Question

Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Activity Predicted Predetermined

Reduction in Overhead Allocation

Activity Units Rate per Unit

Inspection of incoming raw materials 390 $ 44

Inspection of finished goods 390 19

Number of defective units discovered in-house 1,200 50

Number of defective units discovered by customers 325 72

Lost profits due to dissatisfied customers 75 102

Requirements

1. Calculate the predicted quality cost savings from the design engineering work.

Short answer

Answer

Total predicted quality cost savings amount to $115,620.

Step-by-step solution

Quality cost savings

Quality cost-saving is the reduction in the cost by improving the quality of products or services. Quality is improved by implementing quality improvement programs. Thus the cost incurred on quality improvement programs replaces the cost of lower quality products and the overall cost gets reduced.

Calculation of predicted quality cost savings

Activity	Predicted reduction in activity units	Allocation rate per unit	Predicted quality cost savings
Inspection of incoming raw material	390	44	$17,160
Inspection of finished goods	390	19	$7,410
Number of defective units discovered in house	1200	50	$60,000
Number of defective units discovered by customers	325	72	$23,400
Lost profits due to dissatisfied customers	75	102	$7,650
Total predicted quality cost savings			$115,620