A manager of Paris Manufacturing that produces computer hard drives is planning to lease a new automated inspection system. The manager believes the new system will be more accurate than the current manual inspection process. The firm has had problems with hard drive defects in the past and the automated system should help catch these defects before the drives are shipped to the final assembly manufacturer. The relevant information follows.
Current Manual Inspection System
Annual fixed cost = $35,000
Inspection variable cost per unit = $15 per unit
New Automated Inspection System
Annual fixed cost = $165,000
Inspection variable cost per unit = $0.55 per unit
Suppose annual demand is 8,000 units. Should the firm lease the new inspection system?