Dane Manufacturing expects to spend $825,000 in 2013 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 $78,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product.The new method involves $125,000 in training costs and an additional $155,000 in annual equipment rental.It takes two units of material for each finished product.
Internal failure costs average $150 per failed unit of finished goods.During 2012,5% of all completed items had to be reworked.External failure costs average $425 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.
How much will external failure costs change,assuming 825,000 units of materials are received and product failures with customers are cut in half,with the new receiving method?

Question

Quizplus · Accepted Answer

With the current method, the external failure rate is 1% of units sold. Assuming 825,000 units of materials are received and it takes two units of material for each finished product, this means 412,500 finished products are produced (825,000 / 2). With a 1% external failure rate, there are 4,125 failed units (412,500 * 1%). If the product failures with customers are cut in half with the new receiving method, the number of failed units would be 2,062.5 (4,125 / 2). Since each external failure costs $425, the change in external failure costs would be 2,062.5 * $425 = $876,062.5. However, since none of the provided options match this calculation, it's important to reevaluate the approach or the interpretation of the question. Given the options and the scenario, it seems there might have been a misunderstanding in the calculation process. The correct approach involves calculating the initial external failure costs and the new external failure costs based on the provided data and assumptions. However, without the exact calculation leading to one of the provided options, the correct answer based on the given options and the scenario described cannot be accurately determined from the provided calculation. The initial explanation attempted to follow the logic provided but did not accurately account for the specifics of the calculation needed to match the options given.

Dane Manufacturing Expects to Spend $825,000 in 2013 in Appraisal