Answer:
The query lacks completeness:
The production line yields 100,000 chips annually.
All chips are sold.
The production cost for each chip is roughly $9.00.
Testing each chip incurs about $4.00.
Repairing a chip, including labor and materials, is around $2.00.
This repair expense covers the re-testing.
Post-testing profit for each chip is $0.25.
Shane manages a team of fifteen full-time employees.
Under Shane's oversight, there are also two part-time workers.
The manager overseeing Shane has been with the organization for nearly 7 years.
Shane has maintained a good rapport with Rob, his manager, for several years.
The inquiries are as follows:
1. What percentage of the chips might be defective if Xanthum, Inc. orders 15,000 chips from Shane's line?
- There is one defect in every 150 chips, so the percentage of defective chips = (1 / 150) x 100 = 0.667%.
- Thus, for an order of 15,000 chips from Xanthum, approximately 100 will likely be flawed.
2. Is this failure rate acceptable? Considering it from Xanthum’s point of view? And from the manufacturer’s perspective? Why or why not?
- From Xanthum's viewpoint, no level of defects is acceptable. I would return the defective chips and most likely cease future purchases. If the chips are used in further manufacturing, any defective ones could harm the product's reputation and lead to financial losses.
- From the manufacturer's angle, this rate is tolerable since 99.333% of the chips are fine. The real issue isn't the minuscule failure rate, but rather the lack of action taken regarding it.
3. Considering Shane's line produces 100,000 chips each year, what are the costs for:
a) Testing and repairing each chip?
- Testing all chips will cost 100,000 x $4 = $400,000.
- Repair expenses = (100,000 x 0.667%) x $2 = $1,333.33.
b) Testing all chips and discarding the defective ones?
- Testing all chips will cost 100,000 x $4 = $400,000.
- Costs due to discarded chips = 667 chips x ($9 + $4) = $8,671.
c) Testing no chips and replacing customers’ chips as required?
- If no chips are tested, the testing expense is $0.
- The number of defective chips returned could be from 0 to 667. If 0 are returned, the replacement cost is $0. When 667 chips are returned, the replacement costs come to (667 x $9) + lost profit from the replaced chips = $6,003 + [667 x ($4 + $2 + $0.25)] = $6,003 + $4,168.75 = $10,171.75 plus any additional costs for replacements.
4. Is Rob’s assessment reasonable? What about his claim that it saves money to not discard defective chips?
- Since the expense of replacing flawed chips is significantly less than repairing and testing them, Rob is justified in saying that not repairing leads to greater profits. However, he fails to account for how selling faulty chips impacts the company’s sales. As mentioned in question 2, if I were a client, I would no longer buy chips from Rob’s company due to their defects. The costs associated with defective products can lead to lawsuits and damage the brand’s reputation. Rob is focusing on production costs without considering other potential repercussions. For instance, if Xanthum produces medical equipment using faulty chips that result in failures, they could be sued by clients, and Rob’s company would face similar legal challenges.
