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 2007 budget for an assumed defect rate of .25% for 6 months production. (Note this is a defect rate in addition to the normal rate faced in each year, 2002-2006, which is already accounted for in marketing cost.)

b. Adjust the fixed production cost for 2007 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?

If the engineers redesign efforts had worked originally, the Budgeted Income Statement for Premium Grade Overnware in 2007 would have been:

a.)	Expected Sales Revenue	1,500,000 4 Quarters($15-10%)	$81,000,000
b.)	Variable cost of goods sold	1,500,000 4 Quarters($5.55-35%)	$21,450,000
c.)	Fixed cost of production	($23,221,033 + 3.5%)	$24,033,769
d.)	Gross Profit	$81,000,000 - ($21,450,000 + $24,033,769)	$35,516,231
e.)	Attributable Costs	$35,516,231 - $27,265,756	$8,250,475
i.)	Marketing Costs	$81,000,000 x 7%	$5,670,000
ii.)	Other Fixed Costs	$2,517,537 + 2.5%	$2,580,475
f.)	Product line profit before G&A allocation	[35,516,231 - 8,250,475)	$27,265,756
g.)	Return on sales	($27,265,756 / $81,000,000) x 100	33.66%

Since the budgeted profit target is 33.66%, the product manager met his profit target of 25% return on sales in 2007 for the product line with the redesign.

The production, quality, and product managers used this budgeted income statement to consider the first option that was given:

2)

	2007
Sales	$ 54,270,000
Sales Units	4,020,000
COGS
Variable	14,502,150
Fixed	26,533,769.16
Gross Profit	$13,234,080.84
Attributable Cost
Market	5,798,900
Other	580,475.425
Prod. Line Profit
Before G&A allocation	$6,854,705.415
Return of Sales	12.63%