(L.OBJ. 4) Analyzing costs of quality [20-30 min] Lori, Inc., is using a costs-of-quali...

(L.OBJ. 4) Analyzing costs of quality [20-30 min]

Lori, Inc., is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Lori’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the 2-year life of the skateboards follow. Also shown are the cost allocation rates for each activity.

Requirements

1. Calculate the predicted quality cost savings from the design engineering work.

2. Lori spent $102,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?

3. What major difficulty would Lori’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?