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Precision Electronics Ltd produces a special type of medical thermometer for health sector. The company recently encounters a quality problem that causes the product's accuracy

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Precision Electronics Ltd produces a special type of medical thermometer for health sector. The company recently encounters a quality problem that causes the product's accuracy of temperature reading. The following relevant cost information is extracted from current costing system for review and analysis. Produced and sold during the year: 100,000 units Rework cost Customer Handling cost Warranty per hour support cost per delivery repair cost per per hour unit $ $ $ $ Variable cost 16 85 520 45 Fixed cost 10 50 250 120 Total 26 135 770 165 After study of the quality issue, production engineering department propose a solution to the quality problem. It requires to add a component (anti-static device) to protect the electronic circuit flow, which will increase the cost $5 more for each unit of the product The quality engineers evaluate the proposal and estimate the impact on the existing operation as follows: (a) Save 8,000 hours of rework (b) Save 150 hours of customer support (c) Move 450 fewer delivery (d) Save 2,500 hours of warranty repairs (e) Sell additional 10,000 medical thermometers, for total contribution margin of $580,000 Precision Electronic expects that even as it improves the quality, it will not be able to save any of the fixed cost of re-work or repair. Precision Electronics uses 1-year time horizon for this decision because there will be a new model to replace existing model in one year time. Required: 1. Do you suggest Precision Electronics to add the new component? Show your working and calculations. (10 marks) 2. Suppose the estimate of additional 10,000 medical thermometer is uncertain. What is the minimum number of additional medical thermometers that Precision Electronics needs to sell to justify adopting the additional new component? (6 marks) 3. Apart from financial measurement, what other factors should managers at Precision Electronics consider when making their decision about adding the new component? (4 marks)

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