Problem: This company manufactures values. When they get rejected, they have to be returned to the initial production stage to be melted and recasted. The rework doesn't require new materials in casting, but does require new materials in finishing.
The following cost data is available:
Costs {Casting}{Finishing}{Inspection}{Packing}{Total}
Direct Materials $225, 12, 0, 8, 245
Direct Labor 84, 121, 24, 16, 245
Flexible Support 122, 164, 30, 20, 336
Capacity-related 63, 89, 16, 10, 178
support
totals 494, 386, 70, 54, 1004
As a result of the quality improvement programs, the reject rate has decreased from 6.4% to 5.1% and the number of rejects has decreased by (6.4%-5.1%) * 10,000 units.
Improvements in reject rates have also led to a decrease in work-in-progress inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% a year.
What is the annual cost savings as a result of the quality improvement?