Verasource Microprocessor Corporation VMC sells 2000 special

Verasource Microprocessor Corporation (VMC) sells 2,000 specialized microprocessor chips each month at a price of $1,500 each. Variable costs amount to $1,500,000, and fixed costs are $500,000. Currently the company has a defect rate of 8 percent (which are chips returned by customers, scrapped by VMC, and replaced). Note that the variable costs include the cost of producing the defective chips. a. What is the hidden cost to the company of making this rate of defectives instead of 2,000 good chipseach month? b. Suppose a Six Sigma effort can reduce the defects to a six-sigma level (assume for simplicity that the defective rate is essentially zero). What is the impact on profitability?

Solution

the defective chips are 160 chips and the variable cost it requires of 160*$750= $120,000

($1,500,000/2000)= $750 per each chip

the hidden cost to produce the defective chips is $120,000.

b. the revenues will definitely goes once if we implements the six sigma technique. but here we need to consider what is the cost of six sigma program to implement it and is there any maintanance cost require for it and what aditional costs we requires.

if the costs are lesser that the revenues definitely it will helps to increase the profits. otherwise it is not suggestiable to follow it.