Answer the following questions using the information below:
Barossa Manufacturing expects to spend $500 000 in 2018 in appraisal costs if it does not change its incoming materials inspection method.If it decides to implement a new receiving method,it will save $50 000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product.The new method involves $70 000 in training costs and an additional $170 000 in annual equipment rental.It takes four units of material for each finished product.
Internal failure costs average $80 per failed unit of finished goods.During 2013,5% of all completed items had to be reworked.External failure costs average $200 per failed unit.The company's average external failures is 1% of units sold.The company carries no ending inventories because all jobs are on a per order basis and a just-in-time inventory ordering method is used.
-How much will external failure costs change assuming 800 000 units of materials are received and that product failures with customers are cut in half with the new receiving method?
A)$500 000 decrease
B)$200 000 decrease
C)$10 000 increase
D)$320 000 decrease

Question

Quizplus · Accepted Answer

With the new receiving method, external failures are cut in half. Initially, external failures are 1% of units sold. Given that it takes four units of material for each finished product, 800,000 units of materials would produce 200,000 finished products. With a 1% failure rate, that's 2,000 failed units. At $200 per failed unit, the initial external failure costs are $400,000. Cutting failures in half would result in 1,000 failed units, costing $200,000. Therefore, the change in external failure costs is a $200,000 decrease.

Answer the Following Questions Using the Information Below