Computing the Cost of Poor Quality.

A company produces 2,000,000 units of a product each year, and you have been asked by the president of the company to look into the costs affected by the quality of the products produced.

This company guarantees its products for one year from the date of purchase, and it pays all shipping costs for sending the defective unit to its Chicago repair center (approximately

$5) and for sending the repaired unit back to the customer (another $5). This repair center works only on defective units covered by warranty, and you can assume all repairs are done perfectly. The company spends $450,000 each year for wages, rent, supplies, etc., for this repair center. The unit variable cost of each unit produced by the company at its Fort Wayne, Indiana, plant amounts to $40.

Required:

Use the above information to answer each of the following questions. Consider each question separately unless one question specifically refers to another.

a. Assume that one-half the defective units sent to the repair center must be replaced with new units because of defects too serious to repair. Compute the total quality costs the company incurs each year if it has a 10% defect rate.

b. Assume the defect rate changes to 5% and every defective unit can be repaired by the Chicago center. Compute the profit increase the company would experience if it reduced its defect rate to 800 parts per million, closed the Chicago center, and sent a new unit to any customer who had a problem during the warranty period with instructions to throw away the defective unit. LO.1