Problem G (special offer ingredient) Quality Calc, Inc., purchases calculator components and assembles them into handheld calculators. The variable cost of one Model A-25 is as follows:

Materials $10

Inspection and rework costs 2

All other variable costs 5

Total variable cost per case $17

In addition, this product incurs $5,000,000 of fixed costs per year.

The company inspects the product at various stages. The cost of inspecting the product and replacing components averages $2 per calculator, shown as the inspection and rework costs. Management is considering purchasing better components that would both increase quality and expand the calculator's capacity. These new components would increase materials costs to $12.50 per calculator, but would decrease inspection and rework costs to $1.50 per calculator. All other variables cost would remain at $5 per calculator. Fixed costs would remain at $5,000,000 per year.

Quality Calc currently sells each A-25 calculator for $25 at a volume of 1 million calculators per year. Management believes it can increase the price of the calculator (which would now be called the A-25 STAR) to $30 per calculator because of its increased capability. Sales volume would remain at 1 million calculators per year for the improved A-25 STAR. Should Quality Calc purchase the better components?