Design Products Is Committed to Its Quality Program

question 62

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 2011, it has budgeted $1,000,000 for prevention costs and $700,000 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 management a change in the 2011 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 expected past the 200,000 level. The new method involves $90,000 in training costs and $60,000 in yearly testing supplies.
Traditionally, 3% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories.
Required:
a. 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 2011?
b. 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%?
c. What would be the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in part (b)?

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Definitions:

Coase Theorem

A concept in economics that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property.

External Benefit

A benefit derived from a product or service that affects people who are not directly involved in the transaction or production of it.

Pollution Reduction

Efforts and measures taken to decrease the amount of pollutants released into the environment.

Trade Permits

Licenses or permissions required by governments for businesses to engage in certain trade activities, often used to control the volume or nature of traded goods and services.