29. Verizon Manufacturing Company spent $400,000 in 2012 to inspect incoming com

Question

29. Verizon Manufacturing Company spent $400,000 in 2012 to inspect incoming components. of the $400,000, $240,000 is fixed appralsal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2012, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training and $150,000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2013 for the project. Verizon expects no changes in its operating level in the foreseeable future What is the change in total quality cost projected for 2013? A. $400,000 decrease B. $290,000 decrease C. $550,000 decrease D. $560,000 decrease

Explanation / Answer

Answer:A.$400000 decrease

1. No. of finished units with external failures i n 2012 = 400,000 * 0.01 = 4,000. 2. No. of finished units with external failures projected for 2013 = 4,000/2 = 2,000. 3. Projected external failure costs in 2013 = 2,000 * $200 = $400,000. 4. Actual external failure costs in 2012 = 4,000 * $200 = $800,000. 5. Anticipated change in total external failure costs in 2013 = $800,000 - $400,000 = $400,000 decrease.

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