7 ABC TRANSISTOR CORPORTION The ABC Transistor Corporation ships out transistor in lots of 12. 10% of all transistors produced are defective. ABC promises to repair any defectives which are shipped out. It also gives a money-back guarantee to consumers if a lot has more than 2 defectives. The cost to ABC to repair a transistor is $10.00. The money-back guarantee costs ABC $30.00 in addition to repair costs. 1. Compute the probability that a lot of transistors will have more than 2 defectives. 2. For every lot which is shipped out, what is the expected cost to ABC resulting from defective production of transistors? 3. By a major restructuring of the production process, the defective rate can be reduced to 5%. The cost of carrying this out, based on debt amortization, is $200,000 per annum. ABC sells approximately 100,000 lots (dozens) of transistors per year. Should ABC reduce the defective rate? 4. What other considerations aside from the monetary cost of defective production of transistors should be taken into account in ABC's decision of whether or not to reduce the defective rate? 78