(Cost of quality) Howell Electronics manufactures hand-held palm pilots for the discriminating business person. The firm produced 3,000 palm pilots dur¬ ing its first year of operations. At year-end, it had no inventoiy of finished goods. The company sold 2,700 units through regular market channels (some after rework), but 300 of them were so defective that they had to be sold as scrap. For this first year, the firm spent $60,000 on prevention costs and $30,000 on quality appraisal. There were no customer returns. An in¬ come statement for the year follows.

a. Compute the total profit lost by the company in its first year of opera¬ tions by selling defective units as scrap rather than selling the units through regular channels.

b. Compute the total failure cost for the company in its first year.

c. Compute total quality cost incurred by the company in its first year.

d. What evidence indicates that the firm is dedicated to manufacturing and selling high-quality products? LO.1

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Sales Regular channel Scrap Cost of goods sold Original production costs Rework costs Quality prevention and appraisal Gross margin Selling and administrative expenses (all fixed) Net loss $540,000 24,000 $564,000 $300,000 44,000 90,000 (434,000) $130,000 (180,000) $ (50,000)