Q. 3. The production, quality and product managers considered their second option to be producing and selling flawed units for 6 months while engineers corrected the problem. Under this option, the company would not disclose the problem and hope for the best. Perhaps none of the product claims would involve any injury; only product replacement would be required at a cost of about $12 per unit.

a. Adjust the 2017 budget for an assumed defect rate of .25% during the first 6 months of production. (Note this is a defect rate in addition to the normal rate faced in each year, 2012-2016, which is already accounted for in marketing cost.)

b. Adjust the fixed production cost for 2017 for an additional $2,000,000 in design engineering to solve the problem within a 6-month period. (This will involve the use of overtime and consultants).

What would the budgeted profit and return on sales be if option two were selected?