(Cost of quality) Golf courses are demanding in their quest for high-quality carts because of the critical need for lawn maintenance. Ride-in-Style manufactures golf carts and is a recognized leader in the industry for quality products. In recent months, company managers have become more interested in trying to quantify the costs of quality in the company. As an initial effort, the company was able to identify the following 1997 costs, by category, that are associated with quality:

Managers were also aware that in 1997, 250 of the 8,000 carts that were produced had to be sold as scrap. These 250 carts were sold for $80 less profit per unit than “good” carts. Also, the company incurred rework costs amounting to $6,000 to sell 200 other carts through regular market channels.

a. Using the above data, find Ride-in-Style’s 1997 expense for the following: 1. Lost profits from scrapping the 250 units 2. Total failure costs 3. Total quality costs

b. Assume that the company is considering expanding its existing full 5-year warranty to a full 7-year warranty in 1998. How would such a change be reflected in quality costs?

LO1

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PREVENTION COSTS Quality training Quality technology Quality circles APPRAISAL COSTS Quality inspections $15,000 50,000 32,000 18,000 Test equipment 14,000 Procedure verifications 9,000 INTERNAL FAILURE COSTS Scrap and waste 6,500 Waste disposal 2,100 EXTERNAL FAILURE COSTS Warranty handling Customer reimbursements/returns 9,500 7,600