Question 6

An automobile manufacturer plans to spend one billion dollars to improve the quality of a new model. The manufacturer expects the quality improvement program to eliminate the need for recall and reduce the costs for warranty repairs. The manufacturers experience has been, on average, 1.5 recalls for each new model at a cost of $300 per vehicle per recall.

The average cost per recall, if one is needed, is expected to increase by 10% for the new model. Costs for other warranty repairs are expected to decrease from $200 to $80 per unit. Sales of the new model were expected to be 500,000 units without the quality-improvement program. The firm believes that the proposed, well-advertised quality program expected to cost an additional $50 million will increase total sales to 650,000 units. The gross profit per unit on the new model sold is $5,000.

Required:

Would you recommend the proposed quality-improvement program? Please show all your computations to support your answer.