An Inspection Decision With Quality Costs
A company is considering additional final inspection costs of $1 per unit before delivery to customers.The additional inspection should reduce the defective rate from 3 percent to 1 percent.If a defective unit is found,it is scrapped at no additional cost.The manufacturing costs before the final inspection are $200 per unit.The management believes that the external failure costs are $40 per defective unit.
Should the management incur the additional inspection costs?

Question

Quizplus · Accepted Answer

The Answer is Solution to An Inspection Decision With Quality Costs (5 minutes)
The manufacturing costs before the final inspection are irrelevant because they are sunk costs at the time of inspection.For each 100 units inspected,two defective units (from 3 percent to 1 percent)will be found that would have been delivered to customers.Each of those defective units would have cost the company $40 if delivered.Therefore,the total cost of inspecting 100 units is (100 units)($1/unit)or $100 and the cost of sending two more defective units is (2 defective units)($40/defective unit)or $80.In this case it is cheaper not to inspect,assuming that the costs have all been measured accurately.

An Inspection Decision with Quality Costs