PIM Industries Inc. manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 4% of the 61,000 units manufactured per year. The average rejection rate of the industry is 2%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $180,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,600 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average.

Required:

1-a. What would be the projected five-year impact on operating profit?

Five-year projected effect on operating income

1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting?

multiple choice

• Yes

• No