QUESTION 3 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 hours per unit	1		0.5
Percentage of units reworked in the plant	4%		10%
Rework costs per hot water tank	$410		$385
Percentage 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:

1. Prepare 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

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