Cysco Corp has a budget of $1,207,000 in 2017 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $106,000 in variable costs. The new method will require $50,200 in training costs and $143,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 201,000 units.
Appraisal costs for the year are budgeted at $503,000. The new prevention procedures will save appraisal costs of $50,600. Internal failure costs average $34 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $58 per failed unit. The company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories.
How much will appraisal costs change assuming that the new prevention methods reduce material failures by 40% in the appraisal phase?
◦ $156,200 decrease
◦ $307,545 decrease
◦ $50,600 increase
◦ $50,600 decrease
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