Question:
Classifying quality costs and using these costs to make decisions
Kane manufactures high-quality speakers. Suppose Kane is considering spending the following amounts on a new quality program:
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Additional 20 minutes of testing for each speaker
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$ 620,000
|
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Negotiating with and training suppliers to obtain higher-quality
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materials and on-time delivery
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410,000
|
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Redesigning the speakers to make them easier to manufacture
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1,350,000
|
Kane expects this quality program to save costs, as follows:
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Reduce warranty repair costs
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$ 225,000
|
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Avoid inspection of raw materials
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540,000
|
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Avoid rework because of fewer defective units
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800,000
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It also expects this program to avoid lost profits from the following:
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Lost sales due to disappointed customers
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$ 940,000
|
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Lost production time due to rework
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278,000
|
Requirements
1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, external failure).
2. Should Kane implement the quality program? Give your reasons.