Kathy Norton, president of Merica Products, was concerned with the trend in sales and profitability. The company had been losing customers at an alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the end of 2001, Kathy decided to begin a quality improvement program. As a first step, they identified the following costs in their accounting records as quality related:

Required:
1. Prepare a quality cost report by quality cost category.
2. Calculate the relative distribution percentages for each quality cost category. Comment on the distribution.
3. Using the Taguchi loss function, an average loss per unit is computed to be $6 per unit. What are the hidden costs of external failure? How does this affect the relative ciistribution?
4. Merica's quality manager decided not to bother with the hidden costs. What do you think was his reasoning? Any efforts to reduce measured external failure costs will also reduce the hidden costs. Do you agree? Explain.

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2001 Rework Sales (200,000 units @ $40) Scrap (internally rejected products) Training program $8,000,000 240,000 320,000 96,000 Consumer complaints 160,000 Warranty 320,000 Test labor 240,000 Inspection labor Supplier evaluation 200,000 24,000