Question:
Cost of quality) Elijah Electronics makes PDAs. The firm produced 45,000 PDAs during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 42,300 units through regular market channels, but 450 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $240,000 on prevention costs and $120,000 on quality appraisal. There were no customer returns. An income statement for the year follows.
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Sales
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Regular channel
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$8,460,000
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|
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Seconds
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213,750
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|
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Scrap
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15,750
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$8,689,500
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Cost of goods sold
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|
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Original production costs
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$2,876,400
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Rework costs
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63,000
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Quality prevention and appraisal
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360,000
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(3,299,400)
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Gross margin
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$5,390,100
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Selling and administrative expenses (all fixed)
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(1,470,000)
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Profit before income taxes
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$3,920,100
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a. Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels.
b. Compute the total failure cost for the company in its first year.
c. Compute total quality cost incurred by the company in its first year.
d. What evidence indicates that the firm is dedicated to manufacturing and selling high-quality products?