Largo Toys is using a costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The company's senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the 2 -year life of the toy robot follow. Also shown are the cost allocation rates for each activity.

Requirements 

1. Calculate the predicted quality cost savings from the design engineering work.

2. Largo Toys spent \(\$ 60,000\) on design engineering for the new toy robot. What is the net benefit of this "preventive" quality activity?

3. What major difficulty would Largo Toys' managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure quality improvement?

Activity Inspection of incoming materials.......... Inspection of finished goods.............. Predicted Reduction in Activity Units 300 300 Activity Cost Allocation Rate Per Unit $20 30 Number of defective units discovered in-house 3,200 15 Number of defective units discovered by customers. 900 40 Lost sales to dissatisfied customers..... 300 60