Question

LaCrosse Products has a budget of $901,000 in 2017 for prevention costs. If it decides to automate a portion of its prevention? activities, it will save $80,300 in variable costs. The new method will require $40,100 in training costs and $109,000 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 153,000 units. Appraisal costs for the year are budgeted at $604,000. The new prevention procedures will save appraisal costs of $50,600. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 33?% of all completed items. The proposed changes will cut the internal failure rate by one?third. Internal failure units are destroyed. External failure costs average $52 per failed unit. The? company's average external failures average 33?% of units sold. The new proposal will reduce this rate by 45?%. Assume all units produced are sold and there are no ending inventories. Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive? changes? (Note: numbers shown as? (negatives) represent net savings and positive numbers represent net? cost.)

A) $(22,950)

B) $(107,406)

C) $(112,156)

D) $149,100

NOTE****  THE ANSWER IS "C" PLEASE JUST EXPLAIN HOW TO GET THAT ANSWER

Answer 1

Dear Student, when i tried to answer the above question with the given specific numbers, i couldn't reach the answer option "c".

The answer I Obtained was - A net saving of $ 1415716.

Since you were sure about the option 'c'. I considered various other methods by using different numbers.

And when i answerd the question taking the rate of both internal and external average rate as 3% (unstead of 33%) i got the answer with option 'C". I request you to recheck the question. I thourougly believe that it will be 3%.

Here is the answer given taking rate as 3%

Prevention Changes Savings

New Cost

Training = 40,100

New Equipment = 109,000

Total New Cost = 149,100

Savings = (80,300)

Net Increase = 68,800

Appraisal Changes

The new prevention procedures will save appraisal costs of $50,600

Internal Failure Changes

Internal Failure Cost = 153,000 x 0.03 x 15 = 68,850

Saving made will be 1/3

Savings = 22,950

External Failure Changes

External Failure Cost = 153,000 x 0.03 x 52 = 238,680

Saving Rate = 45%

Savings = 238,680 x .45 = 107,406

Net impact of Changes = 68,800 + (50,600) + (22,950) + (107,406) = (112,156) -----Which is option 'C"

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If you are sure that it is 33% the i can do the question again if you want.

Dear Student, I have completed your solution. Kindly check and let me know in case of any clarifications

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