Quick Fire Batteries is considering introducing a new Supreme battery with a lifetime warranty. In 2013, Quick Fire sold 100,000 batteries with a 4-year warranty. Introducing the Supreme battery would require accounting for future replacement costs under the lifetime warranty. Analysis shows the total warranty claims costs for the Supreme battery in 2019-2021 would be $184,150 in present value. Factoring this in, the wholesale price of the Supreme battery is calculated to be $59.33. Given the financial analysis, Quick Fire should proceed with launching the Supreme battery.

1. QUICK FIRE BATTERIES,
INC.
FIN490
Members: Sean Coykendall
Mark Novak
Andrew Worden
Yi Chen

2. EXECUTIVE SUMMARY
 In 2013, there were 100,000 Advantage batteries sold by Quick
Fire Batteries, Inc. that came with a four-year warranty.
 The Supreme battery project has to take into account the
inflation factor when calculating future cost of replacing the
battery.
 Allison realized that auto parts retailers could purchase batteries
from her competitors that carried an unlimited warranty for $40
to $60.
 The price elasticity of demand for automobile batteries could be
a factor in the Supreme battery sales.
 The Supreme Battery project for Quick Fire Batteries, Inc. should
be implemented.

3. Introduction
What is this case goal?
 This case study will describe the costs of providing an
automobile battery with a life time warranty for Quick Fire
Batteries, Inc.
 This process has to take into affect the future cost of
batteries they will be replacing as well as the probability of
failure on those batteries.

4. EXECUTIVE SUMMARY-Financial Background
TABLE 2
Quick Fire Batteries, Inc.
Statement of Revenue and Expense
December 31, 2013
2011 2012 2013
Net sales revenue $860,000 $2,150,000 $4,500,000
Cost of goods sold
Direct materials 270000 675000 1400000
Direct labor 173400 433500 900000
Manufacturing overhead 96600 241500 500000
Cost of goods sold $540,000 $1,350,000 $2,800,000
Gross profit $320,000 $800,000 $1,700,000
Selling expense 96000 160000 425000
Administrative expense 64000 80000 153000
General expense 16000 40000 68000
Depreciation 64000 240000 425000
Total operating costs $240,000 $520,000 $1,071,000
Net operating income $80,000 $280,000 $629,000
Interest expense 32000 98000 189000
Earnings before taxes $48,000 $182,000 $440,000
Income taxes (40%) $19,200 $72,800 $176,000
Earnings after tax $28,800 $109,200 $264,000
TABLE 1
Quick Fire Batteries, Inc.
Corporate Sales History
2011 2012 2013
Units sold (Advantage battery) 20,000 50,000 100,000
Average net selling price (per
battery) $43 $43 $45

5. EXECUTIVE SUMMARY-Financial Background
TABLE 4
Quick Fire Batteries, Inc.
Warranty Retention Forecast for the Supreme Battery
Proportion of Supreme customer base retaining warranty coverage:
5 years after purchase 6 years after purchase 7 years after purchase
60% 50% 30%
TABLE 5
Quick Fire Batteries, Inc.
Inflation Forecast: 2014 through 2021
Year Producer Price Index Consumer Price Index
2014 2% 3%
2015 4% 2%
2016 3% 4%
2017 3% 3%
2018 3% 3%
2019 3% 3%
2020 3% 3%
2021 3% 3%
Average annual inflation rate 3% 3%

6. Historical Production Costs for Advantage
Battery
 What the Cost
Quick Fire to
produce each
Advantage
battery ?
 What the per-
unit statement
of revenue and
expense ?
Quick Fire Batteries, Inc.
Per-Unit Statement of Revenue and Expense
December 31, 2013
2011 2012 2013
Net sales revenue $43.00 $43.00 $45.00
Cost of goods sold
Direct materials 13.50 13.50 14.00
Direct labor 8.67 8.67 9.00
Manufacturing overhead 4.83 4.83 5.00
Cost of goods sold $27.00 $27.00 $28.00
Gross profit $16.00 $16.00 $17.00
Selling expense 4.80 3.20 4.25
Administrative expense 3.20 1.60 1.53
General expense 0.80 0.80 0.68
Depreciation 3.20 4.80 4.25
Total operating costs $12.00 $10.40 $10.71
Net operating income $4.00 $5.60 $6.29
Interest expense 1.60 1.96 1.89
Earnings before taxes $2.40 $3.64 $4.40
Income taxes (40%) $0.96 $1.46 $1.76
Earnings after tax $1.44 $2.18 $2.64

