Cysco Corp Has a Budget of $1,200,000 in 2017 for Prevention

question 3

Multiple Choice

Cysco Corp has a budget of $1,200,000 in 2017 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $103,000 in variable costs. The new method will require $51,000 in training costs and $148,000 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 207,000 units.
Appraisal costs for the year are budgeted at $508,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $34 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 $52 per failed unit. The company's average external failures average 4.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.
Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? Assume that internal product failures are reduced by 45% with the new procedures.

• A) $215,280
• B) $(489,095)
• C) $(465,540)
• D) $(254,000)

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Definitions:

Cost of Goods Manufactured

The total production cost of goods completed and made ready for sale during a specified period.

Manufacturing Overhead

All overhead costs related to the production process, apart from direct materials and direct labor expenses.

Adjusted Cost of Goods Sold

The cost of goods sold after adjustments for changes in inventory levels, returns, or allowances have been made.

Cost of Goods Available

The cost of goods available represents the total cost of inventory available for sale during a certain period, calculated as beginning inventory plus purchases minus ending inventory.