Reference no: EM132930366

Verizon Manufacturing Company spent $420,000 in 2019 to inspect incoming components. Of the $420,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes six components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $61,800 annual cost for training and $159,000 for equipment rental and maintenance. The new equipment will eliminate $44,500 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $113,500 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future.

Problem 1: How much do you expect total external failure costs to change?

Multiple Choice

Option 1: $4,000 increase.

Option 2: $150,000 decrease.

Option 3: $300,000 decrease.

Option 4: $75,000 decrease.

Option 5: $120,000 decrease.