Question

Boingo Construction Toys Corp. is using a costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The company'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 toy robot follow. Also shown are the cost allocation rates for the activities. (Click on the icon to view the information.) Data Table Х - Read the requirements Predicted Activity Cost Reduction in Allocation Rate Activity Units per Unit 305 $ 21 Requirement 1. Calculate the predicted quality cost savings from the design engineering work. Predicted Reduction in Activity Activity Costs Inspection of incoming materials. Inspection of finished goods.. Number of defective units discovered in-house. Number of defective units discovered by customers 305 $ 27 Activity Inspection of incoming materials. Inspection of finished goods... Number of defective units discovered in-house Number of defective units discovered by customers Lost sales to dissatisfied customers.... 3.400 $ 14 925 $ 39 270 $ 55 Lost sales to dissatisfied customers Print Done Total predicted quality cost savings Requirement 2. The company spent $72,000 on design engine for the new toy robot. What is the net benefit of this "preventive" quality activity? Less: Net benefit of design engineering Requirement 3. What major difficulty would management have had in implementing this costs-of-quality approach?

Answer 1

Requirement 1

Activity	Predicted Reduction in Activity Costs
Inspection of Incoming Materials	6,405
Inspection of Finished Goods	8,235
Number of defective Units discovered in house	47,600
Number of defective Units discovered by Customers	36,075
Lost Sales to dissatisfied Customers	14,850
Total Predicted Quality Cost Savings	113,165

Notes

Predicted Reduction in Activity Costs = Predicted Reduction in Activity Units * Activity Cost Allocation Rate per Unit

Inspection of Incoming Materials = 305 * $ 21 = $ 6,405

Inspection of Finished Goods = 305 * $ 27 = $ 8,235

Number of Defective Units discovered in House = 3,400 * $ 14 = $ 47,600

Number of Defective Units discovered by Customers = 925 * $ 39 = $ 36,075

Lost Sales to dissatisfied Customers = 270 * $ 55 = $ 14,850

Requirement 2

Total Predicted Quality Cost Savings. 113,165

Less : Costs of Design Engineering. 72,000

Net Benefit of Design Engineering 41,165

Requirement 3

The major problem faced by the company is the identification of appropriate cost drive and measurement of reduction in the activity level of units.

Another quality approach it could have use to measure quality improvement is quality of costs before engineering development and after development

For accurate answers for Requirement 3 please provide the option provided.