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?

Would appreciate the steps on how to do this, thank you.

EXHIBIT ONE Chef Marco's Choice, Inc Premium Grade Ovenware Product Income Statement For the years ended December 31, 2002-2006 2006 2005 2004 2003 2002 Sales Sales in units Cost of Goods Sold Variable Fixed Gross Profit Attributable costs Marketing Other (primarily fixed) Product line profit before G&A allocation $13,240,117 $18,898,211 25,364,382 20,651,700 17,751,250 Return on Sales $ 78,599,808 $81,874,800 $86,184,000 $75,600,000 $67,500,000 4,5*00,000 5,239,987 5,458,320 5,745,600 5,040,000 29,081,929 31,112,424 31,026,240 27,972,000 24,975,000 27,865,240 23,221,033 21,701,900 19,729,000 18,100,000 $21,652,639 27,541,343 $33,455,860 $ 27,899,000 $ 24,425,000 5,894,986 2,517,537 6,140,610 2,502,522 5,774,3218 2,317,150 5,140,800 2,106,500 4,758,750 1,915,000 16.84% 23.08% 29.43% 27.32% 26.30% EXHIBIT ONE Chef Marco's Choice, Inc Premium Grade Ovenware Product Income Statement For the years ended December 31, 2002-2006 2006 2005 2004 2003 2002 Sales Sales in units Cost of Goods Sold Variable Fixed Gross Profit Attributable costs Marketing Other (primarily fixed) Product line profit before G&A allocation $13,240,117 $18,898,211 25,364,382 20,651,700 17,751,250 Return on Sales $ 78,599,808 $81,874,800 $86,184,000 $75,600,000 $67,500,000 4,5*00,000 5,239,987 5,458,320 5,745,600 5,040,000 29,081,929 31,112,424 31,026,240 27,972,000 24,975,000 27,865,240 23,221,033 21,701,900 19,729,000 18,100,000 $21,652,639 27,541,343 $33,455,860 $ 27,899,000 $ 24,425,000 5,894,986 2,517,537 6,140,610 2,502,522 5,774,3218 2,317,150 5,140,800 2,106,500 4,758,750 1,915,000 16.84% 23.08% 29.43% 27.32% 26.30%