Gurland Valves Company manufactures brass valves that meet precise specification standards. All finished valves are inspected before being packaged and shipped to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishing.
Gurland Valves Company manufactures brass valves that meet precise specification standards. All finished valves are inspected before being packaged and shipped to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishing.
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![Quality improvement programs and cost savings
Gurland Valves Company manufactures brass valves that meet precise specification standards. All
finished valves are inspected before being packaged and shipped to customers. Rejected valves
are returned to the initial production stage to be melted and recast. Such rework requires no new
materials in casting but requires new materials in finishing.
The following unit cost data for direct materials, direct labor, and time-driven activity-based
costing (ABC) are available:
Casting Finishing Inspection Packing Total
Costs
Direct materials
Direct labor
Support
$225
$12
$0
$8 $245
$84
$121
$24
$16 $245
$122
$164
$30
$20 $336
As a result of a quality improvement program, the reject rate has decreased from 6.4% to 5.1%,
and the number of rejects has decreased by (6.4% - 5.1%) x (10,000) units. Improvements in reject
rates have also led to a decrease in work-in-process inventory from $386,000 to $270,000.
Inventory carrying costs are estimated to be 15.0% per year.
a) What is the decrease in the number of rejected units attributable to the new quality improvement
program assuming a production rate of 10,000 units?
Round to the nearest whole unit. 130
b) Determine the total savings as a result of the quality improvement, assuming that capacity
costs, as indicated by the time-driven ABC support costs, can be reduced if not needed.
Round amounts to the nearest whole dollar.
Savings
From decrease in reject rate
$
31,850 x
From reduction in inventory carrying cost
21,900 x
Total savings
$
43,680 x](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffdcff400-bd56-492f-9b2e-14c4309856c6%2Fdc0661b0-d062-49aa-8919-fef6b3908672%2F25i2qak_processed.png&w=3840&q=75)
Transcribed Image Text:Quality improvement programs and cost savings
Gurland Valves Company manufactures brass valves that meet precise specification standards. All
finished valves are inspected before being packaged and shipped to customers. Rejected valves
are returned to the initial production stage to be melted and recast. Such rework requires no new
materials in casting but requires new materials in finishing.
The following unit cost data for direct materials, direct labor, and time-driven activity-based
costing (ABC) are available:
Casting Finishing Inspection Packing Total
Costs
Direct materials
Direct labor
Support
$225
$12
$0
$8 $245
$84
$121
$24
$16 $245
$122
$164
$30
$20 $336
As a result of a quality improvement program, the reject rate has decreased from 6.4% to 5.1%,
and the number of rejects has decreased by (6.4% - 5.1%) x (10,000) units. Improvements in reject
rates have also led to a decrease in work-in-process inventory from $386,000 to $270,000.
Inventory carrying costs are estimated to be 15.0% per year.
a) What is the decrease in the number of rejected units attributable to the new quality improvement
program assuming a production rate of 10,000 units?
Round to the nearest whole unit. 130
b) Determine the total savings as a result of the quality improvement, assuming that capacity
costs, as indicated by the time-driven ABC support costs, can be reduced if not needed.
Round amounts to the nearest whole dollar.
Savings
From decrease in reject rate
$
31,850 x
From reduction in inventory carrying cost
21,900 x
Total savings
$
43,680 x
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