You are the accountant at a production company and you are asked for advice on proposed improvements to the  processes in the company. The scrap rate of the current production process is 12% and the return rate is 2.5%. The wasted material (scrap costs)of one unit of a manufactured product amounts to £17.50 per unit. The average warranty or repair cost per unit is £75 per unit returned.

Option A

Invest an additional £300,000 in new equipment. The new process will require an additionalBcost of £1.25 per unit that is produced. The prediction is that scrap rate will be reduced by 50% from the current levels, but there will be no change in the current levels of the return rate.

Option B 

Invest an additional £60,000 in new equipment. The new process will require an additional cost of £2.00 per unit that is produced. The prediction is that scrap rate will be reduced by 70% from current levels, and the current return rate will be reduced by  60% from current levels.

Option C

Invest an additional £1.5 million in new equipment. The new process will require no additional cost per unit that is produced. The prediction is that scrap rate will be reduced by 40%  current levels, and the return rate will be reduced by 70% from current levels.

REQUIRED

a. Currently, production stands at 600,000 units. If we assume that the current production levels will continue, which option of the three listed above would you recommend and why?

b. If production increases to 1,000,000 units, which option would you recommend and why?