A manufacturer estimates that the proportion of nonconforming items in one proce

Question

A manufacturer estimates that the proportion of nonconforming items in one process is 3.5 percent. The estimated cost of inspecting each item is $0.50, while the cost of replacing a nonconforming item after it leaves the production area is $25. What is the best economic inspection decision? A manufacturer estimates that the proportion of nonconforming items in one process is 3.5 percent. The estimated cost of inspecting each item is $0.50, while the cost of replacing a nonconforming item after it leaves the production area is $25. What is the best economic inspection decision?

Explanation / Answer

Estimated cost of inspecting each item = 0.50 per item

Expected cost of replacing with out conforming it = 0.035* 25 = 0.875

Here expected cost of replacing is higher than estimated cost of inspecting.

So economical decision is to inspect each item.

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