How much will internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%

ACCOUNTING

Multiple Choice

Metropolitan Manufacturing expects to spend $400,000 in 20x4 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 $40,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product. The new method involves $60,000 in training costs and an additional $160,000 in annual equipment rental. It takes two units of material for each finished product.


Internal failure costs average $80 per failed unit of finished goods. During 20x3, 5% of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are 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 internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%?

a. $ 20,000 increase

b. $ 25,000 decrease

c. $80,000 decrease

d. $160,000 decrease

Click here for the SOLUTION