Question

Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training and $150,000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future. How much are internal failure costs in total projected to change

Answer 1

Answer:

The question is incomplete, the option include:

• $20,000 decrease.
• $45,000 decrease.
• $80,000 decrease.
• $160,000 decrease.  is Correct
• $320,000 decrease.

Explanation:

1. In 2019 the number of finished units with internal faults = $400,000 completed units * 0.05 = $20,000.

2. In 2020 the number of finished units with internal faults = $20,000* (1 -0.1) = $18,000.

3. In 2020, the projected cost of internal failure= $18,000 * $80= $1,440,000;

4. In 2019 the expense of internal failure= $20,000 * $80 = $1,600,000.

5. Projected shift in the cost of internal failure = $1,600,000 - $1,440,000 = decrease of $160,000