47. (Cost of quality) Lampposts-R-Us, Ltd., manufactures hardwood lampposts for the discriminating homeowner. The firm produced 3,000 lampposts during its first year of operations. At year-end, there was no inventory of finished goods. The company sold 2,700 through regular market channels (some after rework), but 300 units were so defective that they had to be sold as scrap. For this first year, the firm spent $30,000 on prevention costs and $15,000 on quality appraisal.

There were no customer returns. An income statement for the year follows.

Sales: Regular channel $270,000 Scrap 12,000 $282,000 Cost of goods sold:

Original production costs $150,000 Rework costs 22,000 Quality prevention and appraisal 45,000 (217,000)

Gross margin $ 65,000 Selling and administrative expenses (all fixed) (90,000)

Net loss $ (25,000)

a. Compute the total profits lost by the company in its first year of operations by selling defective units as scrap rather than selling the units through regular channels.

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

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

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