Flyer Ltd (Flyer) is an automobile manufacturer specialized in high-end motorbikes. The company manufactures and sells 10,000 motorbikes each year. Flyers management has decided to spend $1 billion in 2020 for a quality management program to improve the quality of the companys products.

As a quality improvement initiative, the production manager suggests to replace the engine model that are currently used in all Flyers products. The new engine model will cost $250 per unit more than the existing one. However, he expects that the new model will bring to the company the following improvements:

1. reduction of 15,000 rework hours;

2. saving of 900 hours of customer support;

3. move 300 fewer loads;

4. reduction of 15,000 hours of warranty repairs;

He anticipates that, with the improved product quality, Flyer can sell an additional 100 motorbikes in the year, leading to additional contribution margin of $3,000,000.

To support his proposal, the production manager listed out the following data regarding the costs of rework and repair for Flyers products:

	Variable cost	Fixed cost	Total cost
	$	$	$
Rework cost per hour	80	115	195
Repair costs
Customer support cost per hour	40	65	105
Transportation cost per load	700	230	930
Warranty repair cost per hour	90	152	242

It is believed that even if the change can improve quality, it will not be able to save any of the fixed costs of re-work or repair.

Required:

(a) Should Flyer change to the new engine model? Show your calculations.

(b) Suppose the estimate of 100 additional motorbikes sold is uncertain. What is the minimum number of additional motorbike that Flyer needs to sell to justify adopting the production managers proposal?

(c) What other factors should Flyers management consider when making their decision about changing to a new component??

(d) Identify the four categories of cost of quality. Out of these four categories, what cost(s) should Flyer consider spending more on for its quality management programme? Explain briefly.