Calculating quality cost measures Oscola Microchip Company's computer disks divi- sion experiences a 15% rejection rate at its final inspection. Rejected disks have no salvage value. The per unit cost of computer disks was $7.20 per box shipped last year. The division's total production for the year is 500,000 boxes without considering any defective units. The selling price of the disks is $9.00 per box.

The company's quality department has been working with design engineering and produc- tion personnel in an effort to reduce product failures. A proposed modification of the production process would reduce disk rejects to an estimated four percent. The expected costs of the production changes are:

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New equipment annual lease cost.... $450,000 Elimination of annual lease cost on old equipment. (250,000) Increase in material cost 80,000