Question

No. 165 No. 172 Number of machines produced and sold 80 100 Warranty costs: Average repair cost per unit $1,200 $400 Percentage of units needing repair 70% 10% Reliability engineering at $150 per hour 1,600 hours 2,000 hours Rework at AT’s manufacturing plant: Average rework cost per unit $1,900 $1,600 Percentage of units needing rework 35% 25% Manufacturing inspection at $50 per hour 300 hours 500 hours Transportation costs to customer sites to fix problems $29,500 $15,000 Quality training for employees $35,000 $50,000 Requirements: 1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure. 2. Using the classifications in requirement (1), compute AT’s quality costs for machine no. 165 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs. 3. Repeat requirement (2) for machine no. 172. 4. Comment on your findings, noting whether the company is “investing” its quality expenditures differently for the two machines. 5. Quality costs can be classified as observable or hidden. What are hidden quality costs, and how do these costs differ from observable costs?

Answer 1

Part 1)

The classification is provided as below:

Warranty Costs	External Failure
Reliability Engineering	Prevention
Rework at AT’s Manufacturing Plant	Internal Failure
Manufacturing Inspection	Appraisal
Transportation Costs to Customer Sites	External Failure
Quality Training for Employees	Prevention

Part 2-a)

The AT's quality costs for Machine No. 165 in dollars and as a percentage of sales revenues is calculated as below:

	No. 165
	Dollars	Percentage of Sales
Sales Revenue	4,800,000
Prevention Cost:
Reliability Engineering (1,600*150)	240,000
Quality Training for Employees	35,000
Total	275000	5.73%
Appraisal Cost (300*50) :	15,000	0.31%
Internal Failure Cost	53200	1.11%
External Failure:
Warranty Costs	67200
Transportation to Customers	29,500
Total	96700	2.01%
Total Quality Costs	439900	9.16%

_____

Part 2-b)

The AT's costs as a percentage of total quality costs is arrived as below:

	No. 165
Prevention	275000	62.51%
Appraisal	15,000	3.41%
Internal Failure	53200	12.09%
External Failure	96700	21.98%
Total	$439900

Part 3-a)

The AT's quality costs for Machine No. 172 in dollars and as a percentage of sales revenues is calculated as below:

	No. 172
	Dollars	Percentage of Sales
Sales Revenue	5,500,000
Prevention Cost:
Reliability Engineering (2000*150)	300,000
Quality Training for Employees	50,000
Total	350,000	6.36%
Appraisal Cost (500*50) :	25,000	0.45%
Internal Failure Cost	40,000	0.73%
External Failure:
Warranty Costs	4,000
Transportation to Customers	15,000
Total	19,000	0.35%
Total Quality Costs	434,000	7.89%

_____

Part 3-b)

The AT's costs as a percentage of total quality costs is arrived as below:

	No. 172
Prevention	350,000	80.65%
Appraisal	25,000	5.76%
Internal Failure	40,000	9.22%
External Failure	19,000	4.38%
Total	$434,000

_____

Part 4)

Yes, the company is investing its quality expenditures differently for 2 machines. It is evident from the fact that the company is spending 86.41% (80.65% + 5.76%) of its quality expenditures on prevention and appraisal costs for Machine 172. On the other hand the company is spending only 65.92% (62.51% + 3.41%) on same costs for Machine 165.