1. Horizon Manufacturing Company spent $400,000 in 2021 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2021, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Horizon contracted Quality-is-Free Consultants, Incorporated (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $61,000 annual cost for training and $155,000 for equipment rental and maintenance. The new equipment will eliminate $42,500 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $107,500 in early January 2022 for the project. Horizon expects no changes in its operating level in the foreseeable future.

How much do you expect total external failure costs to change?

Multiple Choice

$320,000 decrease.

$200,000 decrease.

$10,000 increase.

$400,000 decrease.

$800,000 decrease.

2. Horizon Manufacturing Company spent $400,000 in 2021 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2021, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Horizon contracted Quality-is-Free Consultants, Incorporated (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training and $150,000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2022 for the project. Horizon expects no changes in its operating level in the foreseeable future.

The $100,000 payment to the consulting firm for cost of quality (COQ) reporting purposes is best classified as a(n):

Multiple Choice

Administrative cost.

External failure cost.

Appraisal cost.

Prevention cost.

Internal failure cost.