Product Design and Quality Costs.

Use the information from problem 10-15 to answer this question.

a. Assume the company normally requires eighteen months to develop anew product with an error rate of 500 ppm after the product reaches the customer. Company managers would like to speed up by six months the release of a product now under development to take advantage of an emerging market for the product. They estimate the product will have a life of only 12 months as set out in the schedule below. The schedule also shows the units they predict they can sell each quarter, the selling price, and the unit variable cost.

Units Price Cost Quarter 1 10,000 $ 2,000 $ 1,000 Quarter 2 25,000 1,500 800 Quarter 3 40,000 1,200 600 Quarter 4 35,000 1,000 500 Managers can speed up product development by six months and release the product at the start of Quarter 1 if they spend $15,000,000 on development and production, or they can spend $10,000,000 on these costs and release the product at the start of quarter 3.

The development team working on the new product estimates it can get the product ready by the beginning of Quarter 1, but the error rate after the product reaches the customer will be an astonishing 100,000 ppm, 200 times the 500 ppm usual error rate.

Team members also say they can beat the normal error rate and introduce the product with a rate of only 200 ppm after the product reaches the customer if management allows them to bring out the product at the start of Quarter 3.
Should management speed up the introduction of the new product? Show calculations in good form to support your answer.

b. Explain why a company should consider improving the quality of the products it makes. In writing your answer consider the situation in question

a, and explain what your answer to question a tells you about the issue of product quality. LO.1