Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 29

Cost-of-Quality Improvement—Relevant Cost Analysis PIM Industries, Inc., manufactures electronics components. Each unit costs $30 before the final test. The final test rejects, on average, 5 percent of the 50,000 units manufactured per year. The average rejection rate of the industry is 3 percent. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $100,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting that will cost an additional $5,000 in operating cost each year, the firm expects to reduce its rejection rate to no higher than the industry average.

Required

1.  Should the firm install the lighting? (show calculations)

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2.  What other considerations might affect this decision?

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3.  What is the primary role of the management accountant in this decision context?

Step 1 of 4

When there is a company producing goods and services, then it is very important for the company to control the quality of products produced. High level of variation in product quality will make batch unacceptable, so it is necessary to control quality and that too with cost-effectiveness.