Use the Information Below to Answer the Following Question(s)

question 16

Multiple Choice

Use the information below to answer the following question(s) .
Dylan Products 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 $90,000 in variable costs.The new method will require $40,000 in training costs and $150,000 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 210,000 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 $20 per failed unit of finished goods.The internal failure rate is expected to be 4% 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 $48 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)$190,000 increase,no
• D)$100,000 increase,yes
• E)$90,000 increase,no

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Definitions:

Superior

In economics, refers to a good for which demand increases as consumer incomes increase, opposite of an inferior good.

Player

An individual, group, or entity participating in a competitive or cooperative activity, often used in the context of games, sports, or market participants.

Negative-sum Games

Situations in which the total losses exceed the total gains, leading to a net decrease in wealth or benefit.

Incentive

A thing that motivates or encourages someone to do something, particularly in economic contexts to influence behaviors.