Metropolitan Manufacturing expects to spend $400,000 in 20X6 in appraisal costs

ID: 2527815 • Letter: M

Question

Metropolitan Manufacturing expects to spend $400,000 in 20X6 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $40,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product. The new method involves $60,000 in training costs and an additional $160,000 in annual equipment rental. It takes two units of material for each finished product Internal failure costs average $80 per failed unit of finished goods. During 20x5, 5% of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used What is the net effect on appraisal costs for 20X6, assuming the new receiving method is implemented and that 800,000 material units are received? a. $20,000 increase b. $20,000 decrease c. $200,000 decrease d. $220,000 increase How much internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%? a. $20,000 increase b. $25,000 decrease c. $80,000 decrease d. $160,000 decrease How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method? a. $10,000 increase b. $200,000 decrease c. $320,000 decrease d. $400,000 decrease

Explanation / Answer

Solution 1: b. $20,000 decrease

Since 800,000 material units has been received and as per the question, 2 units of material are used in each finished product which means that 400,000 (800,000 *1/2) units of finished goods is made.

Let’s analyze the savings to be made under new plan;

Training Cost to be incurred

60000

Annual Equipment rental

160000

Saving in Fixed appraisal cost

-40000

Saving in Variable cost

-160000

Net Saving

20000

Solution 2: d $160,000 decrease

Since 400,000 units of finished goods has been produced. During 20X5, 5% of the finished goods has been reworked due to internal failure. After the new receiving method, during 20X6, rework will reduce by 10% which will save a net of rework cost on 0.5% units (5% * 10%) of 400,000 finished goods i.e. equivalent to 2,000 units

Internal failure costs per unit = $80

No. of equivalent units reduced for failure = 2000 units

Amount saved due to less rework = 2000 * 80 = $160,000

Solution 3: D 400,000 decrease

No. of units sold = No. of units produced since company follows Pre order and JIT inventory policy.

Since 400,000 units of finished goods has been produced. During 20X5, 1% of the finished goods sold has been with external failure i.e. 4,000 units.

After the new receiving method, during 20X6, external failure will reduce to 50% which will save a net of external failure cost on 0.5% units sold (1% * 50%) of 400,000 finished goods i.e. equivalent to 2,000 units.

External failure costs per unit = $200