Question
ysco Corp has a budget of $1,207,000 in 2017 for prevention costs. If it decides to automate a portion of its prevention activities, it will
ysco Corp has a budget of $1,207,000 in 2017 for prevention costs. If it decides to
automate a portion of its prevention activities, it will save $109,000 in variable costs. The
new method will require $50,300 in training costs and $144,000 in annual equipment costs.
Management is willing to adjust the budget for an amount up to the cost of the new
equipment. The budgeted production level is 202,000 units.
Appraisal costs for the year are budgeted at $501,000. The new prevention procedures will
save appraisal costs of $50,100. Internal failure costs average $36 per failed unit of
finished goods. The internal failure rate is expected to be 5% of all completed items. The
proposed changes will cut the internal failure rate by one-half. Internal failure units are
destroyed. External failure costs average $56 per failed unit. The company's average
external failures average 4.1% of units sold. The new proposal will reduce this rate to 2%.
Assume all units produced are sold and there are no ending inventories.
How much do external failure costs change if all the changes are as the new prevention
procedures anticipated? Assume all units produced are sold and there are no ending
inventories.
A) $279,576 decrease
B) $237,552 decrease
C) $226,240 decrease
D) $254,520 decrease
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