Answer the following questions using the information below:
Mildura Products has a budget of $1 200 000 in 2018 for prevention costs.If it decides to automate a portion of its prevention activities,it will save $75 000 in variable costs.The new method will require $24 000 in training costs and $145 000 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 210 000 units.
Appraisal costs for the year are budgeted at $500 000.The new prevention procedures will save appraisal costs of $35 000.Internal failure costs average $20 per failed unit of finished goods.The internal failure rate is expected to be 4% of all completed items.The proposed changes will cut the internal failure rate by one-half.Internal failure units are destroyed.External failure costs average $48 per failed unit.The company's average external failures average 2.5% of units sold.The new proposal will reduce this rate to 1%.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)$84 000 increase
B)$126 000 decrease
C)$84 000 decrease
D)$168 000 decrease

Question

Quizplus · Accepted Answer

The current total internal failure costs can be calculated as: 
Internal failure costs = $20 x 0.04 x 210,000 = $168,000

If the internal failure rate is reduced by 50%, the new total internal failure costs would be: 
New internal failure costs = $20 x 0.02 x 210,000 = $84,000

Therefore, the internal failure costs would decrease by $84,000 with the new procedure.

The best choice is to implement the new procedures. The cost savings from prevention, appraisal, and internal failure costs alone would be ($75,000 + $35,000 + $84,000) = $194,000, which is greater than the cost of the equipment ($145,000). Additionally, the company would benefit from a reduction in external failure costs. Overall, implementing the new procedures would result in cost savings and improved quality control.

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