Question

A company currently using an inspection process in its material receiving the part is trying to install an overall cost reduction program. One possible reduction is the elimination of one inspection position. This position tests material that has a defective content of the average of 0.04. By inspecting all items, the inspector is able to remove all defects. The inspector can inspect 50 units per hour. The hourly rate including fringe benefits for this position is $90.00. If the inspection is eliminated, defects will go into product assembly and will have to be replaced later at a cost of $100.00 each when they are detected in final product testing. a. Should this inspection station be eliminated? Support your answer. (5 points) b. What is the co to inspect each unit? Show details. (5 points) Is there benefit (or loss) from the current inspection process? How much? Show work. (5 points) C.

Answer 1

a) Average Defective content = 0.04 i.e 4 per 100 units.

Units inspected/Hour=50 units

Therefore, Average defective units for 50 units = 50*0.04= 2 units

Replacement cost of 2 units = 2*100 = 200$

Cost of inspector per hour = 90$.

Since average replacement cost is greater than the cost of inspector per hour, the inspector and inspection station should be retained.

b) cost of inspection station=90$

Therefore, the cost of inspection of each unit per hour = 90/50= 1.8 $

c)Yes, there is a benefit from the current inspection process.

The benefit is Average Replacement cost/hour- current cost of inspection/hour = 200$-90$ = 110$