Electro Ltd manufactures a single electronic circuit board for the telecommunications industry. At the end of December 2011 the company received a letter of complaint from Telecom International PLC, its largest customer, about the poor quality of recent component shipments. As a result, in January 2012 the directors of Electro Ltd implemented a TQM system and this has been used to estimate the following costs of quality for 2012 and 2011:

Electro Ltd’s total revenue for 2012 was £62,000,000 (£56,700,000 in 2011).

Required

(a) Decide whether the quality management costs above should be classified as prevention, appraisal, internal failure or external failure cost and use your analysis as the basis for preparing a cost of quality report for 2012 and 2011.

(b) Compare the costs of quality for the two years. What do the results reveal about the management of quality at Electro Ltd?

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2012 2011 Operating costs of the customer complaints 270,000 480,000 department Depreciation of test equipment 370,000 270,000 Inspection 150,000 80,000 Forgone contribution from lost sales 823,000 1,790,000 Product recall 360,000 920,000 Product testing 670,000 700,000 Quality engineering Quality training 770,000 520,000 1,100,000 700,000 Retesting 480,000 1,250,000 Rework 580,000 770,000 Supplier reviews 200,000 50,000 Cost of warranty repairs 240,000 320,000