Refer to information in Exercise 19-17 in answering this question. Safe Travel 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 200 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 $ 10. If this problem is not corrected, Safe Travel estimates that out of the 200 car seats affected, customers will realize that the problem is due to a defect in the seats in only three cases. Safe Travel’s legal team has estimated that each of these three cases would result in a lawsuit that could be settled for about $ 500,000. All lawsuits settled would include a confidentiality clause, so Safe Travel’s reputation would not be affected.
In Exercise 19-17, Safe Travel produces car seats for children from newborn to 2 years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Safe Travel’s only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $ 5.00 per car seat, and the repair cost is $ 1.00 per car seat. All 200,000 car seats were inspected last year, and 5% were found to have problems with the stitching in the straps during the internal inspection. Another 1% of the 200,000 car seats had problems with the stitching, but the internal inspection did not discover them. Defective units that were sold and shipped to customers needed to be shipped back to Safe Travel and repaired. Shipping costs are $ 8.00 per car seat, and repair costs are $ 1.00 per car seat. However, the out-of-pocket costs (shipping and repair) are not the only costs of defects not discovered in the internal inspection. Negative publicity will result in a loss of future contribution margin of $ 100 for each external failure.

1. Assuming that Safe Travel expects to sell 200,000 car seats next year, what would be the cost of increasing the quality of all 200,000 car seats?
2. What will be the total cost of the lawsuits next year if the problem is not corrected?
3. Suppose Safe Travel 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?
4. Are there any other costs or benefits that Safe Travel should consider?

  • CreatedMay 14, 2014
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