Question 4

Scenario 4: Product Quality Decision Coca-Cola produces water in bottles. The variable cost of a case (12 one-liter bottles) is as follows: Woter and bottes Inspection and rework costs All other variable costs Fotal variable cost per case In addition, the plant has $150,000 of fixed costs per year. The plant inspects the product at various stages. When inspectors find the water is below standard or the bottles have defects, production workers replace the water and/or the bottles. The cost of inspecting the product and replacing water and/or bottles averages $1.00 per case, and is recorded as inspection and rework costs. Coca-Cola leadership is concerned about product quality. Even though inspections are done on the bottling line, dissatisfied customers are switching to competitive water products. Management is considering purchasing a high-quality water product named Smart Water. This product would increase water and bottle costs to $2.50 per case while decreasing inspection and rework costs to $0.40 per case. All other variable costs would remain at $3.00 per case. Coca-Cola would sell Smart Water for $8.00 per case. If the high-quality water is purchased, Coca-Cola expects to sell 100,000 cases of water this year at $8.00 per case. If Coca-Cola continues to produce the current low-quality water, the company expects to sell 90,000 cases of water this year at $8.00 per case. Fixed costs are $150,000 per year whether the company buys high-quality water or low-quality water. Should Coca-Cola purchase the high-quality water? Complete a differential analysis to support your recommendation. What other things should Coca-Cola consider about a higher quality water versus the current water