Question

Clason, Inc. manufactures door panels. Suppose Clason is considering spending the following amounts on a new total quality management (TQM) program:

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Strength-testing one item from each batch of panels \( 68,000

Training employees in TQM 27,000

Training suppliers in TQM 39,000

Identifying suppliers who commit to on-time delivery of

perfect-quality materials 58,000

Clason expects the new program would save costs through the following:

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Avoid lost profits from lost sales due to disappointed customers \) 86,000

Avoid rework and spoilage 63,000

Avoid inspection of raw materials 57,000

Avoid warranty costs 15,000

Requirements

1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost.

2. Should Clason implement the new quality program? Give your reason.

Answer

Short answer

The cost of taking the quality improvement programs is $192,000. The cost of not taking the improvement programs is $221,000. So it is advisable to take the improvement program.

Step-by-step solution

Classification of the given costs

Prevention Costs –

i) Training Employees in TQM

ii) Training Suppliers in TQM

iii)Identifying suppliers who commit to on-time delivery of perfect-quality materials

Appraisal Cost –

i) Strength-testing one item from each batch of panels

Internal Failure Costs –

i) Avoid rework and Spoilage

ii) Avoid inspection of raw materials

External Failure Costs –

i) Avoid lost profits from lost sales due to disappointed customers

ii) Avoid warranty costs

Analysis of quality improvement programs

Undertake the Quality Improvement Program_____________

Prevention

Training Employees in TQM $27,000

Training Suppliers in TQM $39,000

Identifying suppliers who commit to

on-time delivery of perfect-quality materials $58,000

Total Prevention Costs $124,000

Appraisal

Strength-testing one item from

each batch of panels $68,000

Total Appraisal Costs $68,000

Total cost of undertaking the quality improvement programs $192,000

Do not undertake the Quality Improvement Program_____________

Internal Failure

Avoid rework and spoilage $63,000

Avoid inspection of raw material $57,000

Total Internal Failure Costs $120,000

External Failure

Avoid lost profits from lost sales

due to disappointed customers $86,000

Avoid warranty costs $15,000

Total Appraisal Costs $101,000

Total cost of undertaking the quality improvement programs $221,000

As it can be seen from the above analysis, if quality improvement programs are taken Clason can save $29,000 cost.

So it is advisable to take the quality improvement programs.