Question

COSTS OF QUALITY ANALYSIS. SafeT produces car seats for children from newborn to 2 years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Safe Travel’s only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $5.00 per car seat, and the repair cost is $1.00 per car seat. All 200,000 car seats were inspected last year, and 5% were found to have problems with the stitching in the straps during the internal inspection. Another 1% of the 200,000 car seats had problems with the stitching, but the internal inspection did not discover them. Defective units that were sold and shipped to customers needed to be shipped back to Safe Travel and repaired. Shipping costs are $8.00 per car seat, and repair costs are $1.00 per car seat. However, the out-of-pocket costs (shipping and repair) are not the only costs of defects not discovered in the internal inspection. Negative publicity will result in a loss of future contribution margin of $100 for each external failure.

Calculate appraisal cost.

Calculate internal failure cost.

Calculate out-of-pocket external failure cost.

Determine the opportunity cost associated with the external failures.

What are the total costs of quality?

What factors other than cost should SafeT consider, if it wished to change its inspection process?

Answer 1

1

Answer: appraisal cost =$1,000,000

Working notes for the above answer:

appraisal cost

= Inspection Cost

= $5 × 200,000 Car Seats

= $1,000,000

appraisal cost =$1,000,000

_____________________________________________________

2

Answer: Internal Failure Cost =$10,000

Working notes for the above answer:

Internal Failure Cost

= Rework Cost

= 5% × 200,000 × $1

= 10,000 × $1

= $10,000

_____________________________________________________

3

Answer: out-of-pocket external failure cost =$18,000

Working notes for the above answer:

out-of-pocket external failure cost

=Shipping Cost + Repair Cost

= 1% × 200,000 × ($8 + $1)

= 2,000 × $9

= $18,000

_____________________________________________________

4

Answer: Opportunity Cost of External Failure =$200,000

Working notes for the above answer:

Opportunity Cost of External Failure

= Lost Future Profits

= (1% × 200,000) × $100

= 2,000 car seats × $100

= $200,000

_____________________________________________________

5

Answer: Total Cost of Quality Control =$1,228,000

Working notes for the above answer:

Total Cost of Quality Control

= $1,000,000 + $10,000 + $18,000 + $200,000

= $1,228,000

______________________________________________________

6

In addition to lowering costs using the alternative inspection plan Safe Travel has other factors they should consider.

• First off their reputation can be effected if their external failure percentage increases and this may lead to the costs being higher due to the profit loss.
• Then that would lead to them being sued due to defective car seats.