Premier Corp expects to spend $800,500 in 2017 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,100 in fixed appraisal costs and variable costs of $0.50 per materials units received. The new method involves $140,600 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2016, 4% of all completed items had to be reworked. External failure costs average $430 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.
What is the net effect on appraisal costs for 2017, assuming the new receiving method is implemented and that 800,500 material units are received?
◦ $1292 increase
◦ $169,750 decrease
◦ $290,600 decrease
◦ $4003 increase
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