Red River Manufacturing Division makes a variety of home furnishings.
In 2005 the company installed a system to report on quality costs. At the end of 2007 the division general manager wanted an assessment of whether quality costs in 2007 differed from those in 2005. Each month the actual costs had been compared with the plan, but at this time the manager wanted to see only total annual numbers for 2007 compared with 2005. The production supervisor prepared the following report.

1. For each of the four quality cost areas, explain what types of costs are included and how those costs have changed between 2005 and 2007.
2. Assess overall quality performance in 2007 compared with 2005. What do you suppose has caused the changes observed in quality costs?

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Red River Manufacturing Division Quality Cost Report (in thousands of dollars) QUALITY COST AREA 1. Prevention Cost % of Total Quality Cost 2. Appraisal Cost % of Total Quality Cost 3. Internal Failure Cost % of Total Quality Cost Total Internal Quality Cost (1+2+3) % of Total Quality Cost 2005 COST 45 3.3% 124 9.1% 503 36.9% 672 2007 COST 107 12.3% 132 15.2% 368 42.5% 607 49.3% 70.0% 4. External Failure Cost 691 259 % of Total Quality Cost 50.7% 29.9% Total Quality Cost 1,363 866 Total Product Cost 22,168 23,462 % Total Quality Cost to Total Product Cost 6.1% 3.7%