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:
Additional 20 minutes of testing for each speaker
$ 620,000
Negotiating with and training suppliers to obtain higher-quality
materials and on-time delivery
410,000
Redesigning the speakers to make them easier to manufacture
1,350,000
Kane expects this quality program to save costs, as follows:
Reduce warranty repair costs
$ 225,000
Avoid inspection of raw materials
540,000
Avoid rework because of fewer defective units
800,000
It also expects this program to avoid lost profits from the following:
Lost sales due to disappointed customers
$ 940,000
Lost production time due to rework
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.
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