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.
Required:
Should the management incur the additional inspection costs?

Question

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The Answer of 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.
Required:
Should the management incur the additional inspection costs?