Nirvana Products Company Has Just Gone Through a Rigorous Evaluation

question 4

True/False

Nirvana Products Company has just gone through a rigorous evaluation due to sliding profits in the past year. The engineers strongly recommend implementing an aggressive preventative maintenance program, but the accountants say it will cost $50,000. The lawyers insist on a zero-defect product inspection as the units are being packaged, but the accountants say it will cost $40,000. The vice president for production said he just thought it was too expensive of a gamble to take, but the factory manager pointed out that if they did not look ahead at the consequences, they could easily lose $100,000 of sales to their competitors because of shoddy goods, and a costly production shutdown that would cost them another $100,000 if the machinery gives out unexpectedly.
In this situation, the company should not invest in the quality programs being recommended because they are not justified on a cost/benefit basis.

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Definitions:

Price Floor

A minimum price set by the government for certain goods and services, below which they cannot be sold, aimed at protecting producers.

Government Purchases

Expenditures made by the government for goods and services that affect the economy, including investments and spending on infrastructure, healthcare, and education.

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, due to market price.

Price Floor

A government or regulatory-imposed minimum price for a particular good or service, above the equilibrium price.