A company is considering spending the following on a new quality improvement program
Inspect raw materials $123,000
Reengineer to improve product quality 760,000
Inspect finished goods 150,000
Preventive maintenance of equipment 140,000
The company expects this quality program to reduce costs by the following amounts:
Avoid lost profits due to unhappy customers $910,000
Fewer sales returns 65,000
Decrease the cost of rework 155,000
Lower warranty costs 54,000
Group each cost under the four categories of quality management systems. Comment whether the company should undertake the quality improvement program.
What will be an ideal response
Undertake the Quality Improvement Program
Prevention
Reengineer to improve product quality $760,000
Preventive maintenance of equipment 140,000
Total prevention costs $900,000
Appraisal
Inspect raw materials $123,000
Inspect finished goods 150,000
Total appraisal costs 273,000
Total costs of undertaking the quality improvement program $1,173,000
Do Not Undertake the Quality Improvement Program
Internal Failure
Cost of rework $ 155,000
Total internal failure costs $155,000
External Failure
Lost profits due to unhappy customers $910,000
Sales returns 65,000
Warranty costs 54,000
Total external failure costs 1,029,000
Total costs of not undertaking the quality improvement program $1,184,000
These estimates suggest that the company would save $11,000 ($1,184,000 - $1,173,000 ) by undertaking the quality improvement program.
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