Problem 10-17 A company currently using an inspection process in its material re

Question

Problem 10-17 A company currently using an inspection process in its material receiving department is trying to install an overall cost reduction program. One possible reduction is the elimination of one inspection position. This position tests items for which the probability of a material defect averages 0.02. By inspecting all items, the inspector is able to remove all defects. The inspector can inspect 48 units per hour. The hourly rate including fringe benefits for this position is $10. If the inspection position is eliminated, defects will go into product assembly and will have to be replaced later at a cost of $11 each when they are detected in final product testing. Assume that the line will operate at the same rate (i.e., the inspection rate) if the inspection operation was eliminated. a-1. If the inspector position is eliminated, what will the hourly cost of defects be? (Round your answer to 2 decimal places.) Cost per hourS a-2. Should this inspection position be eliminated based on costs alone? No O Yes b. What is the cost to inspect each unit? (Round your answer to 2 decimal places.) Cost per unit c. Is there benefit (or loss) from the current inspection process? How much? (Input all amounts as positive values. Round your answers to 2 decimal places.) Hourly Per unit Benefit

Explanation / Answer

Ans:

1) Computation of hourly cost of defects:

   cost per hour = 48 * 0.02 * $11

   = $10.56

2) No, Since the cost incurred by eliminating inspection position is higher than current cost of inspection position.

3) Cost to inspect each unit = $10 / 48 units

= $0.21 per unit

4) Benefits of the current inspection process

Hourly = $10.56 - $10

   = $0.56 per hour

Per unit = $0.56 / 48 units

   = $0.01 per unit

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