Q1) TQ Products is committed to its quality program. It works with all areas of company to establish sound quality programs within reasonable budget guidelines. For 20X5, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has budget of $100 per failed item, where as external failure has a total budget of $600,000.
Product Testing has proposed to management change in 20X5 budget for new method of testing products. If management makes a decision to implement new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No extra savings are expected past 200,000 level. New method involves $110,000 in training costs and $60,000 in yearly testing supplies.
Traditionally, 3% of all completed items have to be reworked. External failure costs average $120 per failed unit. Company's average external failures are 1% of units sold. Company carries no ending inventories.
a. Determine the adjusted budget for appraisal costs, suppose new method is implemented and 800,000 units are tested during manufacturing process in 20X5?
b. How much do internal failure costs change, suppose 600,000 units are tested under new method and it decreases the amount of unacceptable units in manufacturing process by 40%?
c. What would be change in external failure budget, suppose external failures are decreased by 60% and same facts as in part (b)?