Strykerz Corp Expects to Spend $800,000 in 2015 in Appraisal

question 7

Multiple Choice

Strykerz Corp expects to spend $800,000 in 2015 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 $60,000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product.The new method involves $140,000 in training costs and an additional $150,000 in annual equipment rental. Internal failure costs average $160 per failed unit of finished goods.During 2014,5% 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

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Definitions:

Marginal Tax Rate

The rate at which the last dollar of a taxpayer's income is taxed, indicating the impact of the next dollar of taxable income.

Weighted Average Cost

A method used to calculate the average cost of goods available for sale, which is weighted by the quantity of goods at each purchase price.

Source of Funds

Refers to the origins of the capital or money a company uses for its operations or investments.

Cost of Capital

A metric used to determine the minimum expected return needed on an investment in order to be deemed a worthwhile expenditure, reflecting the investor's required return.