Premier Corp expects to spend $801,000 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 $60,300 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $150,000 in training costs and an additional $157,000 in annual equipment rental.
Internal failure costs average $180 per failed unit of finished goods. During 2014, 4% of all completed items had to be reworked. External failure costs average $400 per failed unit. The company's average external failures are 3% 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.
How much will external failure costs change assuming 810,000 units of materials are received and that product failures with customers are cut in half with the new receiving method?
◦ $16,020 increase
◦ $4,860,000 decrease
◦ $2,187,000 decrease
◦ $9,720,000 decrease
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