Determining inspection cost

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Reference no: EM1348085

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?

Reference no: EM1348085

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