Question

Number of units manufactured and sold Selling price per unit Variable manufacturing and selling costs per unit Hours spent by engineers improving design. Testing and inspection hours per unit Percentage of units reworked in the plant after inspection Average variable rework costs per refrigerator 3,200 units 1,250 750 1,500 0.5 hours 7% 520

Answer 1

Answer 1:

Grayson Cost of Quality Report: Costs Incurred Total Costs of Percentage of Total Cost Quality of Quality (Rounded) Prevention Costs: Cost of Hours spent by engineers improving design $90,000 Total prevention costs $90,000 10.7 % Appraisal Costs: Testing and inspection hours - Cost $128,000 Total appraisal costs $128,000 15.2 % Internal Failure Costs: Rework cost of units repaired after inspection $116,480 Total internal failure costs $116,480 13.8 % External failure Costs: $182,400 $325,000 Rework cost repaired under warranty at customers' home Opportunity cost of estimated lost sales due to quality reputation Total external failure costs Total cost of quality $507,400 $841,880 60.3% 100.0 %

Working:

Cost of Hours spent by engineers improving design = 1500 * $60 = $90,000

Testing and inspection hours - Cost = 3200 * 0.5* $80 = $128,000

Rework cost of units repaired after inspection = 3200 * 7% * $520 = $116,480

Rework cost repaired under warranty at customers' home = 3200 * 10% * $570 = $182,400

Opportunity cost of estimated lost sales due to quality reputation = Units * Contribution per unit = 650 * ($1250 - $750) = $325,000

Total cost of quality = 90000 + 128000 + 116480 + 507400 = $841,880

Answer 2:

Variable rework cost at customer's home is generally higher than in-factory variable repair cost. This is higher since it involves additional costs like cost of travelling, additional time spent by engineers, cost of time spent by customer service personnel in recording complaints, ensuring its clouser etc.

Normally in terms of value chain, rework cost to repair keeps on increasing along the value chain.

Answer 3:

Cost of quality report gives total cost and activity wise break up of it. Analysis of this helps in identifying reasons so that action can be taken to identify issues at an early stage or best to find ways to prevent it altogether by improving design.

Thus it helps in improvement of production processes and improving the product itself.