Answer the Following Questions Using the Information Below

question 57

Multiple Choice

Answer the following questions using the information below:
Cysco Corp has a budget of $1,200,000 in 2015 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $100,000 in variable costs. The new method will require $50,000 in training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 200,000 units.
Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $30 per failed unit of finished goods. The internal failure rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $50 per failed unit. The company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.
-What is the net change in the budget of prevention costs if the procedures are automated in 2015? Will management agree with the changes?

• A) $100,000 decrease, yes
• B) $90,000 decrease, yes
• C) $100,000 increase, no
• D) $90,000 increase, yes

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Definitions:

Balance Sheet

An accounting document showcasing a firm's assets, debts, and equity of shareholders at a precise time.

Last Day

The final day of a given period, often used in the context of contracts, employment, or calendar periods.

Retainer Fee

An upfront cost paid by a client to secure the services of a consultant, lawyer, or other professional for a specified period, ensuring availability and commitment.

Recorded

The process of documenting financial transactions in the accounting records of an organization.