Assignment Task: Quality improvement programs and cost savings Gurland Valves Company manufactures brass valves that meet precise specification standards. All finished valves are inspected before being packaged and shipped to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishing. The following unit cost data for direct materials, direct labor, and time-driven activity-based costing (ABC) support are available:
|
|
COSTS
|
CASTING FINISHING
|
INSPECTION
|
PACKING
|
TOTAL
|
|
Direct materials
|
$225
|
$12
|
$0
|
$8
|
$245
|
|
Direct labor
|
84
|
121
|
24
|
16
|
245
|
|
Support
|
122
|
164
|
30
|
20
|
336
|
As a result of a quality improvement program, 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 working- process inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% per year. Estimate the annual cost savings as a result of the quality improvement, assuming that capacity costs as indicated by the time driven ABC support costs can be reduced if not needed.
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