Q.38PGA-1
Question
Question: Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 $ 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
Step-by-Step Solution
VerifiedAnswer
Total predicted quality cost savings amount to $115,620.
Quality cost-saving is the reduction in the cost by improving the quality of products or services. Quality is improved by implementing quality improvement programs. Thus the cost incurred on quality improvement programs replaces the cost of lower quality products and the overall cost gets reduced.
Activity | Predicted reduction in activity units | Allocation rate per unit | Predicted quality cost savings |
|
|
|
|
Inspection of incoming raw material | 390 | 44 | $17,160 |
Inspection of finished goods | 390 | 19 | $7,410 |
Number of defective units discovered in house | 1200 | 50 | $60,000 |
Number of defective units discovered by customers | 325 | 72 | $23,400 |
Lost profits due to dissatisfied customers | 75 | 102 | $7,650 |
Total predicted quality cost savings |
|
| $115,620 |