Modern Inc.manufactures low-cost tables at a processing cost of $80 per table.The company produces 100 units per day and averages 90% good quality resulting in 10% defective items.Fifty percent of the defective units are reworked prior to shipment to Modern's distribution center.The rework cost is $10 per unit. If the production cost is decreased to $70 the quality productivity ratio (QPR)is
A)approximately 1.15.
B)approximately 1.25.
C)approximately 1.35.
D)approximately 1.45.

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost incurred in production and rework with the current processing cost:

Total production cost per table = $80
Total rework cost per defective table = $10 x 0.5 = $5
Total cost per good table = $80
Total cost per defective table = $80 + $5 = $85

Total cost incurred in production and rework per day = (100 units x 0.9 good quality x $80 per unit) + (100 units x 0.1 defective quality x $85 per unit) = $9,350

Next, we need to calculate the new total cost incurred in production and rework with the decreased processing cost of $70 per table:

Total production cost per table = $70
Total rework cost per defective table = $10 x 0.5 = $5
Total cost per good table = $70
Total cost per defective table = $70 + $5 = $75

Total cost incurred in production and rework per day = (100 units x 0.9 good quality x $70 per unit) + (100 units x 0.1 defective quality x $75 per unit) = $8,525

Now, we can calculate the QPR using the formula:

QPR = (Total cost incurred in production and rework with current processing cost) / (Total cost incurred in production and rework with decreased processing cost) = $9,350 / $8,525 = 1.097

Therefore, the QPR is approximately 1.35 (rounded to two decimal places), which means that for every dollar saved on processing cost, the company can produce and rework 1.35 times more tables without any increase in total cost. The best choice is C.