Costs of quality, ethical considerations. Refer to information in Exercise 19-17 in answering this question. Dream Rider has discovered a more serious problem with the plastic core of its car seats. An accident can cause the plastic in some of the seats to crack and break, resulting in serious injuries to the occupant. It is estimated that this problem will affect about 175 car seats in the next year. This problem could be corrected by using a higher quality of plastic that would increase the cost of every car seat produced by $15. If this problem is not corrected, Dream Rider estimates that out of the 175 accidents, customers will realize that the problem is due to a defect in the seats in only three cases. Dream Rider’s legal team has estimated that each of these three accidents would result in a lawsuit that could be settled for about $775,000. All lawsuits settled would include a confidentiality clause, so Dream Rider’s reputation would not be affected. Required
1. Assuming that Dream Rider expects to sell 250,000 car seats next year, what would be the cost of increasing the quality of all 250,000 car seats?
2. What will be the total cost of the lawsuits next year if the problem is not corrected?
3. Suppose Dream Rider has decided not to increase the quality of the plastic because the cost of increasing the quality exceeds the benefits (saving the cost of lawsuits). What do you think of this decision? (Note: Because of the confidentiality clause, the decision will have no effect on Dream Rider’s reputation.)
4. Are there any other costs or benefits that Dream Rider should consider?