7. Future Production Costs for Advantage
Battery
 How much will
Advantage
battery cost in
the next ten
years?
Quick Fire Batteries, Inc.
Cost Per Battery Producer Price Index
2014 $28.56 2%
2015 $29.70 4%
2016 $30.59 3%
2017 $31.51 3%
2018 $32.46 3%
2019 $33.43 3%
2020 $34.43 3%
2021 $35.47 3%
Quick Fire Batteries, Inc.
Production Costs for Advantage
Battery
Year
Cost Per
Battery
2011 $27.00
2012 $27.00
2013 $28.00

8. Forecast to Produce new Supreme
Battery
 The forecast of unit cost for the Advantage battery does off
useful information when developing a forecast of the total cost
to produce the new Supreme battery in 2014.
 Reason:
 the Supreme battery is exactly identical to the Advantage
battery, the only difference is that the Supreme battery will be
offering a lifetime warranty to its original purchaser
 Both of the Quick Fire batteries will cost the same amount to
produce, but the Supreme battery will include a warranty
replacement premium.

9. Expected Warranty Claims from Supreme
Battery
 How many warranty
claims can Quick
Fire expect to
receive
in 2019, 2020, and
2021 from its sales
of the Supreme
battery?
Forecasted Warranty Claims for Supreme Battery
Year
2019 2020 2021
Retained coverage 60% 50% 30%
Projected failure rate 30% 40% 30%
Expected warranty claims 18% 20.0% 9.0%
Number of warranty claims 7,200 3,360 454
Number of sales in 2014 40,000

10. Consideration of Potential Claims before
2019 and after 2021
 When developing the total cost of warranty claims for the
Supreme battery it is not necessary to consider the
potential claims that could occur before 2019 because the
battery has a projected 0% failure rate for the first four
years of the products life span.
 In addition, it is not necessary to consider the potential
claims after 2021 due to the fact all batteries should fail
within the 7 year life span. According to the projected failure
rates, after 7 years the batteries failure rate was 100%.

11. Total Warranty Claims Quick Fire will
Experience
 What is the total cost
of warranty claims that
Quick Fire will
experience in 2019,
2020, and 2021 ?
Quick Fire Batteries, Inc.
Total Cost of Warranty Claims for Supreme Battery
Year
2019 2020 2021
Cost per battery $33.43 $34.43 $35.47
Number of warranty claims 7,200 3,360 454
Total cost of warranty
claims $240,698 $115,696 $16,087

12. Incorporating Warranty Costs into Pricing
Framework
 What the
total cost
of warranty
claims for
Surpeme
Battery in
2014?
Quick Fire Batteries, Inc.
Total cost of warranty claims for Surpeme Battery in 2014
Year
2019 2020 2021
Total cost of warranty claims $240,698 $115,696 $16,087
Years until claim 5 6 7
PV of total cost $125,011 $52,709 $6,429
Total warranty expense in 2014 $184,150
Cost of capital 14%

13. Whole Sale Price of Supreme Battery
 What is the wholesale
price of Supreme
Battery?
Quick Fire Batteries, Inc.
Whole Sale Price of Supreme Battery
Year
2013 2014
Net sales revenue $4,500,000 $2,373,200
Cost of goods sold
Direct materials 1400000
Direct labor 900000
Manufacturing overhead 500000
Cost of goods sold $2,800,000 $1,142,400
Gross profit $1,700,000 $1,230,800
Warranty expense 0 184150
Promotion expense 0 150000
Selling expense 425000 224136
Administrative expense 153000 80689
General expense 68000 35862
Depreciation 425000 224136
Total operating costs $1,071,000 $898,971
Net operating income $629,000 $331,829
Interest expense 189000 99674.4
Earnings before taxes $440,000 $232,154
Income taxes (40%) $176,000 $92,862
Earnings after tax $264,000 $139,293
Net profit margin 5.87%
Price of Supreme Battery $59.33

14. Should Quick Fire Proceed with the Supreme
Battery?
 Yes! Allison and Quick Fire Batteries, Inc.
should proceed with the Supreme battery in
2014.
 Overall, Quick Fire Batteries, Inc. should enter
the market with the Supreme battery.

15. Thanks