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Annual Cost Savings

This is my homework question and I'm stuck!!!

This company manufactures values. When they get rejected, they have to be returned to the initial production stage to be melted and recasted. The rework doesn't require new materials in casting, but does require new materials in finishing.

The following cost data is available:

Costs {Casting}{Finishing}{Inspection}{Packing}{Total}
Direct Materials $225, 12, 0, 8, 245
Direct Labor 84, 121, 24, 16, 245
Flexible Support 122, 164, 30, 20, 336
Capacity-related 63, 89, 16, 10, 178

totals 494, 386, 70, 54, 1004

As a result of the quality improvement programs, the reject rate has decreased from 6.4% to 5.1% and the number of rejects has decreased by (6.4%-5.1%) * 10,000 units.

Improvements in reject rates have also led to a decrease in work-in-progress inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% a year.

What is the annual cost savings as a result of the quality improvement?

Solution Preview

In order to find out the cost savings, need to see what all consts will not be incurred again if the unit does not get rejected. If the unit gets rejected, it has to be reworked. In the casting department, except for material, all other costs will be incurred. In the Finishing and Inspection department, all costs will be ...

Solution Summary

The solution explains how to calculate the annual cost savings from a quality improvement program