Answer the following questions using the information below:
Nurioopta Products has a budget of $900 000 in 2018 for prevention costs.If it decides to automate a portion of its prevention activities,it will save $65 000 in variable costs.The new method will require $24 000 in training costs and $110 000 in annual equipment costs.Management is willing to adjust the budget for an amount up to the cost of the new equipment.The budgeted production level is 170 000 units.
Appraisal costs for the year are budgeted at $600 000.The new prevention procedures will save appraisal costs of $30 000.Internal failure costs average $15 per failed unit of finished goods.The internal failure rate is expected to be 3% of all completed items.The proposed changes will cut the internal failure rate by one-third.Internal failure units are destroyed.External failure costs average $54 per failed unit.The company's average external failures average 3% of units sold.The new proposal will reduce this rate by 50%.Assume all units produced are sold and there are no ending inventories.
-How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures?
A)$38 250 decrease
B)$750 000 decrease
C)$76 500 decrease
D)$500 000 decrease

Question

Quizplus · Accepted Answer

The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. So, the new internal failure rate will be 3% - (3% x 1/3) = 2%. The internal failure costs average $15 per failed unit of finished goods. So, the internal failure costs will change by $15 x (3% - 2%) x 170,000 units = $38,250.

Answer the Following Questions Using the Information Below