Cost of quality ) Smooth Sailing is very aware that its scuba diving tanks must be of high quality to maintain its reputation of excellence and safety. The company has retained you as a consultant and you have suggested that quantifying the costs that would be important to the understanding and management of quality. Your experience as a cost accountant helped you determine year 2006 costs of quality from the company’s accounting records as follows:

You also determined that 1,200 of the 100,000 tanks made in 2006 had to be sold as scrap for $70 less profit per tank than the nondefective tanks. Smooth Sailing also incurred $4,000 of rework costs that had been buried in overhead (in addition to the failure costs listed) in producing the tanks sold at the regular price.

a. Smooth Sailing’s management has asked you to determine the 2006 “costs” of the following:
1. Lost profit from scrapping the 1,200 units 2. Total failure cost 3. Total quality cost

b. Assume that the company is considering expanding its existing full 2- year warranty to a full 3-year warranty in 2007. How would such a change be reflected in quality costs? LO.1

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Prevention Costs Foolproofing machinery $10,000 Quality training 30,000 Educating suppliers 22,000 Appraisal Costs Quality inspections Recording defects Procedure verifications Internal Failure Costs Waste disposal Unplanned downtime External Failure Costs Warranty handling Customer reimbursements/returns $12,000 9,000 6,000 $ 4,500 1,400. $ 6,400 5,100