Arusetta Inc. produces a popular brand of air conditioner that is backed by a five-year warranty. . In Year l, Arusetta began implementing a total quality management program that has resulted in significant changes in its cost of quality. Listed below is Arusetta’s financial information relating to sales and quality for Years I and 2.
| Year 1 | Year 2 |
Sales revenue | $500,000 | $500,000 |
Warranty expense | 22,000 | 18,500 |
Product design | 5,000 | 15,000 |
Scrap | 2,000 | 1,200 |
Process reengineering | 8,000 | 12,000 |
Raw materials inspections | 4,800 | 2,300 |
Product liability claims | 5,000 | 8,500 |
Rework | 3,100 | 2,800 |
Returns resulting from defects | 7,000 | 4,500 |
Supplier certification costs | 500 | 2,500 |
Preventive maintenance on equipment | 1,300 | 2,600 |
Final inspection costs | 10,000 | 7,000 |
Employee quality training | 1,200 | 4,000 |
Equipment breakdown repair costs | 8,500 | 3,000 |
Estimate of lost sales due to Quality problems | 10,000 | 10,000 |
Instructions
a. Prepare.a cost of quality report for Arusetta covering Year 1 and Year 2. Your report should divide the above costs into the four categories of quality costs and include total dollar amounts for each category.
b. How have the total amounts of prevention and external failure costs changed over the two years? What are some possible explanations for these changes?
c. At Arusetta, preventive maintenance has a direct effect on the repair costs associated with equipment breakdowns. Did the decrease in repair costs justify the increase in maintenance costs?
d. Why might Arusetta’s estimate of lost sales remain the same despite the adoption of the total quality management program?
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