Shepton Specialty Products Ltd. is a manufacturer of surgical instruments. Given the changes in surgical technology, Shepton has had to invest heavily in maintaining and upgrading its state-of-the-art product line. Shepton has become noted for the high quality of its product and the reasonableness of its prices.
Shepton is currently evaluating the design and production of its neurosurgical line of products. They want to know what the current quality costs are and how much it would cost to improve quality. Currently, the company has an expected spoilage rate in the neurosurgical line of 1 unit for every 200 units produced. It costs $2,000 per week plus $0.10 per unit to inspect this product. With the current inspection policy and production specifications, the company experiences a return and warranty claim of one unit for every 500 units produced. Such a return normally costs the company the cost of the replacement unit and creates the potential for lost customers. Shepton estimates that every warranty claim loses five unit sales for the company.
Shepton has looked at revamping its quality control system. Using a new computer-assisted design and manufacturing system (that can be leased for $200,000 per year) the company could reduce the spoilage rate to 1 unit for every 350 units produced and reduce variable inspection costs to $0.065 per unit. As well, product returns are expected to drop to 1 unit for every 900 units produced. Average unit cost for the neurosurgical line is shown below.
The average selling price is $33 per unit and variable selling costs are 15 percent of the selling price.
Required
Given Shepton’s interest in quality control, determine whether they should lease the computer system.
