Coca-Cola produces water in bottles. The variable cost of a case (12 one-liter bottles) is as...

 

Transcribed Image Text:

Coca-Cola produces water in bottles. The variable cost of a case (12 one-liter bottles) is as follows: Water and bottles inspection and rework costs All other variable costs Total variable cost per case In addition, the plant has $150,000 of fixed costs per year. $2.00 1.00 3.00 $6.00 The plant inspects the product at various stages. When inspectors find the water is below standard or the bottles have defects, production workers replace the water and/or the bottles. The cost of inspecting the product and replacing water and/or bottles averages $1.00 per case, and is recorded as inspection and rework costs. Coca-Cola leadership is concerned about product quality. Even though inspections are done on the bottling line, dissatisfied customers are switching to competitive water products. Management is considering purchasing a high-quality water product named Smart Water. This product would increase water and bottle costs to $2.50 per case while decreasing inspection and rework costs to $0.40 per case. All other variable costs would remain at $3.00 per case. Coca-Cola would sell Smart Water for $8.00 per case. If the high-quality water is purchased, Coca-Cola expects to sell 100,000 cases of water this year at $8.00 per case. If Coca-Cola continues to produce the current low-quality water, the company expects to sell 90,000 cases of water this year at $8.00 per case. Fixed costs are $150,000 per year whether the company buys high-quality water or low-quality water. Should Coca-Cola purchase the high-quality water? Complete a differential analysis to support your recommendation. Coca-Cola produces water in bottles. The variable cost of a case (12 one-liter bottles) is as follows: Water and bottles inspection and rework costs All other variable costs Total variable cost per case In addition, the plant has $150,000 of fixed costs per year. $2.00 1.00 3.00 $6.00 The plant inspects the product at various stages. When inspectors find the water is below standard or the bottles have defects, production workers replace the water and/or the bottles. The cost of inspecting the product and replacing water and/or bottles averages $1.00 per case, and is recorded as inspection and rework costs. Coca-Cola leadership is concerned about product quality. Even though inspections are done on the bottling line, dissatisfied customers are switching to competitive water products. Management is considering purchasing a high-quality water product named Smart Water. This product would increase water and bottle costs to $2.50 per case while decreasing inspection and rework costs to $0.40 per case. All other variable costs would remain at $3.00 per case. Coca-Cola would sell Smart Water for $8.00 per case. If the high-quality water is purchased, Coca-Cola expects to sell 100,000 cases of water this year at $8.00 per case. If Coca-Cola continues to produce the current low-quality water, the company expects to sell 90,000 cases of water this year at $8.00 per case. Fixed costs are $150,000 per year whether the company buys high-quality water or low-quality water. Should Coca-Cola purchase the high-quality water? Complete a differential analysis to support your recommendation.