Kuching Photoshop Production Sdn Bhd (KPPSB) launched a quality improvement program (QIP) to take advantage of cost savings benefit for the fabrication of big-sized photo frames. The photo frames will be examined and tested for durability and quality before they are being assembled, packaged and transported to wholesale agent at Sibu. It is the responsibility of the producer to ensure that the product is of high quality before it reaches its wholesale agent. Any rejected items are returned to KPPSB for re-work and improvement. Those reworks activity will require new materials in both at the fabrication and assembly but no material required at testing. The following unit cost data for direct materials, direct labour, and time-driven activity-based costing (ABC) support are available: COSTS Fabrication Assembly Testing Packaging Transport TOTAL Direct materials RM 280 40 20 10 10 360 Direct labor RM 160 150 40 15 10 375 Support RM 140 250 40 20 10 460 Fixed support RM 70 50 40 30 10 200 TOTAL 650 490 140 75 40 The result of a QIP has improved the rejection rate from 10.5% to 7.0%, and the number of rejects has decreased by (10.5% - 7.0%) 40,000 units. The ability to decrease the rejection rates have also led to an improvement in work-in- process inventory from RM600,000 to RM420,000. Inventory carrying costs are estimated to be 8.5% per year. It is assumed that the capacity costs as indicated by the time driven ABC support costs can be reduced if not needed.

Required to:

a. Estimate the annual saving from improvement in the rejection rate. (8 marks)

b. Calculate the annual saving in inventory carrying cost (4 marks)

c. Critically explain why companies are encouraged to focus on the cost of good quality rather than the cost of poor quality. (8 marks)