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 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

Answer 1

Budgeted Unit		202000
External Failure Cost		$56 / unit
Current average external failure		4.10%
New Average external failure		2%
Current average external failure Units		202000*4.1%
Current average external failure Units		8282
Current average external failure cost		8282*56
Current average external failure cost		$        463,792
New Average external Units		202000*2%
New Average external Units		4040
New Average external failure		4040*56
New Average external failure		$        226,240
Cost will decrease by		463792-226240
Cost will decrease by		$        237,552
Option B