost of the lawsuits next year if the problem is not corrected?

3. Suppose Safe Travel 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?

4. Are there any other costs or benefits that Safe Travel should consider?