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Inspection Cost

A company is considering additional final inspection costs of $1 per unit before delivery to customers. It currently delivers 60,000 units per year. The additional inspection should reduce the defective rate from 3 percent to 1 percent. If a defective unit is found, it is scrapped at no additional cost. The manufacturing costs before the final inspection are $200 per unit. The management believes that the external failure costs are $40 per defective unit.

a. State the amount of the current cost of external failures.
b. Should the management incur the additional inspection costs? Why or why not?

Solution Preview

a. State the amount of the current cost of external failures.

The current cost of external failures is 60,000 (units) *.03 (failure rate) *$40 (cost per external failure) or $72,000.

b. ...

Solution Summary

This solution illustrates how to compute the cost of external failures and to determine whether a company should incur additional inspection costs.

$2.19