Komerica Corp is committed to its quality program. It works with all areas of th

Question

Komerica Corp is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2015, 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 management a change in the 2015 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 150,000 tests. No additional savings are expected past the 150,000 level. The new method involves $95,000 in training costs and $65,000 in yearly testing supplies.

Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% 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 2015?

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 40%?

Explanation / Answer

(a) Adjusted budget Amount in $ Amount in $ Current Budget $800,000 Addtions: training $95000 Addtions: Supplies $65000 $160000 less:Savings: 150,000*$2 ($300000) Adjusted budget $660,000 (B) reduction In internal failure costs Current budget ($100*0.05*500,000) $2,500,000 Saving rate' 40% net Saivngs $1000,000

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