Production loss due to machine breakdowns 12,000
Inspection of raw materials 4,000
Required:
1 - Complete a cost of quality report.
2 - The CEO has determined that if prevention costs are increased by $55,000, external failure costs will be reduced by
20%. What would be the impact on Yuppie Prepared Meals and should they do it?
3 - The CEO has determined that if prevention costs are increased by $55,000, both internal and external failure costs
would be reduced by 10%. What would be the impact on Yuppie, and should they do it (consider all costs of quality)?
Costs
Incurred
Total Costs
of Quality
Percentage of
Total Costs
of Quality
Prevention Costs:
Total prevention costs
Appraisal Costs:
Total appraisal costs
Internal Failure Costs:
Total Internal Failure
costs
External Failure Costs:
Total external failure costs
Total costs of quality
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Answer:
Costs
Incurred
Total Costs
of Quality
Percentage of
Total Costs
of Quality
Prevention Costs:
Personnel training $20,000
Preventative maintenance on
factory equipment
$5,000
Total prevention costs $25,000 4%
Appraisal Costs:
Mid- point inspection $45,000
Inspection of raw materials $4,000
Total appraisal costs $49,000 8%
Internal Failure Costs:
Cost of defective products found
at the inspection point
$70,000
Cost of disposing of defective
products
$9,000
Production loss due to machine
breakdowns
$12,000
Total Internal Failure Costs $91,000 15%
External Failure Costs:
Warranty claims $315,000
Cost of recall $130,000
Total external failure costs $445,000 73%
Total costs of quality $610,000 100%
2 - Increase Prevention Cost $55,000
External Failure cost savings $445,000 × 20% (89,000)
Net Savings $44,000
They should implement the change
3 - Increase Prevention Cost $55,000
Internal and External Failure cost savings ($91,000 + 445,000) × 20% (53,600)
Net Cost $ 1,400
Based on the identifiable costs of quality they may argue that they should not implement the change, however,
lost sales due to poor quality is an unknown amount. Yuppie may gain sales with an improvement in quality.
258) Carl Clarkson and Lenny Lenid have been assigned to review the costs of quality at the Sprotton Chemicals Ltd.
for the month of September. All amounts are in thousands (000's).
Cost Item Amount
Product testing $350
Clean up of toxic spills within the plant $14,200
Employee training $200
Quality Engineering $675
Supplies used in testing $500
Statistical Process Control $1,750
Payments on lawsuits from product failures $25,000
Some information from a competitor, Sheltonville Industries, has been leaked. You learn that Sheltonville's costs of
quality (as a percentage of total costs of quality) is 15% on external failure, 20% on internal failure, 35% on appraisal and
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the rest on prevention.
Required:
a. Prepare a cost of quality report for September for the Sprotton Chemicals including calculations of each cost
category as a percentage of total costs of quality.
b. Compare Sprotton's approach to quality management to Sheltonville's. Comment on your findings. (What are the
implications of the differences?)
Answer: a.
Sprotton Sept % of Cost Sheltonville
Prevention:
Quality Engineering $675
Employee Training $200
Statistical Process Control $1,750
Total Prevention Costs $2,625 6.15% 30.00%
Appraisal:
Product Testing $350
Supplies used in Testing $500
Total Appraisal Costs $850 1.99% 35.00%
Internal Failure:
Cleanup of toxic spills in plant $14,200
Total Internal Failure $14,200 33.27% 20.00%
External Failure:
Lawsuits $25,000
Total External Failure $25,000 58.58% 15.00%
Total Costs of Quality $42,675
b.
There is a distinct difference as to the distribution of the costs of quality between the two organizations.
Sheltonville invests more in upstream costs (65% in prevention and appraisal costs) compared to Sprotton
(8.14%). Failures downstream are generally more costly in terms of both actual costs (product costs are incurred
when units fail and external failure costs tend to be high) and the opportunity costs from lost sales.
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ESSAY. Write your answer in the space provided or on a separate sheet of paper.
259) Cari and Jereme just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly.
Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they
are ready to open the inn, they need some advice on quality costs and management.