Design Products is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For the current year, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000.
Product Testing has proposed to management a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are incurred past the 200,000 level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies.
Traditionally, 3 percent of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1 percent of units sold. The company carries no ending inventories.
Required:
a. What is the adjusted budget for appraisal costs assuming the new method is implemented and 800,000 units are tested during the manufacturing process during the year?
b. How much does internal failure costs change assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40 percent?
c. What would be the change in the external failure budget assuming external failures are reduced by 60 percent, assuming the same facts as in part (b)?

Question

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The Answer of Design Products is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For the current year, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000.
Product Testing has proposed to management a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are incurred past the 200,000 level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies.
Traditionally, 3 percent of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1 percent of units sold. The company carries no ending inventories.
Required:
a. What is the adjusted budget for appraisal costs assuming the new method is implemented and 800,000 units are tested during the manufacturing process during the year?
b. How much does internal failure costs change assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40 percent?
c. What would be the change in the external failure budget assuming external failures are reduced by 60 percent, assuming the same facts as in part (b)?

Design Products Is Committed to Its Quality Program