Question:

Solar Security manufactures and sells motion-sensing security lights that are powered by solar energy. This product is marketed to customers with free replacement warranty.

A component, Alpha, is purchased from an external supplier and assembled into Solar Securitys lighting product. One unit of Alpha is used for each unit of lighting. The costs associated with Alpha are as follows:

Purchase price	:	$5 per unit
Ordering cost	:	$200 per order regardless of the size of the order
Storage cost	:	$0.30 per unit per year

Solar Security normally places an order equivalent to the Economic Order Quantity (EOQ) when the inventory level of Alpha drops to 1,000 units. Delivery normally takes 1 weeks.

Solar Security operates in a highly competitive market, and is constantly upgrading their product in order to maintain its market share. There are a number of alternative suppliers of security lighting products in the market. Some of the competitors charge a lower price, but supply lower quality lighting products; whereas others supply higher quality lighting products but for a much higher price than Solar Security. The life cycle of products in this market is short. Manufacturers are constantly introducing new products or variations of existing products. Price and quality are the two main factors influencing the buying decisions of customers.

While preparing its budget for the coming year, Solar Security has estimated that the market demand for its lighting product will be 200,000 units and that its share will be 40,000 units. Its largest competitor has a 6% market share, with approximately 30 other companies sharing the remainder of the market. The cost details of each unit of Solar Securitys lighting product are as follows:

$ per unit
Selling price	120
A set of components (including Alpha)	(30)
Assembly cost	(50)
Cost of delivery to customer	(10)
Contribution	30

An analysis of Solar Securitys recent performance revealed that 5% of its lighting product supplied to customers had to be replaced due to defects. Investigation of these faulty products shows that the set of components had been damaged during the assembly process. These returned products cannot be reworked and have no scrap value. If this quality issue could be eliminated, Solar Securitys market share is projected to increase to 25% as a result of improved customer perception.

Required:

1. Based on available information:

1. Prepare the best estimate of Solar Securitys cost of quality for the coming year.

2. An inspection process immediately prior to customer delivery, that costs $50,000, could be implemented at Solar Security. Compute a new best estimate of Solar Securitys cost of quality, assuming that the inspection process will be implemented for the coming year. Advise Solar Security on whether to implement the inspection process. Explain your advice.

2. Calculate the EOQ for component Alpha for the coming year based on budgeted information. Advise Solar Security on their current policy of ordering when the inventory level of Alpha drops to 1,000 units (you may assume the number of weeks in a production year is 50). Ignore part (a)(ii) in your answer.