19-31E
Question
Clason, Inc. manufactures door panels. Suppose Clason is considering spending the following amounts on a new total quality management (TQM) program:
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Strength-testing one item from each batch of panels \( 68,000
Training employees in TQM 27,000
Training suppliers in TQM 39,000
Identifying suppliers who commit to on-time delivery of
perfect-quality materials 58,000
Clason expects the new program would save costs through the following:
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Avoid lost profits from lost sales due to disappointed customers \) 86,000
Avoid rework and spoilage 63,000
Avoid inspection of raw materials 57,000
Avoid warranty costs 15,000
Requirements
1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost.
2. Should Clason implement the new quality program? Give your reason.
Answer
Step-by-Step Solution
VerifiedThe cost of taking the quality improvement programs is $192,000. The cost of not taking the improvement programs is $221,000. So it is advisable to take the improvement program.
Prevention Costs –
i) Training Employees in TQM
ii) Training Suppliers in TQM
iii) Identifying suppliers who commit to on-time delivery of perfect-quality materials
Appraisal Cost –
i) Strength-testing one item from each batch of panels
Internal Failure Costs –
i) Avoid rework and Spoilage
ii) Avoid inspection of raw materials
External Failure Costs –
i) Avoid lost profits from lost sales due to disappointed customers
ii) Avoid warranty costs
Undertake the Quality Improvement Program_____________
Prevention
Training Employees in TQM $27,000
Training Suppliers in TQM $39,000
Identifying suppliers who commit to
on-time delivery of perfect-quality materials $58,000
Total Prevention Costs $124,000
Appraisal
Strength-testing one item from
each batch of panels $68,000
Total Appraisal Costs $68,000
Total cost of undertaking the quality improvement programs $192,000
Do not undertake the Quality Improvement Program_____________
Internal Failure
Avoid rework and spoilage $63,000
Avoid inspection of raw material $57,000
Total Internal Failure Costs $120,000
External Failure
Avoid lost profits from lost sales
due to disappointed customers $86,000
Avoid warranty costs $15,000
Total Appraisal Costs $101,000
Total cost of undertaking the quality improvement programs $221,000
As it can be seen from the above analysis, if quality improvement programs are taken Clason can save $29,000 cost.
So it is advisable to take the quality improvement programs.