19-32E
Question
Loiselle manufactures high-quality speakers. Suppose Loiselle is considering spending the following amounts on a new quality program:
___________________________________________________________________
Additional 20 minutes of testing for each speaker \( 625,000
Negotiating and training suppliers to obtain higher-quality
materials and on-time delivery 430,000
Redesigning the speakers to make them easier to manufacture 1,250,000
Loiselle expects this quality program to save costs as follows:
__________________________________________________
Reduce warranty repair costs \) 275,000
Avoid inspection of raw materials 580,000
Avoid rework because of fewer defective units 825,000_
It also expects this program to avoid lost profits from the following:
___________________________________________________
Lost profits due to disappointed customers $ 920,000
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, or external failure).
2. Should Loiselle implement the quality program? Give your reasons.
Step-by-Step Solution
VerifiedThe cost of taking the quality improvement programs is $2,305,000. The cost of not taking the improvement programs is $2,878,000. So it is advisable to take the improvement program.
Prevention Costs –
i) Negotiating and training suppliers to obtain higher-quality materials and on-time delivery
ii) Redesigning the speakers to make them easier to manufacture
Appraisal Cost –
i) Additional 20 minutes of testing for each speaker
Internal Failure Costs –
i) Avoid inspection of raw materials
ii) Avoid rework because of fewer defective units
External Failure Costs –
i) Reduce warranty repair costs
ii) Lost profits due to disappointed customers
iii) Lost production time due to rework
Undertake the Quality Improvement Program_____________
Prevention
Negotiating and training suppliers to
obtain higher-quality materials and
on-time delivery $430,000
Redesigning the speakers to make
them easier to manufacture $1,250,000
Total Prevention Costs $1,680,000
Appraisal
Additional 20 minutes of testing for each speaker $625,000
Total Appraisal Costs $625,000
Total cost of undertaking the quality improvement programs $2,305,000
Do not undertake the Quality Improvement Program_____________
Internal Failure
Avoid inspection of raw materials $580,000
Avoid rework because of fewer defective $825,000
Total Internal Failure Costs $1,405,000
External Failure
Reduce warranty repair costs $275,000
Lost profits due to disappointed customers $920,000
Lost production time due to rework $278,000
Total Appraisal Costs $1,473,000
Total cost of undertaking the quality improvement programs $2,878,000
As it can be seen from the above analysis, if quality improvement programs are taken Clason can save $573,000 cost.
So it is advisable to take the quality improvement programs.