Design Products Is Committed to Its Quality Program

question 107

Essay

Design Products is committed to its quality program.It works with all areas of the company to establish sound quality programs within reasonable budget guidelines.For 2010,it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs.Internal failure has a budget of $100 per failed item,while external failure has a total budget of $600,000.Product Testing has proposed to a change in the 2010 budget for a new method of testing products.If management decides to implement the new method,$2 per unit of appraisal costs will be saved,up to a level of 200,000 tests.No additional savings are above past the 200,000 level.The new method involves $110,000 in training costs and $60,000 in yearly testing supplies.Traditionally,3 percent of all completed items have to be reworked.External failure costs average $120 per failed unit.The company's average external failures are 1 percent of units sold.The company carries no ending inventories.
Required:
(1)What is the adjusted budget for appraisal costs,assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2010?
(2)How much do internal failure costs change,assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40 percent?
(3)What would be the change in the external failure budget,assuming external failures are reduced by 60 percent,assuming the same facts as in part (b)?

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Definitions:

Variance

A statistical measure that represents the dispersion or spread of a set of data points around their mean value.

Coefficient of Determination

A statistical measure that represents the proportion of the variance for a dependent variable that's explained by an independent variable or variables in a regression model.

Correlation

A statistical measure that expresses the extent to which two variables change together, ranging from -1 to 1.

Pearson Correlation

A measure of the linear relationship between two variables, ranging from -1 to 1, where 1 means a perfect positive correlation and -1 means a perfect negative correlation.