In: Accounting
Safe Travel 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 $6 per seat and the repair cost is $1.25 per seat. All 175,000 car seats were inspected last year and 5% were found to have problems with stitching in the straps during the internal inspection. Another 1% of the 175,000 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 Sage Travel and repaired. Shipping costs are $9 per car seat and repair costs are $1.25 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 contribution margin of $168 for each external failure. Required: Calculate the appraisal cost, internal failure cost and out of pocket external failure cost. Determine the opportunity cost associated with the external failures. What are the Total Costs of Quality in dollars? Safe Travel is concerned with the high upfront cost of inspecting all 175,000 units. It is considering an alternative inspection plan that will cost only $3.50 per car seat inspected. During the internal inspection, this alternative technique will detect only 2.5% of the 175,000 car seats that have stitching problems. The other 3.5% will be detected after the car seats are sold and shipped. What are the total costs of quality for the alternative technique?
Last year all 175000 cars were inspected
Cost of inspection is $ 6.00 per seat
Considering car seat cost is appraisal cost of quality
appraisal cost = 175,000* $6.00 = $1,050,000
No of cars inspected = 175,000
No of cars seats detected with problem = 175,000*5% =8,750
Repair cost = $ 1.25 per seat
Total repair cost = 8,750*1.25= $ 10,937.5
Total internal failures cost= $10,937.5
* external failures
No of car seats shipped back= 1,750
(175,000*1%)
Cost of shipping per each unit is $ 9.00
Total shipping cost = 1,750*9.00= $ 15,750
repair cost = $ 1.25 per seat
Total repair cost = 1,750*1.25 = $ 2187.5
Total external failures cost = $ 15,750 +$ 2187.5 = $17,937.5
* loss of contribution margin
loss of contribution margin of $168 for each external failure
1750 units which are not discovered by internal inspection
The opportunity cost = 1750*168= $294,000
* The Total Costs of Quality = Appraisal cost + internal failure cost + external failure cost + opportunity cost.
= $1,050,000+ $10,937.5+ $17,937.5+ $294,000 = $1,372,875
The Total Costs of Quality = $1,372,875
* alternative inspection plan that will cost only $3.50 per car seat inspected
Appraisal cost
175,000*3.5= $612,500
Internal failure cost
(175,000*2.5%*1.25) = $5,468.75
External failure cost
175,000*3.5%(9+1.25)= $62,781.25
Opportunity cost
(175,000*3.5*168) = $1,029,000
Total quality cost = $612,500+ $5,468.75+ $62,781.25+ $1,029,000
=1,709,750
*** In this case, Variations inspection plan increased cost for the company. There are few factors are in additional to cost savings. The opportunity cost increases which effects the growth of the company.