Tri-State Manufacturing Expects to Spend $800,000 in 2019 in Appraisal

question 213

Essay

Tri-State Manufacturing expects to spend $800,000 in 2019 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 $80,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product.The new method involves $120,000 in training costs and an additional $160,000 in annual equipment rental.It takes four units of material for each finished product.Internal failure costs average $160 per failed unit of finished goods.During 2019, 5% of all completed items had to be reworked.External failure costs average $400 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.Required:
a.What is the net effect on appraisal costs for 2019, assuming the new receiving method is implemented and that 800,000 material units are received?
b.How much will internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of UNACCEPTABLE product units in the manufacturing process by 10%?

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Definitions:

Substitution

The economic principle describing how consumers or producers switch between goods or resources as relative prices or availability change.

Quart

A unit of liquid volume equal to two pints, approximately 0.946 liters in the United States.

Pound

A unit of currency used in the United Kingdom and other areas, or a unit of weight equal to 16 ounces.

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Consumer preferences that signify a desire for diversified bundles of goods, represented by convex-shaped indifference curves.