Answer the following questions using the information below:
Strykerz Corp expects to spend $800,000 in 2015 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 $60,000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2014, 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 would be the change in the external failure budget,if 600,000 units are used and assuming external failures are reduced by 10%.
A) $40,000 increase
B) $250,000 decrease
C) $240,000 decrease
D) $320,000 decrease

Question

Quizplus · Accepted Answer

The external failure cost for 600,000 units is initially 1% of 600,000, which is 6,000 units. At $400 per failed unit, the cost is $2,400,000. A 10% reduction in failures means 600 fewer failed units, saving $240,000.

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