A U. S. car company knowingly released cars for sale with defective fuel lines which caused the cars to spontaneously explode, resulting in multiple deaths. After the cause of failure was found to be deliberate negligence, the company subsequently suffered decreased market share, and a reduction in stock price. This company incurred:

A. an internal failure cost.

B. an ethical failure cost.

C. an external failure cost.

D. an appraisal cost.

B. an ethical failure cost.

The correct answer is letter "A": an internal failure cost.

Explanation:

Internal failure costs are those incurred due to failures detected before the product leaves the manufacturing plant. Product reworks are the most common type of internal failure costs. On the other hand, external failure costs are those detected after the company has delivered a product to end-consumers. Legal fees for lawsuits, product recalls or warranty costs are examples of external failure costs.

Therefore, the U. S. car company incurred internal failure costs since it knew about the defects in the fuel lines before marketing the cars but the firm decided to start selling the vehicles anyway.