(Cost of quality) Golf courses are demanding in their quest for high quality carts because of the critical need for lawn maintenance. Ride in Style manufactures golf carts and is a recognized leader in the industry for quality products. In recent months, company managers have become more interested in trying to quantify the costs of quality in the company. As an initial effort, the company was able to identify the following 2000 costs, by categories that are associated with quality
|
Prevention Costs |
|
|
Quality training |
$15,000 |
|
Quality technology |
50,000 |
|
Quality circles |
32,000 |
|
Appraisal Costs |
|
|
Quality inspections |
$18,000 |
|
Test equipment |
14,000 |
|
Procedure verifications |
9,000 |
|
Internal Failure Costs |
|
|
Scrap and waste |
$ 6,500 |
|
Waste disposal |
2,100 |
|
External Failure Costs |
|
|
Warranty handling |
$ 9,500 |
|
Customer reimbursements/returns |
7,600 |
Managers were also aware that in 2000, 250 of the 8,000 carts that were produced had to be sold as scrap. These 250 carts were sold for $80 less profit per unit than “good” carts. Also, the company incurred rework costs amounting to $6,000 to sell 200 other carts through regular market channels.
a. Using these data, find Ride in Style’s 2000 expense for the following:
1. Lost profits from scrapping the 250 units
2. Total failure costs
3. Total quality costs
b. Assume that the company is considering expanding its existing full 5 year warranty to a full 7 year warranty in 2001. How would such a change be reflected in quality costs?