A quality control procedure involves 100-percent inspection of parts received from a supplier. Historical records show the observed defect rates as follows.

Percent Defective Probability

0 ................................... 15

1 ................................... 45

2 ................................... 25

3 ................................... 15

The cost to inspect 100 percent of the parts received is $250 for each shipment of 500 parts. If the shipment is not 100-percent inspected, defective parts will cause rework problems later in the production process. The rework cost is $35 per each defective part.

a. Complete the payoff table shown here, in which entries represent the total cost of inspection and reworking.

b. The plant manager is considering eliminating the inspection process to save the $250 inspection cost per shipment. Do you support this action? Use EV to justify your answer.

Transcribed Image Text:

Percent Defective Decision 100% inspection No inspection 3 $250 $250 $250 $250