73) Lithgow Design Products Quality Control Manager works with all areas of the company to
establish sound quality programs within reasonable budget guidelines. For 2014, the
company has budgeted $1 000 000 for prevention costs and $800 000 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 2014 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 $110 000 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.
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 2014?
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)?