Garber Valves Company manufactures brass valves meeting precise specification standards. All finished valves are inspected before packing and shipping to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework no new materials in casting but requires new materials in finishing. The following unit cost data are available:

As a result of a quality-improvement program, the reject rate has decreased from 6.4% to 5.1%, and the number of rejects has decreased by (6.4%-5.1%) *(10,000 units). Improvements in reject rates have also led to a decrease in work in process inventory from $ 386,000 to $ 270,000. Inventory carrying costs are estimated to be 15% per year. Estimate the annual cost savings as a result of the quality improvement.

Transcribed Image Text:

Costs Direct materials S 225 Direct labor Variable support 122 Fixed support Finishing S 12 121 164 89 S386 Inspection Packing S 0 24 30 16 S70 Total S 245 245 336 178 $1,004 Casting S8 16 20 10 S 54 84 63 S 494