If the cost of replacing a defective pizza once it has been shipped is $5.00, while the cost of complete (100%) inspection prior to shipment is 30 cents per pizza, what is the point of indifference between complete inspection and shipment without inspection?
A)1.67% defectives
B)3% defectives
C)5% defectives
D)6% defectives
E)16.7% defectives

Question

Quizplus · Accepted Answer

To find the point of indifference, we need to find the defect rate at which the cost of inspection is equal to the cost of replacing defectives.

Let's assume we are producing 1000 pizzas.

The cost of complete inspection prior to shipment is:

0.30 x 1000 = $300

Now let's assume there is no inspection and we ship all pizzas without inspection.

At 6% defect rate, the number of defectives would be:

6/100 x 1000 = 60

Cost of replacing defectives:

60 x $5.00 = $300

So, the cost of inspection and the cost of replacing defectives is the same at a 6% defect rate.

Therefore, the point of indifference is 6% defectives.

Hence, option D) 6% defectives is the best choice.

If the Cost of Replacing a Defective Pizza Once It