Question

Advanced Technologies (AT) produces two compression machines that are popular with manufacturers of plastics: no. 165 and no. 172. Machine no. 165 has an average selling price of $31,400, whereas no. 172 typically sells for approximately $28,200. The company is very concerned about the quality and has provided the following information:

	No. 165			No. 172
Number of machines produced and sold		230			235
Warranty costs:
Average repair cost per unit	$	970		$	420
Percentage of units needing repair		60	%		10	%
Reliability engineering at $185 per hour		1,670	hours		2,035	hours
Rework at AT's manufacturing plant:
Average rework cost per unit	$	1,970		$	1,670
Percentage of units needing rework		30	%		20	%
Manufacturing inspection at $40 per hour		370	hours		535	hours
Transportation costs to customer sites to fix problems	$	30,200		$	16,400
Quality training for employees	$	35,700		$	51,400

Required:
1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure.
2-a. Using the classifications in requirement 1, compute AT's quality costs for machine no. 165 in dollars and as a percentage of sales revenues.
2-b. Using the classifications in requirement 1, compute AT's prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.
3-a. Using the classifications in requirement 1, compute AT's quality costs for machine no. 172 in dollars and as a percentage of sales revenues.
3-b. Using the classifications in requirement 1, compute AT's prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.
4. Is the company "investing” its quality expenditures differently for the two machines?

Answer 1

Part 1)

The classification is provided as below:

Warranty Costs	External Failure
Reliability Engineering	Prevention
Rework at AT’s Manufacturing Plant	Internal Faliure
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 ( 230* 31400)	7,222,000
Prevention Cost:
Reliability Engineering (1670 * 185)	308,950
Quality Training for Employees	35700
Total	344,650	4.77%
Appraisal Cost (370*40) :	14800	0.20%
Internal Failure Cost (230*30%*1970)	135930	1.88%
External Failure:
Warranty Costs (230*60%*970)	133,860
Transportation to Customers	30200
Total	164,060	2.27%
Total Quality Costs	659440	9.13%

_____

Part 2-b)

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

	No. 165
Prevention	344650	52.26% (344650/ 659440*100)
Appraisal	14800	2.24% (14800 / 659440*100)
Internal Failure	135930	20.61% (135930/ 659440*100)
External Failure	164060	24.88% (164060 /659440 *100)
Total	$659440

_____

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 (235*28200)	6,627,000
Prevention Cost:
Reliability Engineering (2035*185)	376,475
Quality Training for Employees	51400
Total	427875	6.46%
Appraisal Cost (535*40) :	21400	0.32%
Internal Failure Cost (235*20%*1670)	78490	1.18%
External Failure:
Warranty Costs (235*10%*420)	9870
Transportation to Customers	16400
Total	26270	0.40%
Total Quality Costs	554035	8.36%

_____

Part 3-b)

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

	No. 172
Prevention	427875	77.23%
Appraisal	21400	3.86%
Internal Failure	78490	14.17%
External Failure	26270	4.74%
Total	$554035

_____

Part 4)

Yes, the company is investing its quality expenditures differently for 2 machines.