Question

Problem 13-1 A company currently using an inspection process in its material receiving department is trying to install an overall cost reduction program. One possible reduction is the elimination of one inspection position. This position tests items for which the probability of a material defect averages 0.04. By inspecting all items, the inspector is able to remove all defects. The inspector can inspect 50 units per hour. The hourly rate including fringe benefits for this position is $9. If the inspection position is eliminated, defects will go into product assembly and will have to be replaced later at a cost of $10 each when they are detected in final product testing. Assume that the line will operate at the same rate (i.e., the inspection rate) if the inspection operation was eliminated.
Required:
a. If the inspector position is eliminated, what will the hourly cost of defects be?
b. Should this inspection position be eliminated based on costs alone?
c. What is the cost to inspect each unit?

Answer 1

Answer:

a. $20

b. No.

c. $0.18 per unit

Explanation:

a. Hourly cost = Material defects * Cost to replace

50 units are inspected per hour with a 0.04 chance of defects.

= 50 * 0.04 = 2 units

Hourly cost = 2 * 10

= $20

b. No. Based on costs alone, Paying the inspector $9 an hour would be more cost effective than paying $20 to replace the defect.

c. Cost of inspecting each unit = Instructor fee/ Units inspected in an hour

= 9 / 50

= $0.18 per unit