Q38PGA-2
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 \( 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
2. Stella spent \)103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
Step-by-Step Solution
VerifiedAnswer
The net benefit of design engineering amounts to $12,620.
Quality improvement activities or programs are the programs that intend to improve quality and reduce costs. There are four types of programs based on quality cost-
1) Prevention cost
2) Appraisal cost
3) Internal failure costs
4) External failure cost
Total predicted quality cost savings: $115,620
Amount spent on design engineering: $103,000