Question

Loiselle manufactures high-quality speakers. Suppose Loiselle is considering spending the following amounts on a new quality program:

___________________________________________________________________

Additional 20 minutes of testing for each speaker \( 625,000

Negotiating and training suppliers to obtain higher-quality

materials and on-time delivery 430,000

Redesigning the speakers to make them easier to manufacture 1,250,000

Loiselle expects this quality program to save costs as follows:

__________________________________________________

Reduce warranty repair costs \) 275,000

Avoid inspection of raw materials 580,000

Avoid rework because of fewer defective units 825,000_

It also expects this program to avoid lost profits from the following:

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Lost profits due to disappointed customers $ 920,000

Lost production time due to rework 278,000

Requirements

1. Classify each of these costs into one of the four categories of quality costs (prevention, appraisal, internal failure, or external failure).

2. Should Loiselle implement the quality program? Give your reasons.

Short answer

The cost of taking the quality improvement programs is $2,305,000. The cost of not taking the improvement programs is $2,878,000. So it is advisable to take the improvement program.

Step-by-step solution

Classification of costs

Prevention Costs –

i)Negotiating and training suppliers to obtain higher-quality materials and on-time delivery

ii)Redesigning the speakers to make them easier to manufacture

Appraisal Cost –

i) Additional 20 minutes of testing for each speaker

Internal Failure Costs –

i) Avoid inspection of raw materials

ii) Avoid rework because of fewer defective units

External Failure Costs –

i) Reduce warranty repair costs

ii) Lost profits due to disappointed customers

iii) Lost production time due to rework

Analysis of quality improvement programs

Undertake the Quality Improvement Program_____________

Prevention

Negotiating and training suppliers to

obtain higher-quality materials and

on-time delivery $430,000

Redesigning the speakers to make

them easier to manufacture $1,250,000

Total Prevention Costs $1,680,000

Appraisal

Additional 20 minutes of testing for each speaker $625,000

Total Appraisal Costs $625,000

Total cost of undertaking the quality improvement programs $2,305,000

Do not undertake the Quality Improvement Program_____________

Internal Failure

Avoid inspection of raw materials $580,000

Avoid rework because of fewer defective $825,000

Total Internal Failure Costs $1,405,000

External Failure

Reduce warranty repair costs $275,000

Lost profits due to disappointed customers $920,000

Lost production time due to rework $278,000

Total Appraisal Costs $1,473,000

Total cost of undertaking the quality improvement programs $2,878,000

As it can be seen from the above analysis, if quality improvement programs are taken Clason can save $573,000 cost.

So it is advisable to take the quality improvement programs.