20.17 Quality improvement, relevant costs and relevant revenues. (25 min) 1 Incremental costs over the next year of choosing the new lens = €50 × 20,000 copiers = €1,000,000. 2 Incremental benefits over the next year of choosing the new lens Costs of quality items Savings on rework costs €1,600 × 300 fewer copiers reworked Savings in customer-support costs €80 × 200 fewer copiers repaired Savings in transportation costs for parts €180 × 200 fewer copiers repaired Savings in warranty repair costs €1,800 × 200 fewer copiers repaired Opportunity costs Contribution margin from increased sales 100 × €6,000 Cost savings and additional contribution margin
€480,000 16,000 36,000 360,000
600,000 €1,492,000 3 Since the expected benefits of €1,492,000 (requirement 2) exceed the costs of the new lens of €1,000,000 (requirement 1), Braganza should introduce the new lens. Note that the opportunity cost benefits in the form of higher contribution margin from increased sales is an important component for justifying the investment in the new lens. The incremental cost of the new lens of €1,000,000 is greater than the incremental savings in rework and repair costs of €892,000. Investing in the new lens is beneficial provided it generates additional contribution margin of, at least, €108,000 (€1,000,000 − €892,000), that is, additional sales of at least €108,000 ÷ €6,000 = 18 copiers.
