Telecoms At Work (TAW) manufactures and markets office communications systems. During the year ended 31 May, TAW made an operating profit of $30 million on sales of $360 million.However, the directors are concerned that products do not conform to the required level of quality and TAW is therefore not fulfilling its full potential in terms of turnover and profits achieved.The following information is available in respect of the year ended 31 May:1. Production data:

Units manufactured and sold ...............................18 000Units requiring rework .............................................2 100Units requiring warranty repair service .................2 700Design engineering hours .....................................48 000Process engineering hours ...................................54 000Inspection hours (manufacturing) .....................288 000

2. Cost data:

...........................................................................................................................$Design engineering per hour ......................................................................96Process engineering per hour .....................................................................70Inspection per hour (manufacturing) .........................................................50Rework per communication system reworked (manufacturing) .......4800Customer support per repaired unit (marketing) ..................................240Transportation costs per repaired unit (distribution) ...........................280Warranty repairs per repaired unit (customer service) .......................4600

3. Staff training costs amounted to $180 000 and additional product testing costs of $72 000.

4. The marketing director has estimated that sales of 1800 units were lost as a result of public knowledge of poor quality at TAW. The average contribution percommunication system is estimated at $7200.

Required:(a) Prepare a cost analysis that shows actual prevention costs, appraisal costs, internal failure costs and external failure costs for the year ended 31 May. Your statement should show each cost heading as a percent of turnover and clearly show the total cost of quality. Comment briefly on the inclusion of opportunity costs in such an analysis.(b) A detailed analysis has revealed that the casings in which the communications systems are housed are often subject to mishandling in transit to TAW?s manufacturing premises. The directors are considering two alternative solutions proposed by the design engineering team which are aimed at reducing the quality problems that are currently being experienced. These are as follows:Option 1 ? Increase the number of immediate physical inspections of the casings when they are received from the supplier. This will require an additional 10 000 inspection hours.Option 2 ? Redesign and strengthen the casings and the containers used to transport them to better withstand mishandling during transportation. Redesign will require an additional 2000 hours of design engineering and an additional 5000 hours of process engineering. Internal failure costs of rework for each reworked communication system are as follows:

The directors of TAW believe that, even if it is able to achieve improvements in quality, it will be unable to save any of the fixed costs of internal and external failure.If TAW chooses to inspect the casings more carefully, it expects to eliminate rework on 720 communication systems whereas if it redesigns the casings it expects to eliminate rework on 960 communication systems.If incoming casings are inspected more carefully, TAW estimates that 600 fewer communication systems will require warranty repair and that it will be able to sell an additional 300 communication systems. If the casing is redesigned, the directors estimate that 840 fewer communication systems will require warranty repair and that an additional 360 communication systems will be sold.External failure costs of repair for each repaired communication system are as follows:

Prepare an estimate of the financial consequences of each option and advise the directors of TAW which option should be chosen.

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(including direct materials, direct labour rework and supplies) (equipment, space and allocated overhead) Variable costs 1920 Allocated fixed costs 2880 Total costs (as per note 2 on cost data) 4800 %24 Total Variable Fixed costs costs costs Customer support costs Transportation costs Warranty repair costs 96 144 240 210 70 280 1700 2900 4600