Reference no: EM132937790

Question - Justice League Ltd (JLL) is in the manufacturing of printed circuit board (PCB) business. It has a good reputation among the customers to be a reliable supplier in the market.

The accountant of JLL is in the midst of preparing the financial budgets for the year 2020. He has budgeted prevention costs of $1,000,000 and appraisal costs of $800,000. The internal failure cost per unit of reject is estimated to be $100 while external failure costs has a budgeted total of $600,000.

The engineering manager, Mr. John Smith, and his team have just developed a new method of testing products. If the board of JLL decides to implement the new method in 2020, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are expected if the tests exceeding the 200,000 level. The new method will need additional training costs budget of $110,000 and another $60,000 in yearly testing supplies. In addition to these, the expected rejection rate will be 3% based on all completed items. These rejected items will need to be reworked. External failure costs average $120 per returned unit by customers. The company's average external customer rejection rate is estimated to be 1% of units delivered.

Required -

(a) Calculate the revised budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2020;

(b) Calculate the changes in the internal failure costs, assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%;

(c) Calculate the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in requirement (b) above.

(d) Discuss whether you agree with the following statement. "External failure costs must be, by all means, be reduced to a minimum. This is to maintain company's good reputation as a reliable supplier of PCB".