Quality (8 marks)

Thermal Heat Industries Inc. (THI) manufactures hot water tanks. Two of their top-of-the-line products are the Aestus and the Fuoco. The industrial engineer that has overseen the design and implementation of the manufacturing of these two products would like a quality report.

You have gathered the following information:

Aestus Fuoco

Units manufactured and sold 5,000 2500

Selling price per unit $1,920 $1,440

Variable costs per unit $1,152 $768

Hours spent on quality design 2,800 500

Testing and inspection hrs per unit 1 0.5

% of units reworked in the plant 4% 10%

Rework costs per hot water tank $410 $385

% of units under warranty

repaired at customer site 3% 8%

Warranty repair costs per hot

water tank $480 $430

Estimated lost sales (in units) from poor quality 160

Labour rates:

Design - $90 per hour

Testing - $48 per hour

Required:

a.Do a cost of quality report for THI. The report should list all cost items categorized by type of quality cost, including percentages in relation to revenues for each product and category. (4 marks)

Aestus Fuoco

Quality item Quality cost % Quality cost%

Prevention

Appraisal

Internal failure

External failure

Total

b.Explain to results to the industrial engineer of THI. Provide a recommendation for quality cost improvement at THI. (4 marks)