Nabors Company had actual quality costs for the year ended June 30, 2015, as given below.
Prevention costs:
Prototype inspection ........ $ 300,000
Vendor certification ........ 600,000
Total prevention costs ........ $ 900,000
Appraisal costs:
Process acceptance ........ 315,000
Test labor ........... 360,000
Total appraisal costs ........ $ 675,000
Internal failure costs:
Retesting ........... $ 187,500
Rework ........... 375,000
Total internal failure costs ... $ 562,500
External failure costs:
Recalls .............. $ 243,750
Product liability........ 618,750
Total external failure costs .... $ 862,500
Total quality costs ........$3,000,000
At the zero-defect state, Nabors expects to spend $375,000 on quality engineering, $75,000 on vendor certification, and $50,000 on packaging inspection. Assume sales to be $25,000,000.
Required:
1. Prepare a long-range performance report for 2015. What does this report tell the management of Nabors?
2. Explain why quality costs still are present for the zero-defect state.
3. What if Nabors achieves the zero-defect state reflected in the report? What are some of the implications of this achievement?