Answer the Following Questions Using the Information Below

question 63

Multiple Choice

Answer the following questions using the information below:
Tri-State Manufacturing expects to spend $800,000 in 2012 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 two units of material for each finished product.
Internal failure costs average $160 per failed unit of finished goods. During 2011, 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.
-How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method?

• A)$20,000 increase
• B)$400,000 decrease
• C)$640,000 decrease
• D)$800,000 decrease

Recognize the significance of market values in calculating the cost of capital over book values.

Know the concept of target capital structure and its relevance to the WACC.

Learn how the marginal cost of capital (MCC) and investment opportunity schedule (IOS) guide capital budgeting decisions.

Understand the components of a firm's capital, and their relative costs.

---

Definitions:

Emotional Bond

A strong psychological connection between individuals, characterized by feelings of affection, loyalty, and attachment.

Mating Strategy

An approach or techniques used by individuals to find and attract a partner for reproduction and long-term bonding.

Evolutionary Psychology

A theoretical approach in psychology that examines psychological structure from a modern evolutionary perspective.

Multiple Sexual Partners

The practice or behavior of having sexual interactions with more than one individual, distinct from monogamous relationships.