Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $63,000 annual cost for training and $165,000 for equipment rental and maintenance. The new equipment will eliminate $47,500 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $122,500 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future.

How much are internal failure costs in total projected to change?

a. $20,000 decrease.
b. $45,000 decrease.
c. $80,000 decrease.
d. $160,000 decrease.
e. $320,000 decrease.

The finished goods which possess internal failure will be $400,000 * 5 % failure in completed items which is $20,000. The total cost of internal failure will be $20,000 * $80 per failed unit which is $1,600,000.

After the changes the internal failure cost is reduced by 10%, the new internal failure cost will be $20,000 * 90% which is $18,000. The total internal cost after the projected changes will be $18,000 * $80 per failed unit which is $1,440,000.

The change in internal failure cost is $1,600,000 - 1,440,000 = $160,000 decrease.