Background:

Y Ltd produces and sells a single product, Y1. The unit specifications of the product are as follows:

Direct material AY: 12 kg at 4 per kg

Machine time: 2 running hours

Machine cost per gross hour: 50

Selling price per unit: 180

Y Ltd is required to fulfil orders for 8,000 units of Y1 per year. There are no stocks of product units at the beginning or the end of the year. Also, the stock level of the material AY remains unchanged throughout the year.

The following additional information affects the costs and revenues:

1. Production quantity is increased to allow for returns from customers which are replaced free of charge. Returns are due to specification failure and account for 5% of units initially delivered to customers.

2. Production quantity is further increased to allow for the downgrading of 16% of product units at the final inspection stage.

3. 6% of the material AY input to the machine process is wasted due to processing problems.

4. 7% of the incoming material AY from suppliers is scrapped due to poor receipt and storage organisation.

5. All of the returned units from customers are rectified using 0.5 hours of machine running time per unit.

6. Machine running time is 80% of gross machine hours and 20% of gross machine hours is machine idle time.

7. Both downgraded production units found at the inspection stage, and rectified units returned from customers are sold at a discount of 25% on the standard selling price.

Y Ltd is aware of the problem of excess costs and it is planning a quality management programme to prevent a number of such problems from occurring. The programme will cost 75,000 and it is estimated that the programme will have the following impact:

1. A reduction in returns of products from customers to 2% of the units initially delivered.

2. A reduction in the downgrading of product units at inspection to 4% at the final inspection stage.

3. A reduction in the material AY losses in process to 1% of the input to the machine process.

4. A reduction in stores losses of the material AY to 2% of the incoming materials.

5. A reduction in machine idle time to 10% of gross hours used.

Question:

Comment on the relevance of a quality management programme and explain the meaning of the following terms: internal failure costs, external failure costs, appraisal costs and prevention costs giving examples for each, taken where possible from the information in the question.