Question

Design 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 2016, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000. Product Testing has proposed to a change in the 2016 budget for a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are expected past the 200,000 level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies. Traditionally, 3 percent of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1 percent of units sold. The company carries no ending inventories.

Required: 1. 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 2016?

2. How much do internal failure costs change, assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40 percent?

3. What would be the change in the external failure budget, assuming external failures are reduced by 60 percent, assuming the same facts as in Requirement 2 ?

Answer 1

Design Products Requirement 1 Current Budget 800000 Additions: Training 110000 Additions: Supplies 60000 170000 Savings: 200,000 x $2 Adjusted budget -400000 570000 Requirement 2 Current budget $100 x 0.03 x 600,000 1800000 Savings rate 0.4 Net savings (reduction in internal failure costs) 720000 Requirement Current budget $120 x 0.01 x 600,000 720000 Savings rate 0.6 Net savings (reduction in external failure budget) 432000