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Christi, Inc., is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Christi's senior managers expect the engineering work to reduce
Christi, Inc., is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Christi'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 skateboards follow. Also shown are the cost allocation rates for each activity. | ||||||||||||
Activity | Predicted Reduction in Activity Units | Activity Cost Allocation Rate Per Unit | ||||||||||
Inspection of incoming materials | 420 | $37 | ||||||||||
Inspection of finished goods | 420 | 26 | ||||||||||
Number of defective units discovered in-house | 1,400 | 56 | ||||||||||
Number of defective units discovered by customers | 325 | 75 | ||||||||||
Lost sales to dissatisfied customers | 150 | 103 | ||||||||||
Requirements: | ||||||||||||
1. Calculate the predicted quality cost savings from the design engineering work. | ||||||||||||
2. Christi spent $103,000 on design engineering for the new skateboard. What is the net benefit of this "preventive" quality activity? | ||||||||||||
3. What major difficulty would Christi's managers have in implementing this cost-of-quality approach? What alternative approach could they use to measure quality improvement? |
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