Question

Construction Toys Corp. is using a​ costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The​ company's 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 toy robot follow. Also shown are the cost allocation rates for the activities.

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

		Predicted
		Reduction in
Activity		Activity Costs
Inspection of incoming materials. . . . . . . .
Inspection of finished goods. . . . . . . . . . .
Number of defective units
discovered in-house. . . . . . . . . . . . .
Number of defective units
discovered by customers. . . . . . . .
Lost sales to dissatisfied customers. . . . .
Total predicted quality cost savings DATA TABLE Predicted Activity Cost Reduction in Allocation Rate Activity Activity Units per Unit Inspection of incoming materials. . . . . . . . . . . . . . . . . . 310 $23 Inspection of finished goods. . . . . . . . . . . . . . . . . . . . . 310 $27 Number of defective units discovered in-house. . . . . . . . . 3,000 $19 Number of defective units discovered by customers. . . . 880 $42 Lost sales to dissatisfied customers. . . . . . . . . . . . . . . 260 $56		REQUIREMENT 1. Calculate the predicted quality cost savings from the design engineering work. 2. The company spent $ 65 comma 000$65,000 on design engineering for the new toy robot. What is the net benefit of this​ "preventive" quality​ activity? 3. What major difficulty would management have had in implementing this​costs-of-quality approach? What alternative approach could it use to measure quality​ improvement

Answer 1

Part 1- Calculation of predicted quality cost savings

Activity	Predicted reduction in activity units (A)	Allocation rate (activity cost) (B)	Predicted quality cost savings (A*B)
Inspection of incoming materials	310	$23	$7130
Inspection of finished goods	310	$27	$8370
Number of defective units discovered in-house	3000	$19	$57000
Number of defective units discovered by customers	880	$42	$36960
Lost sales to dissatisfied customers	260	$56	$14560
Total Predicted quality cost savings			$124020

Part 2 - Construction corp. inc.

Net Benefit design engineering for the new toy robot

Particulars	Amount
Total Predicted quality cost savings	$124020
Cost spent on design engineering	$65000
Net Benefit of design engineering	$59020

Part 3 - There are many difficulties faced by management in implementing cost of quality approach such as difficulty faced in estimating the quality cost, estimation of any design cost to be spent for quality control, allocation of various cost.

Due to these difficulties, management used to prepare the non financial data focusing on quality aspects like Experience analysis, machine brekadowns records, customer grievances.