How much will internal failure costs change assuming 400,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 20 percent?
A) $10,000 increase
B) $50,000 decrease
C) $160,000 decrease
D) $320,000 decrease
E) $500,000 decrease

Question

Quizplus · Accepted Answer

Internal failure costs are costs incurred due to the production of defective units. If the new receiving method reduces the amount of unacceptable product units by 20%, there will be a reduction in the number of defective units that enter the production process, which will reduce the internal failure costs. 
Assuming 400,000 units of materials are received, the reduction in defective units will be 20% of 400,000 which is 80,000 units. 
Thus, if the cost per defective unit is assumed to be $2, the reduction in internal failure cost will be:
80,000 units * $2 = $160,000
Therefore, the internal failure costs will decrease by $160,000. 
Hence, the best choice is C.

How Much Will Internal Failure Costs Change Assuming 400,000 Units