There is a 4 percent defect rate at a specific point in a production process. If

Question

There is a 4 percent defect rate at a specific point in a production process. If an inspector is placed at this point, all the defects can be detected and eliminated. The inspector would cost $8 per hour and could inspect units in the process at the current production rate of 47 per hour. If no inspector is hired and defects are allowed to pass this point, there is a cost of $9 per defective unit to correct the defects later on. Assume that the line will operate at the same rate (i.e., the current production rate) regardless of whether the inspector is hired or not. a. If an inspector is hired, what will be the inspection cost per unit? (Round your answer to 3 decimal places.) Inspection cost per unit $ b. If an inspector is not hired, what will be the defective cost per unit? (Round your answer to 3 decimal places.) Defective cost per unit $ c. Should an inspector be hired based on costs alone? Yes No

Explanation / Answer

Cost of inspection = $8 per hour

Replacement cost= 47 *0.04* 9 = $16.92

inspector cost per unit= 8/47= 0.170

no inspector cost per unit= 16.92/47 = 0.360

So inspector should be hired based on the cost alone because it will result in the savings of = 16.92-8= $8.92

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