Quality improvement programs and cost saving. Garber Valves Company manufactures brass valves meeting precise specification standards. All finished valves are inspected before packing and shipping to customers. Rejected valves are returned to the initals production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishings. The following unit cost data are available:
Costs Casting Finishing Inspection Packing Total
Direct Material $225 $12 $0 $ 8 $245
Direct labor 84 121 24 16 245
Variable support 122 164 30 20 336
Fixed support 63 89 16 10 178
$494 $386 $70 $54 $1004
As a result of a quailty-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%) x (10,000) units. Improvements I reject rates have also led to a decrease in work in process inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% per year. Estimated the annual cost savings as a result of the quality improvement.