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Problem-1 (100 pts)
A small but important raw material is an ingredient in a special plastic used in automobile bumpers. The raw material costs $.50 per bumper. The plastic costs $5. The bumpers have a variable manufacturing cost of $25 each. XYZ Motor Company buys the bumpers from the bumper supplier for $40 each and assembles them into its autos. When a repair shop orders a replacement bumper, it buys bumpers for $100 each and charges the car owner $250 including labor to replace it.
The original raw material has a bad batch that goes into 10,000 front bumpers. While the bad raw material originally costs $5,00, the problem is not discovered until all 10,000 cars have been sold. The government requires XYZ to recall all the cars and have their front bumpers replaced. What is the closest estimate of the failure cost to XYZ and its 10,000 customers?
- $400,000 minus $250,000 refunded by the bumper supplier, or $150,000
- $1 million
- $2 million
- $3 million
Justify your choice with some rough calculations based on the information given. (Think of the different categories of costs involved.Estimate each of these costs and provide some justification for the numbers.)
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