Industrial Technologies, Inc. (ITI), produces two compression machines that are popular with manufacturers of plastics: no. 165

and no. 172. Machine no. 165 has an average selling price of $30,000, whereas no. 172 typically sells for approximately

$27,500. The company is very concerned about quality and has provided the following information:

No. 165 No. 172

Number of machines produced and sold. 160 200

Warranty Costs:

Average Repair cost per unit . $900 $350

Percentage of units needing repair. 70% 10%

Reliability engineering at $150 per hour . 1,600 hrs 2,000 hrs

Rework at ITTs manufacturing plant

Average rework cost per unit. $1,900 $1,600

Percentage of units needing rework.. 35% 25%

Manufacturing Inspection at $50 per hour.. 300 hrs 500 hrs

Transportation costs to customer sites to fix problems. $29,500 $15,000

Quality training for employees.. $35,000 $50,000

1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure.

2. Using the classifications in requirement (1), compute ITI's quality costs for machine no. 165 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.

5. Quality costs can be classified as observable or hidden. What are hidden quality costs, and how do these costs differ from observable costs?