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Chapter 19: 19-32E (page 1075)

Loiselle manufactures high-quality speakers. Suppose Loiselle is considering spending the following amounts on a new quality program:

___________________________________________________________________

Additional 20 minutes of testing for each speaker \( 625,000

Negotiating and training suppliers to obtain higher-quality

materials and on-time delivery 430,000

Redesigning the speakers to make them easier to manufacture 1,250,000

Loiselle expects this quality program to save costs as follows:

__________________________________________________

Reduce warranty repair costs \) 275,000

Avoid inspection of raw materials 580,000

Avoid rework because of fewer defective units 825,000_

It also expects this program to avoid lost profits from the following:

___________________________________________________

Lost profits due to disappointed customers $ 920,000

Lost production time due to rework 278,000

Requirements

1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, or external failure).

2. Should Loiselle implement the quality program? Give your reasons.

Short Answer

Expert verified

The cost of taking the quality improvement programs is $2,305,000. The cost of not taking the improvement programs is $2,878,000. So it is advisable to take the improvement program.

Step by step solution

01

Classification of costs

Prevention Costs 鈥�

i)Negotiating and training suppliers to obtain higher-quality materials and on-time delivery

ii)Redesigning the speakers to make them easier to manufacture

Appraisal Cost 鈥�

i) Additional 20 minutes of testing for each speaker

Internal Failure Costs 鈥�

i) Avoid inspection of raw materials

ii) Avoid rework because of fewer defective units

External Failure Costs 鈥�

i) Reduce warranty repair costs

ii) Lost profits due to disappointed customers

iii) Lost production time due to rework

02

Analysis of quality improvement programs

Undertake the Quality Improvement Program_____________

Prevention

Negotiating and training suppliers to

obtain higher-quality materials and

on-time delivery $430,000

Redesigning the speakers to make

them easier to manufacture $1,250,000

Total Prevention Costs $1,680,000

Appraisal

Additional 20 minutes of testing for each speaker $625,000

Total Appraisal Costs $625,000

Total cost of undertaking the quality improvement programs $2,305,000

Do not undertake the Quality Improvement Program_____________

Internal Failure

Avoid inspection of raw materials $580,000

Avoid rework because of fewer defective $825,000

Total Internal Failure Costs $1,405,000

External Failure

Reduce warranty repair costs $275,000

Lost profits due to disappointed customers $920,000

Lost production time due to rework $278,000

Total Appraisal Costs $1,473,000

Total cost of undertaking the quality improvement programs $2,878,000

As it can be seen from the above analysis, if quality improvement programs are taken Clason can save $573,000 cost.

So it is advisable to take the quality improvement programs.

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Most popular questions from this chapter


Darrel & Co. makes electronic components. Chris Darrel, the president, recently instructed Vice President Jim Bruegger to develop a total quality control program. 鈥淚f we don鈥檛 at least match the quality improvements our competitors are making,鈥� he told Bruegger, 鈥渨e鈥檒l soon be out of business.鈥� Bruegger began by listing various 鈥渃osts of quality鈥� that Darrel incurs. The first six items that came to mind were:

a. Costs incurred by Darrel customer representatives traveling to customer sites to repair defective products, \(13,000.

b. Lost profits from lost sales due to reputation for less-than-perfect products, \)35,000.

c. Costs of inspecting components in one of Darrel鈥檚 production processes, \(40,000.

d. Salaries of engineers who are redesigning components to withstand electrical overloads, \)65,000.

e. Costs of reworking defective components after discovery by company inspectors, \(50,000.

f. Costs of electronic components returned by customers, \)70,000.

Classify each item as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost. Then determine the total cost of quality by category.

The Oakman Company (see Short Exercise S19-1) has refined its allocation system by separating manufacturing overhead costs into two cost pools鈥攐ne for each department. The estimated costs for the Mixing Department, \(510,000, will be allocated based on direct labor hours, and the estimated direct labor hours for the year are 170,000. The estimated costs for the Packaging Department, \)300,000, will be allocated based on machine hours, and the estimated machine hours for the year are 40,000. In October, the company incurred 38,000 direct labor hours in the Mixing Department and 10,000 machine hours in the Packaging Department.

Requirements

1. Compute the predetermined overhead allocation rates. Round to two decimal places.

Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella鈥檚 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 skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Activity Predicted Predetermined

Reduction in Overhead Allocation

Activity Units Rate per Unit

Inspection of incoming raw materials 390 $ 44

Inspection of finished goods 390 19

Number of defective units discovered in-house 1,200 50

Number of defective units discovered by customers 325 72

Lost profits due to dissatisfied customers 75 102

Requirements

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

Question:Low Range produces fleece jackets. The company uses JIT costing for its JIT production system.

Low Range has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On March 1, 2018, the account balances were Raw and In-Process Inventory, \(9,000; Finished Goods Inventory, \)1,700.

The standard cost of a jacket is \(40, composed of \)12 direct materials plus \(28 conversion costs. Data for March鈥檚 activities follow:

Number of jackets completed 15,000

Number of jackets sold (on account, for \)50 each) 14,600

Direct materials purchased (on account) \( 177,500

Conversion costs incurred \) 521,000

Requirements

2. Prepare summary journal entries for March. Underallocated or overallocated conversion costs are adjusted to Cost of Goods Sold monthly.

The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.

Activity Cost Allocation Base

Setup \( 58,000 Number of setups

Machine maintenance 30,000 Number of machine hours

Total indirect manufacturing costs \) 88,000

Lo-Gain Hi-Gain Total

Direct labor hours 1,200 3,800 5,000

Number of setups 40 40 80

Number of machine hours 3,000 2,000 5,000

Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.

Requirements

1. Compute the indirect manufacturing cost per unit using direct labor hours for the single plantwide predetermined overhead allocation rate.
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