Response to the following problem:
CRM, Inc., manufactures computer disk drives. It sells these disk drives to other manufacturers, which use them in assembling computers. CRM is having trouble with its new DVD drive. About half the time, CRM employees find defects while the disk drive is still on the production line. These drives are immediately reworked in the plant. Otherwise, CRM's customers do not identify the problem until they install the disk drives they've purchased. Customers return defective drives for replacement under warranty, and they have also complained that after they install the disk drive, the drive's connector (which plugs into the computer system board) often shakes loose while the computer is being assembled.
The customer must then reassemble the computer after fixing the loose connection.
ustomer must then reassemble the computer after fixing the loose connection. CRM CEO Jay Rich has just returned from a seminar on total quality management (TQM). He forms a team to address these quality problems. The team includes the plant engineer, the production foreman, a customer service representative, the marketing director, and the management accountant.
Three months later, the team proposes a major project to prevent these quality problems. CRM's accountant Anna Crowe reports that implementing the team's proposal will require CRM to incur the following costs over the next three months:
Require CRM to incur the following costs over the next three months:
• $180,500 for CRM scientists to develop a completely new disk drive.
• $70,000 for company engineers to redesign the connector so that it better tolerates rough treatment.
The project team is unsure whether this investment will pay off. If the effort fixes the problem, Crowe expects that
• A reputation for higher quality will increase sales, which in turn will increase the present value of profits by $200,000.
• Fewer disk drives will fail. The present value of the savings from fewer warranty repairs is $170,300.
• The plant will have fewer defective disk drives to rework. The present value of this savings is $100,200.
However, if this project is not successful, there will be no cost savings and no additional sales. The team predicts a 70% chance that the project will succeed and a 30% chance that it will fail.
Required
1. If the quality improvement project succeeds, what is the dollar amount of the benefits?
2. Should CRM undertake this project? Why or why not? Show supporting calculations.