Reference no: EM132614593

The Cruiser Car Company has recently been made aware of an issue in regard to one of their vehicles whereby it appears that the fuel tanks have been positioned incorrectly and are only 15 inches from the rear bumper as opposed to the industry recommended 17 inches. In addition, the vehicles do not have a metal brace separating the fuel tank from the rear of the car, a standard feature in other vehicles. The inherent danger here is that in a rear-end collision the possibility of a fuel-fed fire is enhanced. Consequently, it is likely that the company would have to pay compensation to any victims of accidents in the vehicles.

You are the management accountant within the organisation and you have been asked to provide advice as to what action the company should take. You perform the following analysis. You estimate that there is potential for two hundred fuel-fed fire fatalities to occur each year in the vehicles with an estimated cost to the company in legal damages for each potential fatality of $500,000. Since the company has 41 million vehicles on the road you conclude that each fuel fed fatality will cost the company $2.40 per automobile. The calculation appeared like this in the memorandum:

200 fatalities x $500,000 per fatality / 41,000,000 vehicles = $2.40 per vehicle

Alternatively, you estimate the cost of recalling the vehicles to be $8.59 per vehicle.

In response to your findings the managing director states:

"It is not as if the company deliberately designed the cars this way to cause fires. We will compensate any victims accordingly, however we have to look after the interests of shareholders. Hence, we will pursue the cheaper option and continue to compensate victims."

Question 1: Assuming you are the management accountant write recommendations as to what the company should do.