LaCrosse Products has a budget of $900,000 in 2015 for prevention costs. If it d

Question

LaCrosse Products has a budget of $900,000 in 2015 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,000 in variable costs. The new method will require $40,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units.

Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories.

4) What is the net change in the budget for prevention costs if the procedures are automated in 2015? Will management agree with the changes?

A) $60,000 decrease, yes

B) $60,000 increase, yes

C) $140,000 increase, no

D) $80,000 decrease, yes

Explanation / Answer

cost of installing new machine = 100000

Training cost =                            40000

total cost of installation = 140000

Saving in variable cost = 80000

excess of cost over savings of intallation of New Machine = 80000 - 140000 = -60000

- 60000 additional investment would be required

so Budget should increase by 60000

B) $60,000 increase, yes

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