Question

A company currently using an inspection process in its material receiving department is trying to install an overall cost reduction program. One possible reduction is the elimination of one inspection position. This position test material has a defective content on the average of 0.04. By inspecting all items, the inspector is able to remove all defects. The inspector can inspect 50 units per hour. The hourly rate including fringe benefits for this position is $9. If the inspection position is eliminated, defects will go into product assembly and will have to be replaced later at a cost of $10 each when they are detected in final product testing.

Required:
a. If the inspector position is eliminated, what will the hourly cost of defects be?
b. Should this inspection position be eliminated?
c. What is the cost to inspect each unit?
d. Is there benefit (or loss) from the current inspection process? How much?

Answer 1

defects per hour = 0.04

units inspected per hour = 50

inspector's salary per hour = $9

cost per undetected defects = $10

a. If the inspector position is eliminated, what will the hourly cost of defects be?

number of defects per hour = 0.04 x 50 = 2

cost of defects = 2 x $10 = $20

b. Should this inspection position be eliminated?

no, because the cost of eliminating the position is higher than the cost of hiring the inspector

c. What is the cost to inspect each unit?

cost to inspect each unit = $9 / 50 = $0.18 per unit

d. Is there benefit (or loss) from the current inspection process? How much?

the benefit of the inspection process = $20 - $9 = $11 per hour, or $11 / 50 = $0.22 per unit