Question

Golf Excellence Inc. manufactures golf shoes. The cleats, however are not always properly aligned and often need to be adjusted during the internal inspection process. The inspection costs and repair costs are $8 and $2, respectively. Of the 5,000 shoes inspected last year, 3% were found to have problems with the clears. Another 2% of the 5,000 shoes had problems with the cleats but were not detected during the internal inspection. Defective shoes were sold and shipped back to Golf Excellence and repaired. Shipping costs and repair costs per shoed are $10 and $4, respectively. Negative publicity will result in a loss of future contribution margin of $50 for each external failure.

Provide the following:

a. Appraisal cost

b. Internal failure cost

c. Out of pocket failure cost

d. Opportunity cost of external failure

e. Total cost of quality control

Answer 1

Solution:
a.	Appraisal cost =$40,000
Working Notes:
	Appraisal cost = Inspection cost = inspection costs per unit x 5,000 shoes inspected
		=$8 x 5000
		=$40,000
b.	Internal failure cost =$300
Working Notes:
	Internal failure cost =rework costs = 3% x 5,000 shoes inspected x repair cost
		=3% x 5000 x $2
		=$300
c.	Out of pocket failure cost	$1,400
Working Notes:
	Out-of-pocket cost = (shipping cost + repair cost) X defective units
	= 2% x 5,000 shoes inspected x (repair cost + shipping cost)
	= 2% x 5000 x (10+4)
	=1400
d.	Opportunity cost of external failure	$5,000
Working Notes:
	Opportunity cost of external failure = $50 for each external failure.
		=$50 x 2% x 5000
		=5,000
e.	Total cost of quality control	$46,700
Working Notes:
	Total cost of quality control
	Appraisal costs	$40,000
	Internal failure	$300
	External failure (out-of-pocket)	$1,400
	External failure (lost sales)	$5,000
	Total cost of quality control	$46,700
Please feel free to ask if anything about above solution in comment section of the question.