Because the expected relevant benefits of $3,606,500 exceed the expected relevant costs of the

new component of $1,260,000, Pressing Matters should introduce the new component. Note that
the opportunity cost benefits in the form of higher contribution margin from increased sales is an
important component for justifying the investment in the new component. 

2. The incremental cost of the new component of $1,260,000 is less than the incremental
savings in rework and repair costs of $1,926,500 ($1,106,000 + $29,750 + $78,750 + $712,000).
Thus, it is beneficial for Pressing Matters to invest in the new component even without making
any additional sales. 

3. Pressing Matters should consider nonfinancial factors such as the reputation benefits of
high quality that often cannot be quantified in terms of higher sales. Higher quality also improves
the morale of employees working in the company and their care and commitment to improving
processes.  

19-23 Quality improvement, relevant costs, relevant revenues. AquaPro produces water
purifiers for the household. Business is good but Derek, the manager, has noticed that customers
complain because they find leakages in the plastic nozzles used.  AquaPro provides a warranty
for each machine and charges $115 for each of them.
AquaPro installed 5,000 machines last month and 20% of them have experienced this
leakage problem.  Each repair costs $35 for the company.
Derek believes that the problem can be eliminated by adding an extra check valve
(costing $2.5/machine). This will reduce the number of purifiers produced every month by a 100
(in order to accommodate the price of the extra check value), but will lower the number of the
machines experiencing a leakage from 20% to 5%.

Required:
1. Do you think that AquaPro should implement Derek’s idea?  Answer with calculations.  
2. What are the nonfinancial and qualitative factors that AquaPro may consider in deciding whether
to implement the new design?

SOLUTION

(20 min.)  Quality improvement, relevant costs, relevant revenues.

1.

Current warranty Costs (5,000 × 0.2 × $35.00) $35,000

According to Derek’s idea, the COQ would be:
Cost of check valve (Prevention) ($2.5 × (5000-100)) $12,250
Loss of Revenue (Prevention) 100 × $115               $11,500
Warranty (External Failure) ((5000-100) × 0.05 × $35)   $8,575
Total COQ             $32,325

Derek’s idea will reduce the cost by $2,675. So, it should be implemented.
2. AquaPro should consider the other benefits of mitigating this quality problem. It will
improve the credibility of the product for customers and potential customers, and result in a
lower level of concern towards the hygienic implications of using AquaPro’s water purifiers.
Another consideration is employee morale.  With fewer machines to serve, employees will feel
proud of their employer for fixing the problem and can focus more attention on customer service.

19-24 Waiting time. Toy-For-Fun (TFF) makes customized toys for kids. TTF’s managers are
currently in a fix: although their vending machine is under-utilized according to their
calculations, there is often a queue in front of the machine which incurs waiting time. They want
to know the average waiting time for an order, that is, the time from which an order is received
to when it is manufactured. They have asked for your help and have provided the following
information.

Annual expected number of orders: 18,000

Manufacturing time per order: 20 minutes
Annual machine capacity in hours: 7,200