A manager of Paris manufacturing which 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. Below are the relevant information:

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

1- Suppose annual demand is 8000 units. Should the firm lease the new inspection system?

2- NEW-SPEC, a firm that specializes in providing manual inspection processes for other firms, approached Paris manufacturing and offered to inspect parts for $19 each with no fixed costs. It assured Paris manufacturing that the accuracy and quality of its manual inspections would equal that of the automated inspection system. Demand for the upcoming year is forecast to be 8000 units. Should the manufacturer accept the offer?

Answer rating: 100% (QA)

1 Current Total Cost of manual inspection system Fixed Cost Variable Cost 35000 15 x 8000 ... View the full answer