Quality versus costs Jack has discovered a problem involving

Quality versus costs. Jack has discovered a problem involving the mix of lye to the dry concrete mix that costs the company $20,000 in waste and $14,000 in lost business per period. There are two alternative solutions. The first is to lease a new mix regulator at a cost of $14,000 per period. The new regulator would save Jack $14,000 in waste and $8,000 in lost business. The second alternative is to hire an additional employee to manually monitor the existing regulator at a cost of $12,000 per period. This would save Jack $10,000 in waste and $8,000 in lost business per period.

Which alternative should Jack choose?

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Solution

In present scenario:

Total cost = cost in waste + Cost in lost business = 20000 + 14000 = $34000

Alternative 1:

Cost = Lease cost of new mix regulator = $14000 per period

Benefit = Saving in waste + saving in lost business

Benefit = 14000 + 8000 = $22000

Net Benefit = Benefit – cost = 22000-14000 = $8000 per period

Alternative 2:

Cost = cost of employee salary = $12000 per period

Benefit = Saving in waste + saving in lost business = 10000+8000 = $18000

Net benefit = 18000 – 12000 = $6000

Recommendation:

Alternative 1 should be chosen as it gives high net benefits ($8000) in comparison to alternative 2 that only gives the net benefits of $6000.