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 2020? b. How much do internal failure costs change, assuming 500,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 35%? c. What would be the change in the external failure budget, assuming external failures are reduced by 55% and the same facts as in part
Oman Products is committed to its quality program. It works with all areas of the company to establish sound
quality programs within reasonable budget guidelines. For 2020, it has budgeted $1,000,000 for prevention
costs and $930,000 for appraisal costs. Internal failure has a budget of $80 per failed item, while external
failure has a total budget of $600,000.
Product Testing has proposed to management a change in the 2020 budget for a new method of testing
products. If management decides to implement the new method, $1.5 per unit of appraisal costs will be
saved, up to a level of 300,000 tests. No additional savings are expected past the 300,000 level. The new
method involves $150,000 in training costs and $50,000 in yearly testing supplies.
Traditionally,4 % of all completed items have to be reworked. External failure costs average $100 per failed
unit. The company's average external failures are 2% of units sold. The company carries no ending
inventories.
Required:
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 2020?
b. How much do internal failure costs change, assuming 500,000 units are tested under the new
method and it reduces the amount of unacceptable units in the manufacturing process by 35%?
c. What would be the change in the external failure budget, assuming external failures are reduced by
55% and the same facts as in part (b)?
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