Premier Corp Expects to Spend $800,500 in 2017 in Appraisal

question 113

Multiple Choice

Premier Corp expects to spend $800,500 in 2017 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 $60,100 in fixed appraisal costs and variable costs of $0.50 per materials units received. The new method involves $140,600 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2016, 4% of all completed items had to be reworked. External failure costs average $430 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.
What is the net effect on appraisal costs for 2017, assuming the new receiving method is implemented and that 800,500 material units are received?

• A) $1292 increase
• B) $169,750 decrease
• C) $290,600 decrease
• D) $4003 increase

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Definitions:

Leasing Arrangement

A contractual agreement where a lessor allows a lessee to use an asset in exchange for periodic lease payments.

Encumbered Assets

Assets that are used as security or collateral for a loan or debt, restricting their free use or disposal by the owner.

Secured Borrowing

A type of loan in which the borrower pledges an asset as collateral for the loan, which the lender can claim if the loan defaults.

Financial Statements

Formal records that outline the financial activities and condition of a business, including the balance sheet, income statement, and cash flow statement.