The Cruiser Car Company has recently been made aware of an issue in regard to

one of their vehicles whereby it appears that the fuel tanks have been positioned

incorrectly and are only 15 inches from the rear bumper as opposed to the

industry recommended 17 inches. In addition, the vehicles do not have a metal

brace separating the fuel tank from the rear of the car, a standard feature in other

vehicles. The inherent danger here is that in a rear-end collision the possibility

of a fuel-fed fire is enhanced. Consequently, it is likely that the company would

have to pay compensation to any victims of accidents in the vehicles.

You are the management accountant within the organisation and you have been

asked to provide advice as to what action the company should take.

You perform the following analysis.

You estimate that there is potential for two hundred fuel-fed fire fatalities to

occur each year in the vehicles with an estimated cost to the company in legal

damages for each potential fatality of $500,000. Since the company has 41

million vehicles on the road you conclude that each fuel fed fatality will cost the

company $2.40 per automobile. The calculation appeared like this in the

memorandum:

200 fatalities x $500,000 per fatality / 41,000,000 vehicles

= $2.40 per vehicle

Alternatively, you estimate the cost of recalling the vehicles to be $8.59 per

vehicle.

In response to your findings the managing director states:

"It is not as if the company deliberately designed the cars this way to

cause fires. We will compensate any victims accordingly, however we

have to look after the interests of shareholders. Hence, we will pursue the

cheaper option and continue to compensate victims."

Assuming you are the management accountant write recommendations as to

what the company should do.