Despite Extensive Quality Control Efforts, the Model Q Sparkplug Production

question 26

Essay

Despite extensive quality control efforts, the Model Q sparkplug production line produces plugs with an average defect rate of 4%.Sparkplugs cost $.80 each to produce and the warranty cost for each defective item shipped is estimated to be $2.50.Management is considering the installation of a testing device for
identifying defective sparkplugs.The unit will correctly select
99% of the defective plugs but, unfortunately, will also incorrectly show as defective 5% of the non-defective plugs.Any plug labeled as defective will be discarded.Testing will cost $.025 per sparkplug.
Should the firm install the testing unit?

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Definitions:

Investment

The allocation of resources, usually money, in order to earn income or profit over time.

Partial Equity Method

An accounting method used when an investing company has significant influence over, but not full control of, another company, requiring the investor to record its share of profits.

Equity Method

The Equity Method is an accounting technique used to record investments in other companies, recognizing the income earned from the investment proportional to ownership.

Dividends

Cash disbursements issued to shareholders by a company, commonly originating from the organization's earnings.