Freesia Products has a current year budget of $900,000 for prevention costs. Freesia is considering...
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Freesia Products has a current year budget of $900,000 for prevention costs. Freesia is considering the automation of some prevention activities saving $80,000 in variable prevention costs. The new method will require $40,000 in training costs and $100,000 in annual equipment costs. The budgeted production level is 150,000 units. Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $15 per failed unit. The internal failure rate is expected to be 3% of all units. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's external failure rate is 3.00% of units sold. The new proposal will reduce the external failure rate by 50%. How much do external failure costs change if all changes are as anticipated with the new prevention automation? Assume all finished goods units produced are sold and there is no beginning or ending inventories.
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