Answer the following questions using the information below:
Tri-State Manufacturing expects to spend $800,000 in 2012 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $80,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product. The new method involves $120,000 in training costs and an additional $160,000 in annual equipment rental. It takes two units of material for each finished product.
Internal failure costs average $160 per failed unit of finished goods. During 2011, 5% of all completed items had to be reworked. External failure costs average $400 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.
-What is the net effect on appraisal costs for 2012, assuming the new receiving method is implemented and that 800,000 material units are received?
A)$120,000 increase
B)$120,000 decrease
C)$400,000 decrease
D)$400,000 increase

Question

Quizplus · Accepted Answer

If the new receiving method is implemented, the fixed appraisal costs will decrease by $80,000. The variable appraisal costs will be $0.40 per unit. Since 2 units of material are required for each finished product, the variable appraisal cost per finished product will be $0.80. With 800,000 material units received, there will be 400,000 finished products. Therefore, the total variable appraisal cost will be $320,000 (0.80 * 400,000). The total appraisal cost with the new method will be $400,000 (320,000 + 80,000), which is a decrease of $400,000 from the original cost of $800,000. So, the net effect on appraisal costs will be a decrease of $400,000 - $80,000 = $320,000. However, there is an additional cost of $120,000 for training and $160,000 for annual equipment rental. Therefore, the net effect on appraisal costs will be a decrease of $320,000 - $120,000 - $160,000 = $-120,000, which is a decrease of $120,000.

Answer the Following Questions Using the Information Below