Garber Valves Company manufactures brass valves meetingprecise specification sta
ID: 2433874 • Letter: G
Question
Garber Valves Company manufactures brass valves meetingprecise specification standards. All finished bvalves areinspected before packing and shipping to customers. Rejectedvalves are returned to the initial production stage to be meltedand recast. Such rework requires no new materials in castingbut requires new materials in finishing. The following unitcost data are available: Costs Casting Finishing Inspection Packing Total Direct materials 225 12 0 8 245 Directlabor 84 121 24 16 245 Variable support 122 164 30 20 336 Fixedsupport 63 89 16 10 178 494 386 70 54 1004 As a result of a quality improvement program, the reject ratehas decreased from 6.4% to 5.1%, and the number of rejects hasdecreased by (6.4%-5.1%)X(10,000) units. Improvements inreject rates have also led to a decrease in work in processinventory from 386,000 to 270,000. Inventory carrying costsare estimated to be 15% per year. Estimate the annual costsavings as a result of the quality improvement. Garber Valves Company manufactures brass valves meetingprecise specification standards. All finished bvalves areinspected before packing and shipping to customers. Rejectedvalves are returned to the initial production stage to be meltedand recast. Such rework requires no new materials in castingbut requires new materials in finishing. The following unitcost data are available: Costs Casting Finishing Inspection Packing Total Direct materials 225 12 0 8 245 Directlabor 84 121 24 16 245 Variable support 122 164 30 20 336 Fixedsupport 63 89 16 10 178 494 386 70 54 1004 As a result of a quality improvement program, the reject ratehas decreased from 6.4% to 5.1%, and the number of rejects hasdecreased by (6.4%-5.1%)X(10,000) units. Improvements inreject rates have also led to a decrease in work in processinventory from 386,000 to 270,000. Inventory carrying costsare estimated to be 15% per year. Estimate the annual costsavings as a result of the quality improvement.Explanation / Answer
72,410
17,400
89,810
Savings from reduction in rejection rate [(84 +122) + (12 + 121 + 164) + (24 + 30) x 10,000] x(6.4% - 5.1%) [206 + 297 + 54] x 10,000 x 1.3%72,410
Savings from reduction in inventory carrying cost (386,000 -270,000) x 15%17,400
Total yearly savings due to qualityimprovement89,810
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