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Calculating average product cost

Burger Doodle is a fast-food restaurant that processes an average of 680 food orders each day. The average cost of each order is $6.15. Four percent of the orders are incorrect, and only 10% of the defective orders can be corrected with additional food items at an average cost of $1.75. The remaining defective orders have to be thrown out.

a. Compute the average product cost
b. In order to reduce the number of wrong orders , Burger Doodle is going to invest in a computerized ordering and cash register system. The cost of the system will increase the average order by $0.05 and will reduce defective orders to 1%. What is the annual net cost effect of this quality-improvement initiatives?

Solution Preview

a. Compute the average product cost

I=input=680 orders
%G=percent of good quality product=96%
%R=percent of goods that can be reworked=10%

Kd=direct manufacturing cost per unit=$6.15
Kr= rework cost per unit=$1.75
R= reworked units=I*(1-%G)*(%R)=680*(1-96%)*(10%)=2.72
Average Product ...

Solution Summary

Solution depicts the steps to calculate the average cost. It also analyzes the effect of proposed quality improvement program on annual cost savings.