TQM cost-benefit analysis (Learning Objectives 5, 6)

CRM manufactures computer disk drives. It sells these disk drives to other manufac¬ turers, which use them in assembling computers. CRM is having trouble with its new DVD drive. About half the time, CRM employees find defects while the disk drive is still on the production line. These drives are immediately reworked in the plant. Otherwise, CRM’s customers do not identify the problem until they install the disk drives they’ve purchased. Customers return defective drives for replacement under warranty. They have also complained that after they install the disk drive, the drive s connector (which plugs into the computer system board) often shakes loose while the computer is being assembled. The customers must then reassemble the computer after fixing the loose connection.

CRM’s CEO Jay Rich has just returned from a seminar on TQM. He forms a team to address these quality problems. The team includes the plant engineer, the pro¬ duction supervisor, a customer service representative, the marketing director, and the management accountant.

Three months later, the team proposes a major project to prevent these quality problems. CRM’s accountant Anna Crowe reports that implementing the team’s pro¬ posal will require CRM to incur the following costs over the next three months:
• $180,500 for CRM’s scientists to develop a completely new disk drive.
• $70,000 for the company’s engineers to redesign the connector so that it better tolerates rough treatment.
The project team is unsure whether this investment will pay off. If the effort fixes the problem, Crowe expects that:
• A reputation for higher quality will increase sales, which, in turn, will increase the present value of profits by $200,000.
• Fewer disk drives will fail. The present value of the savings from fewer warranty repairs is $170,300.
• The plant will have fewer defective disk drives to rework. The present value of this savings is $100,200.
However, if this project is not successful, there will be no cost savings and no addi¬ tional sales. The team predicts a 70% chance that the project will succeed and a 30% chance that it will fail.
Requirements 1. If the quality improvement project succeeds, what is the dollar amount of the benefits?
2. Should CRM undertake this project? Why or why not? Show supporting calculations.