Question

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 0.01. 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 $10. If the inspection position is eliminated, defects will go into product assembly and will have to be replaced later at a cost of $11 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.
a-1. If the inspector position is eliminated, what will the hourly cost of defects be? (Round your answer to 2 decimal places.)
Cost per hour $
a-2. Should this inspection position be eliminated based on costs alone?
Yes
No
b. What is the cost to inspect each unit? (Round your answer to 2 decimal places.)
Cost per unit $
c. Is there benefit (or loss) from the current inspection process? How much? (Input all amounts as positive values. Round your answers to 2 decimal places.)
Hourly Per unit
(Click to select)LossBenefit $ $

Answer 1

Answer:

a-1. If the inspector position is eliminated, the defects will not be detected. These cost the company $11 to replace.

Defects per hour = 50 * 0.01 = 0.5 units

Cost per hour = 0.5 * 11 = $5.50

a-2. Based on costs alone, the inspection position should be eliminated. This is because the cost of having the Inspection position is $10 but it would only cost the company $5.50 if the position was not there so the cost of the inspection position is more than the cost incurred if it wasn't there.

b. = Inspection fees/ Units inspected per hour

= 10/50

= $0.50 per unit

c. Cost without Inspection is $5.50. With Inspection is $10.

Hourly Loss = 5.50 - 10

= -$4.50

Per unit loss = -4.50/50

= -$0.09