Barry's Burger Shack operates a single location at NEU selling burgers, fries and sodas to

faculty and students. Revenues for 2015 were $90,000 with profits of $2,250; industry

benchmarks suggest profit margins should be close to 10% of revenue. Barry had noticed

an increasing number of complaints from customers over the quality of his burgers and the messiness of

the soda self service area and has hired you to estimate the cost of quality for his burger business.

Your analysis identified the following broad categories of quality costs in 2015:

1

One in 30 customers returned their burgers for a replacement due to burger being too greasy,

being served too cool, or served with wrong ingredients; cost to replace was ~$1,600 per year

2

Approximately 5% of burgers have to be scrapped during preparation process at an

estimated cost of about $1,200 per year; fries scrap cost about $600 per year

3

Barry uses a mystery shopper service to evaluate employee performance at an annual cost

of $600 per year

4

Barry purchased a special grille last year for $8,000 to reduce grease in burgers and to

ensure more consistent cooking temperature; Grille has an expected life of 5 years (SL depr.)

5

Barry spent $400 on training his cooking and serving staff

6

A customer sued Barry after finding a bandaid in her burger; Barry settled for $2,000.

7

The self service soda area used 6,000 ounces of syrup at a cost of $0.25 per ounce for

5,000 paid sodas; each soda should use 1 ounce of syrup but the excess was spilled

8

Barry, whose annual salary with benefits was $18,000, spent approximately 15% of his time

inspecting burger production operations

Next, you focus on reducing external failure cost. You analyze the cost of returned burgers and determine
70% of returns are due to wrong ingredients. You note Barry is using paper slips to send orders to the grille
so you do some research and find a point of sale terminal that shows customer what they are ordering and
requires grille worker to confirm ingredients before wrapping burger. The new terminal will cost $3,000 with
an expected life of 5 years (use SL depr.), but could save 80% of current returns due to wrong ingredients.
Required:
	Compute NPV for the new terminal with 40% tax rate and Barry's cost of capital =
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Cost		$(3,000)	0	0	0	0	0
Projected annual savings
SL Depreciation
Pre-tax profit increase
less taxes at		40%
After tax profit increase
Add back depreciation
Cash flow		$(3,000)
Net Present Value		$1,759	Positive