Figure 14-1
Phillips Screw Company produces screw fittings. It is determined that T = 1 inch in diameter. Specification limits allow a variation of plus or minus 0.5 inches. Products produced at values beyond the specification limits lose $15. A sample of five units produced showed the following values:

-Refer to Figure 14-1. What is the cost of hidden loss for production of 50,000 units?

Question

Figure 14-1
Phillips Screw Company produces screw fittings. It is determined that T = 1 inch in diameter. Specification limits allow a variation of plus or minus 0.5 inches. Products produced at values beyond the specification limits lose $15. A sample of five units produced showed the following values:
 
-Refer to Figure 14-1. What is the cost of hidden loss for production of 50,000 units?

Quizplus · Accepted Answer

To find the cost of hidden loss for the production of 50,000 units, we need to calculate the proportion of units produced that fall outside the specification limits.

From the sample of 5 units, we can calculate the range: 
Range = Maximum value - Minimum value = 1.05 - 0.95 = 0.1

The specification limits allow a variation of plus or minus 0.5 inches, which means the allowable range is 1+0.5 = 1.5 inches to 1-0.5 = 0.5 inches.

Therefore, the proportion of units that fall outside the specification limits is: 
Proportion = (0.1 - 1)/0.5 = -1.8

This proportion is negative which indicates that all units fall inside the specification limits. Therefore, there is no hidden loss for the production of 50,000 units.

However, if we had found a positive proportion, we would have used the following formula to find the cost of hidden loss: 
Cost of hidden loss = Proportion x Number of units x Cost per unit

The cost per unit is given as $15. Therefore, if we had found a positive proportion, the cost of hidden loss would be: 
Cost of hidden loss = -1.8 x 50,000 x $15 = $1,620,000

Option C is the best choice because it correctly identifies that there is no hidden loss for the production of 50,000 units.

Figure 14-1 Phillips Screw Company Produces Screw Fittings. It Is Determined That