(Cost of quality) Klein Computers is evaluating its quality control costs for 2000and preparing plans and budgets for 2001. The 2000 quality costs incurred in the CPU Division follow
|
Prevention costs |
$150,000 |
|
Appraisal costs |
50,000 |
|
Internal failure costs |
175,000 |
|
External failure costs |
50,000 |
|
Total |
$425,000 |
Prepare a memo to the company president on the following issues:
a. Which categories of quality costs would be affected by the decision to spend $750,000 on new computer chip making equipment (to replace an older model)? Why?
b. If projected external failure costs for 2001 can be reduced 60 percent (relative to 2000 levels) by either spending $25,000 more on appraisal or $40,000 more on prevention, why would the firm opt to spend the $40,000 on prevention rather than the $25,000 on appraisal?