Premier Corp expects to spend $800,500 in 2017 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 $60,100 in fixed appraisal costs and variable costs of $0.50 per materials units received. The new method involves $140,600 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2016, 4% of all completed items had to be reworked. External failure costs average $430 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 2017, assuming the new receiving method is implemented and that 800,500 material units are received?
A) $1292 increase
B) $169,750 decrease
C) $290,600 decrease
D) $4003 increase

Question

Quizplus · Accepted Answer

The net effect on appraisal costs for 2017 with the new receiving method can be calculated as follows: Savings from fixed appraisal costs: $60,100 Savings from variable costs: $0.50 * 800,500 = $400,250 Total savings: $60,100 + $400,250 = $460,350 New costs: Training costs: $140,600 Equipment rental: $150,000 Total new costs: $140,600 + $150,000 = $290,600 Net effect: $460,350 - $290,600 = $169,750 decrease

Premier Corp Expects to Spend $800,500 in 2017 in Appraisal