American Electronics manufactures 200,000 55-inch 4K TVs each year. The variable and fixed costs of rework and repair for the TVs are as follows:

American Electronics’ 55-inch 4K TVs have a quality problem that causes shadows in the picture. Its engineers suggest changing a key component in each TV. The new component will cost $22 more than the old one. In the next year, however, American Electronics expects that with the new component it will 

(1) Save 10,000 hours of rework, 

(2) Save 1,000 hours of customer support, 

(3) Move 300 fewer loads, (4) save 10,000 hours of warranty repairs, and 

(5) Sell an additional 2,000 4K TVs, for a total additional contribution margin of $2,200,000. American Electronics believes that even as it improves quality, it will not be able to save any of the fixed costs of rework or repair. American Electronics uses a 1-year time horizon for this decision because it plans to introduce a 5K TV at the end of the year.

Required

1. Should American Electronics change to the new component? Show your calculations.
2. Suppose the estimate of 2,000 additional TVs sold is uncertain. What is the minimum number of additional TVs that American Electronics needs to sell to justify adopting the new component?
3. What other factors should managers at American Electronics consider when making their decision about changing to a new component?

Transcribed Image Text:

Variable cost Fixed cost Total cost Rework cost per hour $75 $100 $175 Repair Costs Customer support cost per hour $25 $ 50 $75 Transportation cost per load $275 $150 $425 Warranty repair cost per hour $105 $75 $180